SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. 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>
Registrant Class Outstanding at November 13, 2000
--------------------------------- ----------------------------- --------------------------------
<S> <C> <C>
GB Property Funding Corp. Common stock, $1.00 par value 100 shares
GB Holdings, Inc. Common stock, $.01 par value 9,999,994 shares
Greate Bay Hotel and Casino, Inc. Common stock, no par value 100 shares
</TABLE>
1
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 85,678,000 $ 20,897,000
Accounts receivable, net of allowances
of $10,366,000 and $11,413,000, respectively 8,411,000 9,864,000
Inventories 2,590,000 3,784,000
Deferred income taxes 7,196,000 3,478,000
Prepaid expenses and other current assets 3,723,000 2,502,000
------------- -------------
Total current assets 107,598,000 40,525,000
------------- -------------
Property and Equipment:
Land 54,654,000 50,777,000
Buildings and improvements 78,801,000 185,508,000
Operating equipment 16,795,000 108,260,000
Construction in progress 3,252,000 2,295,000
------------- -------------
153,502,000 346,840,000
Less - accumulated depreciation and
amortization -- (189,805,000)
------------- -------------
Net property and equipment 153,502,000 157,035,000
------------- -------------
Other Assets:
Obligatory investments, net of allowances of
$9,806,000 and $9,122,000, respectively 9,286,000 8,386,000
Other assets 2,290,000 2,470,000
------------- -------------
Total other assets 11,576,000 10,856,000
------------- -------------
$ 272,676,000 $ 208,416,000
============= =============
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these consolidated financial statements.
2
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY/(DEFICIT)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 483,000 $ 79,000
Accounts payable 6,026,000 4,849,000
Accrued liabilities -
Salaries and wages 4,151,000 3,458,000
Reorganization costs 2,385,000 1,843,000
Insurance 2,335,000 1,872,000
Other 6,134,000 5,879,000
Due to affiliates 290,000 1,099,000
Other current liabilities 3,957,000 4,322,000
------------- -------------
Total current liabilities 25,761,000 23,401,000
------------- -------------
Liabilities Subject to Compromise (Note 4) -- 217,028,000
------------- -------------
Long-Term Debt 110,375,000 839,000
------------- -------------
Deferred Taxes and Other Noncurrent Liabilities 11,540,000 6,741,000
------------- -------------
Commitments and Contingencies
Shareholder's Equity/(Deficit):
New common stock, $.01 par value per share; 20,000,000
shares authorized; 9,999,994 shares outstanding 100,000 --
Old common stock, $1.00 par value per share;
1,000 shares authorized and outstanding -- 1,000
Additional paid-in capital 124,900,000 27,946,000
Accumulated deficit -- (67,540,000)
------------- -------------
Total shareholder's equity/(deficit) 125,000,000 (39,593,000)
------------- -------------
$ 272,676,000 $ 208,416,000
============= =============
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these consolidated financial statements.
3
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
2000 1999
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Casino $ 63,810,000 $ 61,746,000
Rooms 2,582,000 2,444,000
Food and beverage 7,855,000 7,857,000
Other 1,385,000 1,818,000
------------ ------------
75,632,000 73,865,000
Less - promotional allowances (6,820,000) (6,988,000)
------------ ------------
Net revenues 68,812,000 66,877,000
------------ ------------
Expenses:
Casino 53,302,000 52,496,000
Rooms 648,000 572,000
Food and beverage 2,533,000 2,888,000
Other 1,224,000 1,146,000
General and administrative 2,593,000 2,744,000
Depreciation and amortization, including write-off
of CRDA obligations 3,356,000 6,420,000
------------ ------------
Total expenses 63,656,000 66,266,000
------------ ------------
Income from operations 5,156,000 611,000
------------ ------------
Non-operating income (expense):
Interest income 170,000 262,000
Interest expense (contractual interest of $5,515,000
and $5,519,000, respectively, for the three months
ended September 30, 2000 and 1999) (179,000) (181,000)
Reorganization and other related costs (481,000) (486,000)
Gain on disposal of assets -- 118,000
------------ ------------
Total non-operating expense, net (490,000) (287,000)
------------ ------------
Income before income taxes and extraordinary item 4,666,000 324,000
Income tax benefit 2,235,000 --
Extraordinary gain on prepetition debt discharge 14,795,000 --
------------ ------------
Net income $ 21,696,000 $ 324,000
============ ============
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these consolidated financial statements.
4
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
2000 1999
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Casino $ 177,731,000 $ 175,182,000
Rooms 7,173,000 6,882,000
Food and beverage 21,122,000 20,851,000
Other 3,549,000 4,499,000
------------- -------------
209,575,000 207,414,000
Less - promotional allowances (18,368,000) (17,723,000)
------------- -------------
Net revenues 191,207,000 189,691,000
------------- -------------
Expenses:
Casino 149,087,000 149,472,000
Rooms 2,106,000 2,149,000
Food and beverage 6,685,000 7,878,000
Other 2,851,000 3,027,000
General and administrative 7,663,000 8,270,000
Depreciation and amortization, including write-off
of CRDA obligations 9,414,000 12,227,000
------------- -------------
Total expenses 177,806,000 183,023,000
------------- -------------
Income from operations 13,401,000 6,668,000
------------- -------------
Non-operating income (expense):
Interest income 518,000 520,000
Interest expense (contractual interest of
$16,545,000 and $16,562,000, respectively,
for the nine months ended September 30,
2000 and 1999) (366,000) (221,000)
Reorganization and other related costs (2,807,000) (1,420,000)
Gain/(loss) on disposal of assets (10,000) 257,000
------------- -------------
Total non-operating expense, net (2,665,000) (864,000)
------------- -------------
Income before income taxes and extraordinary item 10,736,000 5,804,000
Income tax provision -- --
Extraordinary gain on prepetition debt discharge 14,795,000 --
------------- -------------
Net income $ 25,531,000 $ 5,804,000
============= =============
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these consolidated financial statements.
5
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30,
2000 1999
----------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 25,531,000 $ 5,804,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain on prepetition debt discharge (14,795,000) --
Depreciation and amortization 9,414,000 12,227,000
(Gain)/loss on disposal of assets 10,000 (257,000)
Provision for doubtful accounts 1,637,000 1,696,000
Increase in accounts receivable (184,000) (2,215,000)
Increase in accounts payable and accrued expenses 2,975,000 3,093,000
Net change in other current assets and liabilities (2,240,000) (1,537,000)
Net change in other noncurrent assets and liabilities (6,410,000) (220,000)
------------ ------------
Net cash provided by operating activities 15,938,000 18,591,000
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (14,422,000) (15,146,000)
Proceeds from disposal of assets 13,000 257,000
Obligatory investments (1,684,000) (2,014,000)
------------ ------------
Net cash used in investing activities (16,093,000) (16,903,000)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 65,000,000 --
Repayments of long-term debt (64,000) (199,000)
------------ ------------
Net cash provided by/(used in) financing activities 64,936,000 (199,000)
------------ ------------
Net increase in cash and cash equivalents 64,781,000 1,489,000
Cash and cash equivalents at beginning of period 20,897,000 23,844,000
------------ ------------
Cash and cash equivalents at end of period $ 85,678,000 $ 25,333,000
============ ============
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these consolidated financial statements.
6
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
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 ("GBLLC"), whose sole member as a result
of the same reorganization is PPI. 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 located 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 as a special purpose subsidiary of Holdings for the purpose of
borrowing funds for the benefit of GBHC. Holdings has no operating activities
and its only significant asset is its investment in GBHC, and as of the
Effective Date, defined below, $59.3 million in cash (see Note 2). Effective
September 2, 1998, GBHC acquired the membership interests in Lieber Check
Cashing LLC ("Lieber"), a New Jersey limited liability company that owned a land
parcel adjacent to 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"). On August 14, 2000, the
Bankruptcy Court entered an order (the "Confirmation Order") confirming the
Modified Fifth Amended Joint Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code Proposed by the Official Committee of Unsecured Creditors and
High River (the "Plan") for the Debtors. High River ("High River") is an entity
controlled by Carl C. Icahn. On September 13, 2000, the New Jersey Casino
Control Commission (the "Commission") approved the Plan. On September 29, 2000,
the Plan became effective (the "Effective Date") (see Note 2). All material
conditions precedent to the Plan becoming binding were satisfied on or before
September 29, 2000. 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"
("SOP 90-7"), and include disclosure of liabilities subject to compromise (see
Note 4). In addition, as a result of the Confirmation Order and the occurrence
of the Effective Date, and in accordance with SOP 90-7, Holdings' has adopted
"fresh start reporting" in the preparation of the accompanying September 30,
2000 consolidated financial statements. Holdings' emergence from Chapter 11
resulted in a new reporting entity with no retained earnings or accumulated
deficit as of September 30, 2000. As a result, the consolidated financial
statements for the periods subsequent to September 30, 2000 reflect the new
basis of accounting and are not comparable to consolidated financial statements
presented prior to September 30, 2000. A black line has been drawn on the
accompanying consolidated financial statements to distinguish between the
pre-reorganization and post-reorganization entity.
7
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
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.
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.
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.
Historically, the Sands' gaming operations have been highly seasonal in
nature with the peak activity occurring from May through September.
Consequently, the results of operations for the three and nine months ended
September 30, 2000 are not necessarily indicative of the operating results to be
reported for the full year.
The consolidated financial statements of Holdings as of September 30, 2000
and for the three and nine month periods ended September 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, these
consolidated financial statements, as adjusted for the adoption of "fresh start
reporting" as required by SOP 90-7, contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the consolidated
financial position of Holdings as of September 30, 2000 and the results of its
operations for the three and nine month periods ended September 30, 2000 and
1999 and its cash flows for the nine month periods ended September 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
Holdings' 1999 Annual Report on Form 10-K.
(2) Financial Reorganization
On the Effective Date, Holdings' existing securities, consisting of its 10
7/8% First Mortgage Notes due January 15, 2004 (the "Old Notes") and all of
Holdings' issued and outstanding shares of common stock owned by PBV and GBLLC
(the "Old Common Stock") were canceled. As of the Effective Date, an aggregate
of 10,000,000 shares of new common stock of Holdings (the "New Common Stock")
were issued and outstanding, and $110,000,000 of 11% First Mortgage Notes due
2005 were issued (the "New Notes"). Holders of the Old Notes received a
distribution of their pro rata shares of (i) the New Notes and (ii) 5,375,000
8
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
shares of the New Common Stock (the "Stock Distribution"). The general unsecured
claims were satisfied by a cash payment of $5,360,000 to the unsecured creditors
fund (the "Fund") on the Effective Date. The Fund Administrator is unrelated to
Holdings and each holder of an unsecured claim will be entitled to its pro rata
share of the Fund. The pro rata share will depend on the total allowed unsecured
claims and the allowance of additional unsecured claims by the Bankruptcy Court
will not require any additional payment into the Fund. Allowed priority claims
in the amount of $335,000 were paid in full on the Effective Date. Holders of
Intercompany Note claims were satisfied in full by an allocation of
approximately 995,079 shares of New Common Stock. However, pursuant to Section
510 of the Bankruptcy Code, all New Common Stock so allocated was distributed to
Holders of Old Notes on account of and pursuant to the subordination provisions
of the Intercompany Notes. Those shares are included in the Stock Distribution.
Holders of any other subordinated claims received no distribution in respect of
their claims. The discharge and satisfaction of all claims has resulted in a
gain of $14,795,000, which has been reflected as an extraordinary item on the
September 30, 2000 consolidated statement of operations. At the Effective Date,
and under the terms of the High River Stock Purchase Agreement, as defined in
the Plan, High River purchased 4,625,000 shares of the New Common Stock for $65
million in cash. As a result of the stock purchase under the High River Stock
Purchase Agreement and the Stock Distribution, entities controlled by Carl C.
Icahn will hold approximately 64.7% of the New Common Stock and 34.4% of the New
Notes.
On the Effective Date, Carl C. Icahn, Robert J. Mitchell, Martin Hirsch,
and Michael L. Ashner, (independent director) were elected to the Board of
Directors of Holdings. Also, on the Effective Date, John P. Saldarelli was
elected as a member of the Board of Directors of Holdings subject to
qualification by the Commission and Robert J. Mitchell resigned as a member of
the Board of Directors of Holdings effective upon the qualification of Mr.
Saldarelli by the Commission. On October 3, 2000, Frederick H. Kraus and Timothy
A. Ebling resigned as members, and Alfred J. Luciani was elected as a member of
the Board of Directors of Holdings.
Pursuant to SOP 90-7, "fresh start reporting" has been reflected as of
September 30, 2000 in the accompanying consolidated financial statements
because: (i) the sum of the allowed claims, plus postpetition liabilities,
exceeded the reorganization value of the preconfirmation assets of the emerging
entity and (ii) Holdings experienced a change of control (as defined in SOP
90-7). SOP 90-7 requires under these circumstances the creation of a new
reporting entity and the recordation of assets and liabilities at their fair
values. In support of the restructuring process, the Debtors retained an
independent third party to determine, among other things, the value of the
equity of Holdings. This independent third party set the value of the equity
between a range of $11 and $14 per share. The Bankruptcy Court, considering the
testimony of that third party and others offered at the confirmation hearing on
the plan, accepted this range and used the mid-point of $12.50 per share for the
purpose of determining the value of the unsecured portion of the claim of the
holders of the Old Notes. For these reasons, Holdings has set the value of the
post confirmation assets of the reorganized entity based upon that value of the
equity and the New Notes and by the post petition liabilities assumed. The
resulting difference in asset value has been allocated to long term assets based
upon a pro rata determination of their fair values, as required by SOP 90-7.
The discharge of debt and "fresh start reporting" have been reflected in
the accompanying September 30, 2000 consolidated financial statements. Holdings'
post confirmation consolidated balance sheet as of
9
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
September 30, 2000 reflects the adoption of "fresh start reporting" and becomes
the opening balance sheet for the "reorganized" corporation.
The effect on the consolidated balance sheet as of September 30, 2000 of
the adoption of "fresh start reporting" is reflected in the following table:
Adjustments to Record the Plan of Reorganization
($000's)
<TABLE>
<CAPTION>
Preconfirmation Post Confirmation
Consolidated Reorganization Fresh Start Consolidated
Balance Sheet Adjustments Adjustments Balance Sheet
--------------- -------------- ----------- -----------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash & cash equivalents $ 26,373 $ 59,305 $ -- $ 85,678
Accounts receivable, net 8,411 -- -- 8,411
Other current assets 9,699 3,810 -- 13,509
--------- --------- --------- ---------
Total Current Assets 44,483 63,115 -- 107,598
--------- --------- --------- ---------
Property & Equipment, net 165,090 -- (11,588) 153,502
--------- --------- --------- ---------
Other Assets 11,576 -- -- 11,576
--------- --------- --------- ---------
Total Assets $ 221,149 $ 63,115 $ (11,588) $ 272,676
========= ========= ========= =========
Liabilities & Shareholders'
Equity (Deficit)
Current Liabilities:
Current maturities of
long term debt $ 483 $ -- $ -- $ 483
Accounts payable 6,026 -- -- 6,026
Accrued expenses 15,295 -- -- 15,295
Other current liabilities 3,957 -- -- 3,957
--------- --------- --------- ---------
Total Current Liabilities 25,761 -- -- 25,761
--------- --------- --------- ---------
Liabilities Subject to Compromise 216,140 (216,140) -- --
--------- --------- --------- ---------
Long Term Debt 375 110,000 -- 110,375
--------- --------- --------- ---------
Deferred Taxes and Other 7,730 3,810 -- 11,540
--------- --------- --------- ---------
Total Liabilities 250,006 (102,330) -- 147,676
--------- --------- --------- ---------
Shareholders' Equity (Deficit):
Common stock - old 1 (1) -- --
Common stock - new
(10,000,000 shares) -- 100 -- 100
Additional paid in capital 27,946 150,551 (53,597) 124,900
Accumulated earnings (deficit) (56,804) 14,795 42,009 --
--------- --------- --------- ---------
Total Shareholders' Equity (Deficit) (28,857) 165,445 (11,588) 125,000
--------- --------- --------- ---------
Total Liabilities & Shareholders'
Equity (Deficit) $ 221,149 $ 63,115 $ (11,588) $ 272,676
========= ========= ========= =========
</TABLE>
10
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(3) Long-Term Debt and Pledge of Assets
Long-term debt is comprised of the following:
September 30, December 31,
2000 2000
------------- -------------
10 7/8% first mortgage, notes due 2004 (a) $ -- 181,980,000
14 5/8% affiliate loan, due 2005 (b) -- 10,000,000
11% first mortgage notes, due 2005 (c) 110,000,000 --
Lieber mortgage (d) 466,000 513,000
Other 392,000 405,000
------------- -------------
Total 110,858,000 192,898,000
Less - current maturities (483,000) (79,000)
Less - debt subject to compromise (Note 4) -- (191,980,000)
------------- -------------
Total long-term debt $ 110,375,000 839,000
============= =============
----------
(a) On February 17, 1994, GBHC obtained the net proceeds from the sale by GB
Property Funding of the Old Notes. Interest on the Old 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 Old
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 Old Notes for periods subsequent to the filing
were suspended. As a result of the Confirmation Order and the occurrence
of the Effective Date, the Old Notes have been satisfied and discharged
(see Note 2).
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 were part of the
security for the Old Notes, were remitted to the Indenture Trustee as
reductions of the outstanding principal of the Old Notes. Proceeds from
the sale of such assets amounting to $4,000 and $263,000, for the nine
months ended September 30, 2000 and the year ended December 31, 1999,
respectively, were remitted to the Indenture Trustee. Although the
payments were remitted to the Indenture Trustee as reductions in principal
in accordance with the order of the Bankruptcy Court, the Indenture
Trustee advised Holdings (i) that such payments were retained by the
Indenture Trustee pursuant to the terms of the Indenture in partial
satisfaction of the fees and expenses incurred by the Indenture Trustee in
the Chapter 11 proceeding and (ii) that the Indenture Trustee has included
the amount of such payments in its fee application before the Bankruptcy
Court for the benefit of the holders of the Old Notes.
11
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(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 was subordinated to the Old Notes. The PRT Subordinated Note was due
on February 17, 2005 and bore interest at the rate of 14 5/8% per annum,
payable semiannually. Interest had been paid only through February 17,
1996. Repayment of the PRT Subordinated Note and the payment of the
related interest were 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
was suspended. As a result of the confirmation of a certain plan of
reorganization of PRT in October 1999, the PRT Subordinated Note was
transferred to GBLLC, whose sole member is PPI. As a result of the
Confirmation Order and the occurrence of the Effective Date, the PRT
Subordinated Note was satisfied and discharged (see Note 2).
(c) As a result of the Confirmation Order and the occurrence of the Effective
Date and under the terms of the Plan (see Note 2), the Old Notes were
canceled and replaced with $110,000,000 of 11% first mortgage notes due
2005. Interest on the New Notes is payable on each March 29 and September
29, beginning March 29, 2001. The outstanding principle is due on
September 29, 2005. The New Notes are unconditionally guaranteed, on a
joint and several basis, by both Holdings and GBHC, and are secured by
substantially all of the assets, as of the Effective Date, other than cash
of Holdings and GBHC.
The indenture for the New Notes contains various provisions which, among
other things, restrict the ability of Holdings and GBHC to incur certain
senior secured indebtedness beyond certain limitations, to merge,
consolidate, or sell substantially all of their assets, to make certain
restricted payments, to incur certain additional senior liens, and to
enter into certain sale-leaseback transactions.
(d) On September 2, 1998 GBHC acquired the membership interests in Lieber (see
Note 8) which owned a certain parcel of land on Pacific Avenue in Atlantic
City until transferring it to GBHC in September, 2000. 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.
Scheduled payments of long-term debt as of September 30, 2000 are set
forth below:
2000 (three months) $ 20,000
2001 467,000
2002 19,000
2003 21,000
2004 23,000
Thereafter 110,308,000
--------------
Total $ 110,858,000
==============
12
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Interest paid amounted to $57,000 and $60,000, respectively, for the nine
months ended September 30, 2000 and 1999. At December 31, 1999, accrued interest
on the Old Notes in the amount of $9,373,000 is included with liabilities
subject to compromise on the accompanying consolidated balance sheets.
13
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(4) Liabilities Subject to Compromise
As a result of the Confirmation Order and the occurrence of the Effective
Date and under the terms of the Plan, liabilities subject to compromise were
discharged as of the Effective Date (see Note 2). Liabilities subject to
compromise consisted of the following at December 31, 1999:
December 31,
1999
------------
Accounts payable and accrued liabilities $ 6,811,000
First Mortgage Notes (Note 3) 181,980,000
PRT Subordinated Note (Note 3) 10,000,000
Borrowings from affiliate (Note 6) 5,000,000
Accrued interest (Notes 3 and 6) 12,855,000
Due to affiliates 382,000
------------
Total $217,028,000
============
(5) Income Taxes
Prior to 1997, Holdings was included in the consolidated federal income
tax return of Hollywood Casino Corporation ("HCC"). 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 (the "Deconsolidation"). 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
reorganization, meals and entertainment, and other expenses. Holdings paid
federal income taxes in the amount of $937,000 and $205,000, respectively, for
the three month periods ended September 30, 2000 and 1999 and $937,000 and
$255,000, respectively, during the nine month periods ended September 30, 2000
and 1999. Holdings made no state income tax payments during the three and nine
month periods ended September 30, 1999. As a result of the Confirmation Order
and the occurrence of the Effective Date and under the terms of the Plan,
Holdings made a state income tax payment in September 2000 in the amount of
$249,000 in satisfaction of a priority claim under the bankruptcy proceedings
for the years 1993 through 1995.
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
14
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
for contributions of, and adjustments to, the carrying value of certain
investment obligations and for other accruals.
At September 30, 2000, Holdings and its subsidiaries have deferred tax
assets including State net operating losses and Federal credit carryforwards.
The State net operating losses ("State 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. In
addition, as part of a certain settlement agreement, GBCC may utilize Federal
net operating losses ("Federal NOL's") of Holdings and its subsidiaries through
December 31, 1998 to offset federal taxable income of GBCC and other members of
its consolidated tax group. Subsequent to the Deconsolidation, Holdings had
approximately $2.8 million in Federal NOL's which were all utilized in the 1999
consolidated federal tax return of Holdings. Statement of Financial Accounting
Standards No. 109 ("SFAS 109") requires that the tax benefit of NOL's and
deferred tax assets resulting from temporary differences be recorded as an asset
and, to the extent that management can not assess that the utilization of all or
a portion of such NOL's and deferred tax assets is more likely than not,
requires the recording of a valuation allowance. As a result of book and tax
losses incurred in 1997 and the filing under Chapter 11 by Holdings in January
1998, management is unable to determine that realization of Holdings' deferred
tax asset is more likely than not and, thus, has provided a valuation allowance
for the entire amount at September 30, 2000. In accordance with SOP 90-7 any
subsequent reduction in the deferred tax asset valuation allowance that exists
at the date that "fresh start reporting" was adopted should be credited directly
to equity. In the event that Holdings' recognizes, in subsequent years, the tax
benefit of any deferred tax asset that existed on the Effective Date, such tax
benefit will be reported as a direct addition to contributed capital.
Sales or purchases of Holdings' New 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 tax attributes
in later tax periods.
The Internal Revenue Service has completed an examination of the
consolidated federal income tax returns of HCC for the years 1993 and 1994 in
which Holdings was included. The results of this examination resulted in a
reduction of Federal NOL's of Holdings prior to the Deconsolidation. However,
since the Federal NOL's were fully reserved for as required by SFAS 109, this
reduction did not impact Holdings statement of operations for the period as
reported. The Internal Revenue Service is continuing to examine the consolidated
federal income tax returns of HCC for the years 1995 and 1996 and the
consolidated federal income tax returns for GBCC for the years 1997 and 1998 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 shareholders of approximately 80% of the common
stock of GBCC (the "Spin Off"). However, as part of a certain 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 as a result of the Spin-Off. In November 2000, HCC reported in its
September 30, 2000 SEC Form 10-Q that the results of the Audit will not have a
material adverse effect on its consolidated position or results of its
operations. In August 2000, GBCC reported in its
15
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
June 30, 2000 SEC Form 10-Q 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 a certain settlement agreement. While this
disclosure by GBCC is contrary to prior representations made by HCC and GBCC to
Holdings, 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.
The State of New Jersey is currently examining the state income tax return
of GBHC for the years 1995 through 1998. However, if the audit results in an
additional tax liability for the years 1995 through 1997, the State of New
Jersey may be barred from asserting the additional claim, if any, as a result of
the Confirmation Order.
As a result of the Confirmation Order and the occurrence of the Effective
Date and under the terms of the Plan, Holdings outstanding debt was discharged
(see Note 2). Pursuant to Section 108 of the Internal Revenue Code, debt that is
canceled or discharged under the Bankruptcy Code does not generate taxable
income in the current period to the Debtor. Instead, certain tax attributes
otherwise available to the debtor are reduced. This attribute reduction is
effective for tax purposes beginning January 1, 2001. Management currently
estimates that approximately $14.3 million of Holdings federal and state tax
attributes relating to the tax bases of noncurrent assets will be reduced as of
January 1, 2001.
(6) Transactions with Related Parties
Prior to July 8, 1998, an indirect subsidiary of GBCC was responsible for
the operations of GBHC under a management agreement. Under the agreement, the
indirect subsidiary was entitled to receive certain fees determined by gross
operating profit. Effective May 1 and through September 28, 1998, as a result of
certain legal proceedings in the Bankruptcy Court, the agreement was suspended
and replaced with a certain fixed fee agreement under which GBHC agreed to pay a
monthly fee of $165,000, consisting of a current fee of $122,000 and a deferred
fee of $43,000. The management agreement was later terminated during the Chapter
11 proceedings without further liability. As a result of the Confirmation Order
and the occurrence of the Effective Date and under the terms of the Plan (see
Note 2) the deferred fees in the amount of $211,000 were paid on the Effective
Date.
GBHC's rights to the trade name "Sands" (the "Trade Name") were derived
from a license agreement between GBCC and an unaffiliated third party. Amounts
payable by the Sands for these rights were equal to the amounts paid to the
unaffiliated third party through September 29, 2000. As a result of the
Confirmation Order and the occurrence of the Effective Date and under the terms
of the Plan, GBHC was assigned by High River the rights under a certain
agreement with the owner of the Trade Name to use the Trade Name as of the
Effective Date. Payment is made directly to the owner of the Trade Name. The
calculation of the license fee is the same as under the previous agreement. Such
charges amounted to $77,000 and $73,000, respectively, for the three month
periods ended September 30, 2000 and 1999 and $214,000 and $206,000,
respectively, during the nine month periods ended September 30, 2000 and 1999.
16
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As a result of a certain settlement agreement and the occurrence of the
Effective Date, an advance from GBHC to another GBCC subsidiary in the amount of
$5,672,000 became uncollectible and valueless and was written off. As the
advance, together with interest amounting to $6,552,000 at September 30, 2000
and $5,850,000 at December 31, 1999, were fully reserved, this writeoff did not
impact Holdings consolidated statement of operations for the period.
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 was subordinated to the Old Notes and payment was subject to
certain conditions (the "PCC Subordinated Note"). Interest accrued on the PCC
Subordinated Note amounted to $728,000 at December 31, 1999, and is included in
liabilities subject to compromise on the accompanying consolidated balance
sheets. The accrual of interest on the PCC Subordinated Note for periods
subsequent to the filing under Chapter 11 was 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. As a result of the Confirmation
Order and the occurrence of the Effective Date and under the terms of the Plan
(see Note 2), the PCC Subordinated Note was satisfied and discharged.
Effective September 2, 1998 and as part of a certain settlement agreement,
Lieber obtained the rights to purchase a certain hotel/motel on Pacific Avenue
in Atlantic City, N.J. (the "Pacific Avenue Hotel"). The assignment of the
rights required a payment of $500,000 to be paid to a designated affiliate of
GBCC at the Effective Date. This obligation was transferred to GBLLC by GBCC and
was paid on the Effective Date.
GBHC previously 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 previously was charged for
certain equipment and other expenses incurred by GBCC and HCC and their
respective subsidiaries that relate to GBHC's business. Such affiliate
transactions are summarized below:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
Billings to affiliates $ -- $ -- $ -- $ 24,000
Charges from affiliates 150,000 194,000 429,000 781,000
(7) 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 and Note 2). See
also Note 6 for the termination of that certain management agreement.
In 1998, GBHC also filed an action in the Bankruptcy Court to recover the
rights to purchase the Pacific Avenue Hotel against GBCC, certain affiliates of
GBCC, and certain former directors of GBHC and to enjoin
17
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
the use of the Federal NOL's of Holdings and its subsidiaries. That action was
settled and, among other things, GBHC recovered the rights to purchase the
Pacific Avenue Hotel, the parties entered into certain general releases, and
Holdings and its subsidiaries agreed to be included in the consolidated tax
return of GBCC for calendar years 1997 and 1998.
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 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.
(8) Acquisition of Lieber Check Cashing and the Agreement for the Pacific
Avenue Hotel
As part of a certain settlement agreement described in Note 7, GBHC
acquired the membership interests in Lieber from affiliates of GBCC for
$251,000. GBHC also caused Lieber to acquire the rights to purchase the Pacific
Avenue Hotel for a payment of $1.3 million and a payment of $500,000 at the
Effective Date of a plan of reorganization. The purchase price of the Pacific
Avenue Hotel was $10 million. With Bankruptcy Court approval, Lieber closed on
that purchase with funds advanced by GBHC in 1999. In September 1999, title to
the land underlying the former Pacific Avenue Hotel was transferred to GBHC.
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. The $500,000 due under the settlement agreement was paid on the
Effective Date.
(9) Acquisition of Claridge Administration Building
In April, 2000, GBHC entered into an agreement with the entities
controlling the Claridge Hotel and Casino (the "Claridge") 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 present value of the $2.0 million
consideration has been recorded in other current and other noncurrent
liabilities section of the balance sheet.
(10) Reclassifications
Certain reclassifications have been made to prior year's consolidated
financial statements to conform to the 2000 consolidated financial statement
presentation.
18
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
about the business, financial condition and prospects of Holdings. The actual
results could differ materially from those indicated by the forward-looking
statements because of various risks and uncertainties including, among other
things, changes in competition, economic conditions, tax regulations, state
regulations applicable to the gaming industry in general or Holdings in
particular, and other risks indicated in Holdings' filings with the Securities
and Exchange Commission. Such risks and uncertainties are beyond management's
ability to control and, in many cases, 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 Old Notes.
GBHC was unable to obtain additional borrowings from affiliates or other
sources and, accordingly, 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").
On August 14, 2000, the Bankruptcy Court entered an order (the "Confirmation
Order") confirming the Modified Fifth Amended Joint Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code Proposed by the Official Committee of
Unsecured Creditors and High River (the "Plan") for the Debtors. High River
("High River") is an entity controlled by Carl C. Icahn. On September 13, 2000,
the New Jersey Casino Control Commission (the "Commission") approved the Plan.
On September 29, 2000, the Plan became effective (the "Effective Date") (see
Note 2). All material conditions precedent to the Plan becoming binding were
satisfied on or before September 29, 2000. 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", ("SOP 90-7) and include disclosure of
liabilities subject to compromise (see Note 4). In addition, as a result of the
Confirmation order and the occurrence of the Effective Date, and in accordance
with SOP 90-7, Holdings has adopted "fresh start reporting" in the preparation
of the accompanying September 30, 2000 consolidated financial statements. The
emergence of Holdings from Chapter 11 resulted in a new reporting entity with no
retained earnings or accumulated deficit as of September 30, 2000. As a result,
the consolidated financial statements for the periods subsequent to September
30, 2000 reflect the new basis of accounting and are not comparable to
consolidated financial statements presented prior to September 30, 2000. A
19
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
black line has been drawn on the accompanying consolidated financial statements
to distinguish between the pre-reorganization and post-reorganization entity.
On the Effective Date, Holdings' existing securities, consisting of its 10
7/8% First Mortgage Notes due January 15, 2004 (the "Old Notes") and all of
Holdings' issued and outstanding shares of common stock (the "Old Common Stock")
were canceled. As of the Effective Date an aggregate of 10,000,000 shares of new
common stock (the "New Common Stock") were issued and outstanding, and
$110,000,000 of 11% First Mortgage Notes due 2005 were issued (the "New Notes").
Holders of the Old Notes received a distribution of their pro rata shares of (i)
the New Notes and (ii) 5,375,000 shares of the New Common Stock (the "Stock
Distribution"). The general unsecured claims were satisfied by a cash payment of
$5,360,000 to the unsecured creditors fund (the "Fund") on the Effective Date.
The Fund Administrator is unrelated to Holdings and each holder of an unsecured
claim will be entitled to its pro rata share of the Fund. The pro rata share
will depend on the total allowed unsecured claims and the allowance of
additional unsecured claims by the Bankruptcy Court will not require any
additional payment into the Fund. Allowed priority claims in the amount of
$335,000 were paid in full on the Effective Date. Holders of Intercompany Note
claims were satisfied in full by an allocation of approximately 995,079 shares
of New Common Stock. However, pursuant to Section 510 of the Bankruptcy Code,
all New Common Stock so allocated was distributed to Holders of Old Notes on
account of and pursuant to the subordination provisions of the Intercompany
Notes. These shares are included in the Stock Distribution. Holders of any other
subordinated claims received no distribution in respect of their claims. The
discharge and satisfaction of these claims has resulted in a gain of
$14,795,000, which has been reflected as an extraordinary item on the September
30, 2000 consolidated statement of operations. At the Effective Date, and under
the terms of the High River Stock Purchase Agreement, as defined in the Plan,
High River purchased 4,625,000 shares of the New Common Stock for $65 million in
cash. As a result of the stock purchase under the High River Stock Purchase
Agreement and the Stock Distribution, entities controlled by Carl C. Icahn will
hold approximately 64.7% of the outstanding common stock and 34.4% of the New
Notes.
On of the Effective Date, Carl C. Icahn, Robert J. Mitchell, Martin
Hirsch, and Michael L. Ashner, (independent director) were elected to the Board
of Directors of Holdings. Also, on the Effective Date, John P. Saldarelli was
elected as a member of the Board of Directors of Holdings subject to
qualification by the Commission and Robert J. Mitchell resigned as a member of
the Board of Directors of Holdings effective upon the qualification of Mr.
Saldarelli by the Commission. On October 3, 2000, Frederick H. Kraus and Timothy
A. Ebling resigned as members, and Alfred J. Luciani was elected as a member of
the Board of Directors of Holdings.
Operating Activities
At September 30, 2000, consolidated Holdings had cash and cash equivalents
of $85.7 million. GBHC had cash and cash equivalents of $26.4 million. Holdings
only significant asset is its investment in GBHC and cash of $59.3 million. GBHC
generated cash flow from operations of $18.3 million for the nine months ended
September 30, 2000 compared to $18.6 million for the nine months ended September
30, 1999. An additional $65 million in cash was provided to Holdings by the
acquisition by High River of 4,625,000 shares of the New Common Stock.
20
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Financing Activities
On the Effective Date, Holdings' existing securities, consisting of the
Old Notes and all of Holdings' Old Common Stock owned by PBV and GBLLC were
canceled. Also, on the Effective Date, 10,000,000 shares of New Common Stock
were issued and outstanding. Of the 10,000,000 shares, 5,375,000 shares were
distributed to the holders of the Old Notes in a pro rata distribution, and
4,625,000 shares were purchased by High River for $65 million. New Notes in the
amount of $110,000,000 were issued and distributed to the Holders of the Old
Notes in a pro rata distribution. The current portion of long term debt due
during the remainder of 2000 is $20,000.
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 were part of the security
for the Old Notes, were remitted to the Indenture Trustee as reductions to the
outstanding principal of the Old Notes. Proceeds from the sale of such assets,
amounting to $4,000 and $145,000 for the nine months ended September 30, 2000
and 1999, respectively, were remitted to the Indenture Trustee. Although the
payments were remitted to the Indenture Trustee as reductions in principal in
accordance with the order of the Bankruptcy Court, the Indenture Trustee advised
Holdings (i) that such payments were retained by the Indenture Trustee pursuant
to the terms of the Indenture in partial satisfaction of the fees and expenses
incurred by the Indenture Trustee in the Chapter 11 proceeding and (ii) that the
Indenture Trustee has included the amount of such payments in its fee
application before the Bankruptcy Court for the benefit of the holders of the
Old Notes.
Investing Activities
Recurring capital expenditures for the nine months ended September 30,
2000 amounted to approximately $5.7 million. In addition, approximately $6.7
million was expended 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 $3.4 million.
In addition to the recurring capital expenditures, the Sands spent $2.0
million for the nine months ended September 30, 2000 for the acquisition of
certain real property as discussed below. Management anticipates that an
additional $160,000 will be spent for the remainder of 2000 for the demolition
of certain improvements on that property.
In 1998, and as part of a certain settlement agreement, GBHC acquired the
membership interests in Lieber from affiliates of GBCC for $251,000. GBHC also
caused Lieber to acquire the rights to purchase a certain hotel/motel on Pacific
Avenue in Atlantic City, New Jersey (the "Pacific Avenue Hotel") from another
affiliate of GBCC for payment of $1.3 million and a payment of $500,000 at the
Effective Date. The purchase price of the Pacific Avenue Hotel was $10 million.
With Bankruptcy Court approval, Lieber closed on that purchase with funds
advanced by GBHC in 1999. Demolition of the Pacific Avenue Hotel was completed
in 1999 and construction of the new front entrance to the Sands' facility was
completed in June 2000. As part of the land assemblage for the creation of the
new front entrance, GBHC obtained certain lease rights in March 2000 for
$371,000 and another leasehold interest in June, 2000 for $30,000.
21
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 was
situated between GBHC's existing main entrance and the new Pacific Avenue
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 obtained
Bankruptcy Court approval of the assumption of the PM Agreement as modified
above and by the reduction of the monthly license fee to $20,000 a month after
the 40 months elimination of the license fee. In April, 2000, closing took place
on the CAB. GBHC demolished the CAB and will incorporate the land as part of the
new front entrance.
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 nine months ended September 30, 2000
totaled $2.0 million and are anticipated to be approximately $803,000 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.
Certain CRDA Bonds totaling $329,000 were redeemed during the nine months ended
September 30, 2000.
On October 5, 2000, Holdings submitted an offer to purchase 100% of the
stock of Claridge Hotel and Casino Corporation ("CHCP") issued as part of a plan
of reorganization of CHCP, Atlantic City Boardwalk Associates, L.P. ("ACBA"),
and the Claridge at Park Place, Inc. ("CPPI"). The offer contemplated that all
property of ACBA would be conveyed to CPPI as part of the Plan. As a result,
Holdings would have acquired control over all of the real and personal property
used in the operation of the Claridge Hotel Casino (the "Claridge") including
cash. The Claridge is located next to the Sands. Under this offer, Holdings
would have distributed 7,199,000 shares of New Common stock to the noteholders
of CHCP. This offer expired on October 13, 2000 after it was not accepted by the
Board of Directors of CHCP by that date. As of this date, Holdings has announced
its intent to file a plan of reorganization with the Bankruptcy Court for the
Claridge.
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 Old Notes and the
Subordinated Notes for periods subsequent to the filing was suspended. On August
14, 2000, the Bankruptcy Court confirmed the Plan and on September 29, 2000 the
Plan became effective. 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.
22
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
Gaming Operations
The following table sets forth certain unaudited financial and operating
data relating to the Sands' and other Atlantic City casinos' capacities, volume
of play, hold percentages and revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
($000's, except for Units)
<S> <C> <C> <C> <C>
Units:
Table Games - Sands 90 100 84 100
- Atlantic City (ex. Sands) 1,236 1,264 1,101 1,271
Slot Machines - Sands 1,978 1,996 1,942 2,002
- Atlantic City (ex. Sands) 33,880 34,199 33,596 33,938
Gross Wagering (1)
Table Games - Sands $ 127,226 $ 126,773 $ 348,676 $ 343,198
- Atlantic City (ex. Sands) 2,027,467 2,019,614 5,500,998 5,411,588
Slot Machines - Sands 579,455 563,563 1,599,876 1,527,068
- Atlantic City (ex. Sands) 10,107,798 9,528,925 27,460,642 25,850,672
Hold Percentages (2)(3)
Table Games - Sands 14.2% 13.0% 14.8% 15.0%
- Atlantic City (ex. Sands) 15.2% 15.1% 15.7% 15.5%
Slot Machines - Sands 7.7% 7.9% 7.7% 7.9%
- Atlantic City (ex. Sands) 8.2% 8.3% 8.2% 8.3%
Revenues (2)
Table Games - Sands $ 18,099 $ 16,479 $ 51,424 $ 51,548
- Atlantic City (ex. Sands) 308,512 305,200 862,767 836,489
Slot Machines - Sands 44,853 44,447 123,883 121,304
- Atlantic City (ex. Sands) 829,076 788,833 2,254,541 2,133,969
Other (4) - Sands 858 820 2,424 2,330
- Atlantic City (ex. Sands) N/A N/A N/A N/A
</TABLE>
----------
(1) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (the "Drop") and coins wagered
in slot machines (the "Handle").
(2) The Sands' hold percentages and revenues are reflected on an accrual
basis. Comparable accrual basis data for the remainder of the Atlantic
City gaming industry as a whole is not available; consequently, industry
hold percentages and revenues are based on information available from the
Casino Commission and are possibly higher than if computed on the accrual
basis.
(3) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the
"hold percentage".
(4) Consists of revenues from poker and simulcast horse racing wagering.
Comparable information for the remainder of the Atlantic City gaming
industry is not available.
23
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Patron Gaming Volume
Table game drop increased by $453,000 (.4%) and $5.5 million (1.6%),
respectively, during the three and nine month periods ended September 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 an increase of .4% and 1.7%, respectively. As a
result, the Sands table game market share (expressed as a percentage of the
Atlantic City gaming industry aggregate table game drop) remained unchanged at
5.9% and 6.0% for the three and nine months ended September 30, 2000 as compared
to the same time periods in 1999. The Sands table game drop increase for the
nine months ended September 30, 2000 is attributable to increases in both the
rated and the unrated market segment. The rated segment are 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. The Sands table game drop increase for the three months
ended September 30, 2000 is attributable to an increase in the unrated players
segment. However, that increase is being slightly offset by a decrease in the
rated segment. The number of table games decreased by 16% at the Sands. By
comparison, the number of table games at all other Atlantic City casinos
decreased 13.4%. Aggregate gaming space at all other Atlantic City casinos
decreased by approximately 38,700 square feet at September 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 $15.9 million (2.8%) and $72.8 million
(4.8%), respectively, during the three and nine month periods ended September
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 nine months ended September 30, 2000 was 6.1% and 6.2% 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 decreased to 5.5% from 5.6%
for the nine months ended September 30, 2000 and 1999, respectively. The Sands'
market share of slot machine handle as a percentage of total industry slot
handle decreased slightly from 5.6% to 5.4% for the three months ended September
30, 2000 compared to the same period in 1999. The increased Sands slot handle
during 2000 is attributable to an increased volume of play from both rated and
unrated players. The number of slot machines decreased by 60 (3.0%) machines at
the Sands due to temporary slot machine reconfigurations. 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.
24
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
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 nine month periods ended September 30,
2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------ ----------------------------------------------
$ % $ %
2000 1999 Variance Change 2000 1999 Variance Change
---- ---- -------- ------ ---- ---- -------- ------
($000's)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Casino $ 63,810 $ 61,746 $ 2,064 3.3 $ 177,731 $ 175,182 $ 2,549 1.5
Rooms 2,582 2,444 138 5.6 7,173 6,882 291 4.2
Food and Beverage 7,855 7,857 (2) (0.0) 21,122 20,851 271 1.3
Other 1,385 1,818 (433) (23.8) 3,549 4,499 (950) (21.1)
Promotional Allowances (6,820) (6,988) 168 2.4 (18,368) (17,723) (645) (3.6)
Costs and Expenses:
Casino 53,302 52,496 (806) (1.5) 149,087 149,472 385 0.3
Rooms 648 572 (76) (13.3) 2,106 2,149 43 2.0
Food and Beverage 2,533 2,888 355 12.3 6,685 7,878 1,193 15.1
Other 1,224 1,146 (78) (6.8) 2,851 3,027 176 5.8
General and Administrative 2,593 2,744 151 5.5 7,663 8,270 607 7.3
Depreciation and Amortization 3,356 6,420 3,064 47.7 9,414 12,227 2,813 23.0
Income from Operations 5,156 611 4,545 743.9 13,401 6,668 6,733 101.0
Non-operating items, net 490 287 (203) (70.7) 2,665 864 (1,801) (208.4)
Income Tax Provision (2,235) -- 2,235 N/A -- -- -- N/A
</TABLE>
Revenues
Casino revenues increased $ 2.1 million (3.3%) and $2.6 million (1.5%) for
the three and nine month periods ended September 30, 2000 compared with the same
periods in 1999. The increase in casino revenue for the three month periods
ended September 30, 2000 was due to increased table drop and slot handle and an
increase in the table hold percentage that were partially offset by a decrease
in slot hold percentage. The increase in casino revenue for the nine month
period ended September 30, 2000 was due to increased table drop and slot handle.
However, the increase in table drop and slot handle was offset by decreased
table and slot hold percentages.
Rooms revenue increased $138,000 (5.6%) and $291,000 (4.2%) for the three
and nine month periods ended September 30, 2000 compared with the same periods
in 1999. Rooms revenue increase for the three month period ended September 30,
2000 was due to an increase in the average daily room rate ("ADR") offset by an
reduction in the occupancy rate. Rooms revenue increase for the nine month
period ended September 30, 2000 was due to an increase in both the ADR and
occupancy rates.
25
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Food and beverage revenues increased $271,000 (1.3%) for the nine month
period ended September 30, 2000 compared to the same period in 1999 due to an
increase in revenue per cover. Food and Beverage revenue did not change
significantly during the three month period ended September 30, 2000 compared to
the same period in 1999.
Other revenues decreased $433,000 (23.8%) and $950,000 (21.1%) for the
three and nine month periods ended September 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 remained unchanged at 57.7% during the three month period ended
September 30, 2000 as compared to the same period of 1999. Such allowances
increased to 57.7% from 55.0% during the nine month period ended September 30,
2000 as compared to the same period of 1999. The increase was 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 are offset by reductions in casino expenses for marketing programs.
Departmental Expenses
Casino expenses did not change significantly during the three and nine
month periods ended September 30, 2000 compared with the same periods in 1999.
Rooms expense increased $76,000 (13.3%) during the three month period
ended September 30, 2000 compared with the same period in 1999 based in part
from an increase in payroll and related benefits. Rooms expense did not change
significantly during the nine month period ended September 30, 2000 compared
with the same period in 1999.
Food and beverage expense decreased $355,000 (12.3%) and $1.2 million
(15.2%) during the three and nine month periods ended September 30, 2000
compared with the same periods in 1999. These decreases were 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 increased $78,000 (6.8%) during the three month period
ended September 30, 2000 and decreased $176,000 (5.8%) during the nine month
period ended September 30, 2000 compared with the same periods in 1999. The
increase for the three month period ended September 30, 2000 was primarily
attributable to a $600,000 charge related to specific marketing plans which were
no longer applicable after the Effective Date. This increase was offset by an
increase in the allocation of other expenses to casino expenses. The decrease
for the nine month period ended September 30, 2000 was a result of decreased
costs associated with theatre entertainment. Those decreases were partially
offset by a lower allocation of other expenses to casino expense.
26
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
General and Administrative Expenses
General and administrative expenses decreased $151,000 (5.5%) and $607,000
(7.3%) during the three and nine month periods ended September 30, 2000 compared
with the same periods in 1999. The decreases were due to higher than normal
repairs and maintenance costs in 1999 and reduced insurance and utility costs in
2000.
Depreciation and Amortization
Depreciation and amortization expense decreased $3.1 million (47.7%) and
$2.8 million (23.0%) during the three and nine month periods ended September 30,
2000 compared with the same periods in 1999. The decrease was due to an expense
associated with the recognition of a future donation liability to the CRDA in
1999. This liability represented the present value of the future cash donations
committed to the CRDA. The decrease was partially offset by capital additions
including the rooms' renovations and new slot machines, which were depreciated
for the full period in 2000 as compared to a partial period in 1999.
Interest Income and Expense
Interest income decreased $92,000 (35.1%) during the three month period
ended September 30, 2000 compared to the same period in 1999. The decrease was
due to interest earned on deposits for land acquisitions in 1999. Interest
income did not change significantly during the nine month period ended September
30, 2000 compared to the same period in 1999. 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 decreased $2,000 (1.1%) during the three month period
ended September 30, 2000 and increased $145,000 (65.6%) during the nine month
period ended September 30, 2000 compared to the same periods in 1999. The
decrease for the three month period ended September 30, 2000 was primarily due
to the recognition of interest expense on the future CRDA donation liability in
1999 being expensed in the current period. The increase for the nine month
period ended September 30, 2000 was due to the additional interest expense
associated with the acquisition of the CAB. As a result of the Chapter 11
filing, the accrual of interest expense on the Old Notes, the PRT Subordinated
Note and other affiliate advances for periods subsequent to the filing were
suspended.
Income Tax Provision
Prior to 1997, Holdings was included in the consolidated federal income
tax return of Hollywood Casino Corporation ("HCC"). 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 (the "Deconsolidation"). Accordingly, beginning in 1999,
Holdings' provision for federal income taxes is calculated and paid on a
consolidated basis with GB Property Funding and GBHC.
At September 30, 2000, Holdings and its subsidiaries have deferred tax
assets including State net operating losses and Federal credit carryforwards.
The State net operating losses ("State NOL's") do not expire before the
27
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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. In
addition, as part of a certain settlement agreement, GBCC may utilize Federal
net operating losses ("Federal NOL's") of Holdings and its subsidiaries through
December 31, 1998 to offset federal taxable income of GBCC and other members of
its consolidated tax group. Subsequent to the Deconsolidation, Holdings had
approximately $2.8 million in Federal NOL's which were all utilized in the 1999
federal tax return of Holdings. Statement of Financial Accounting Standards No.
109 ("SFAS 109") requires that the tax benefit of NOL's and deferred tax assets
resulting from temporary differences be recorded as an asset and, to the extent
that management can not assess that the utilization of all or a portion of such
NOL's and deferred tax assets is more likely than not, requires the recording of
a valuation allowance. As a result of book and tax losses incurred in 1997 and
the filing under Chapter 11 by Holdings in January 1998, management is unable to
determine that realization of Holdings' deferred tax asset is more likely than
not and, thus, has provided a valuation allowance for the entire amount at
September 30, 2000. In accordance with SOP 90-7 any subsequent reduction in the
deferred tax asset valuation allowance that exists at the date that "fresh start
reporting" was adopted should be credited directly to equity. In the event that
Holdings' recognizes, in subsequent years, the tax benefit of any deferred tax
asset that existed on the Effective Date, such tax benefit will be reported as a
direct addition to contributed capital.
The Internal Revenue Service has completed an examination of the
consolidated federal income tax returns of HCC for the years 1993 and 1994 in
which Holdings was included. The results of this examination resulted in a
reduction of Federal NOL's of Holdings prior to the Deconsolidation. However,
since the Federal NOL's were fully reserved for as required by SFAS 109, this
reduction did not impact Holdings statement of operations for the period. as
reported. The Internal Revenue Service is continuing to examine the consolidated
federal income tax returns of HCC for the years 1995 and 1996 and the
consolidated federal income tax returns for GBCC for the years 1997 and 1998 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 shareholders of approximately 80% of the common
stock of GBCC (the "Spin Off"). However, as part of a certain 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 as a result of the Spin Off. In November 2000, HCC reported in its
September 30, 2000 SEC Form 10-Q that the results of the Audit will not have a
material adverse effect on its consolidated position or results of its
operations. In August 2000, GBCC reported in its June 30, 2000 SEC Form 10-Q
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 a
certain settlement agreement. While this disclosure by GBCC is contrary to prior
representations made by HCC and GBCC to Holdings, 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
28
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
consolidated groups' Federal NOL's
As a result of the Confirmation Order and under the terms of the Plan,
Holdings outstanding debt was discharged (see Note 2). Debt that is canceled or
discharged under the Bankruptcy Code does not generate taxable income in the
current period to the Debtor. Instead, certain tax attributes otherwise
available to the debtor are reduced. This attribute reduction is effective for
tax purposes beginning January 1, 2001. Management currently estimates that
approximately $14.3 million of Holdings federal and state tax attributes
relating to the tax bases of noncurrent assets will be reduced as of January 1,
2001.
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 in
reorganization and other related costs.
Reorganization costs did not change significantly for the three months
ended September 30, 2000 compared to the same period in 1999. Reorganization
costs increased by $1.4 million (97.7%) for the nine months ended September 30,
2000 compared to the same period in 1999 as attributed to the estimated amount
of the fees of the Indenture Trustee that are required to be paid under the
Plan.
Other Factors Impacting Earnings
The Company recorded an extraordinary gain of $14.8 million during the
third quarter as a result of the discharge of debt and satisfaction of claims
associated with Holdings emergence from Chapter 11 bankruptcy proceedings (see
Note 2).
Pro Forma Effect of Reorganization Proceedings
The pro forma effect of the reorganization on Holdings results of
operations, as if the reorganization had been effective January 1, 2000, would
result in a decrease in net income of approximately $2.8 million for the nine
month period ended September 30, 2000. This decrease is a result of additional
interest expense that would be incurred of approximately $9.1 million, offset by
interest income earned on additional cash balances of approximately $2.5
million, and the elimination of reorganization expense incurred during the nine
month period of $2.8 million.
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.
29
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
30
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On January 5, 1998, the Debtors filed petitions for relief under Chapter
11 of the Bankruptcy Code in the Bankruptcy Court. On August 14, 2000, the
Bankruptcy Court entered the Confirmation Order for the Plan. On September 13,
2000, the Commission approved the Plan. On September 29, 2000, the Plan became
effective (see Note 2). All material conditions precedent to the Plan becoming
binding was satisfied on or before September 29, 2000.
Item 3. Defaults Upon Senior Securities
As a result of the filings discussed in Item 1. above, the Old Notes were
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 were part of the security
for the Old Notes, were remitted to the Indenture Trustee as reductions to the
outstanding principal of the Old Notes. Through the Effective Date, $524,000 was
remitted to the Indenture Trustee as the proceeds on the sale of furniture and
equipment. The accrual of interest on the Old Notes for periods subsequent to
the filings was suspended; such interest on a contractual basis amounted to
$63,810,000 as of the Effective Date.
Item 6.(a) - Exhibits
Item 6.(b) - Reports on Form 8-K
A report on Form 8-K was filed on August 21, 2000 to report the
confirmation by the Bankruptcy Court of the Modified Fifth Amended Joint Plan of
Reorganization Under Chapter 11 of the Bankruptcy Code Proposed by the Official
Committee of Unsecured Creditors and High River for the Debtors.
A report on Form 8-K/A was filed on October 2, 2000 to amend the
Indenture.
A report on Form 8-K was filed on October 5, 2000 to report the submission
of a proposal by Holdings to acquire the Claridge Casino Hotel.
A report on Form 8-K was filed on October 20, 2000 to report the intention
of Holdings to file a plan of reorganization and related disclosure statement in
the bankruptcy cases involving the Claridge Hotel Casino.
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.
Registrant
Date: November 14, 2000 By: /s/ Timothy A. Ebling
-------------------- ----------------------------------------
Timothy A. Ebling
Executive Vice President, Chief
Financial Officer and Principal
Accounting Officer
31
