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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998
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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
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GB PROPERTY FUNDING CORP.
GB HOLDINGS, INC.
GREATE BAY HOTEL AND CASINO, INC.
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(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)
(Registrant's telephone number, including area code): (609) 441-4000
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Securities registered pursuant to Section 12(b) of the Act:
$185,000,000 PRINCIPAL
AMOUNT OF 10-7/8% FIRST MORTGAGE NOTES DUE
JANUARY 15, 2004
- ------------------------------------------- ------------------------------------
Title of each class Name of exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
NONE
- --------------------------------------------------------------------------------
(Title of Class)
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
--- ---
As of April 12, 1999, 1,000 shares of Common Stock of GB Holdings, Inc.,
$1.00 par value, were outstanding, 79% of which was held by Pratt Casino
Corporation and 21% by PBV, Inc. As of April 12, 1999, 1,000 shares of Common
Stock of GB Property Funding Corp., $1.00 par value, and 100 shares of Common
Stock of Greate Bay Hotel and Casino, Inc., no par value, were outstanding, all
of which were held by GB Holdings, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated part or parts of this report. NONE
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PART I
ITEM 1. BUSINESS
GENERAL
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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 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 is an indirect, wholly owned subsidiary of Greate Bay Casino Corporation
("GBCC"). Effective after December 31, 1998, PCC transferred 21% of the stock
ownership in Holdings to PBV, Inc., a newly formed entity controlled by certain
stockholders of GBCC ("PBV"). GBCC's common stock is listed on the OTC Bulletin
Board Service under the trading symbol "GEAAQ".
GB Property Funding was organized during September, 1993 as a special
purpose subsidiary of Holdings for the purpose of borrowing funds through the
issuance of the 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.
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 Option
Agreement expires, by its terms, after September 30, 1999. 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.
On January 5, 1998, Holdings, GB Property Funding and GBHC (collectively,
the "Debtors") filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of New Jersey (the "Bankruptcy Court"). The prior Boards of
Directors resigned on January 2, 1998 and new Boards of Directors were elected
at that time. Each company continues to operate in the ordinary course of
business, as set forth in the Bankruptcy Code, and each company's executive
officers and directors as of the date of the filing remain in office, subject to
the jurisdiction of the Bankruptcy Court, other than the following: as required
by the Settlement Agreement, as defined 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 J. Timothy Smith was elected as a Director of the
Debtors on August 3, 1998. On May 11, 1998, August 10, 1998 and November 9,
1998, as a result of motions filed by the Debtors, the Bankruptcy Court extended
the exclusive period during which only the Debtors may file a plan of
reorganization for 90 days until August 10, 1998, for another 90 days until
November 9, 1998, and for another 60 days until January 11, 1999, respectively.
On January 11, 1999, the exclusivity period expired and, as a result, any party
in interest may file a plan of reorganization. Management is in the process of
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seeking sponsor(s) for a plan of reorganization, which requires confirmation by
the Bankruptcy Court in accordance with the Bankruptcy Code and approval by the
New Jersey Casino Control Commission ("the Casino Commission"). In the event the
plan of reorganization is confirmed, continuation of the business thereafter is
dependent on Holdings ability to achieve successful future operations. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should
Holdings be unable to continue as a going concern.
New Jersey Management, Inc. ("NJMI"), also a wholly owned subsidiary of
PCC, was responsible for the operations of the Sands under a management
agreement dated August 19, 1987, as amended, with GBHC (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 for, the software
used in its operations from the same affiliate of GBCC. 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.
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 rights under the Option Agreement, 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, entered into 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 noncash 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.
THE SANDS
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For a description of the Sands' facilities, please refer to "Item 2. -
Properties."
Business Strategy. The Sands' marketing strategy in the highly competitive
Atlantic City market has consisted of seeking higher-value repeat patrons
through its capital improvements program and its use of sophisticated casino
information technology to monitor and control certain casino operations and to
target marketing efforts toward frequent visitors. Traditionally, the Sands has
been successful in its marketing efforts toward the high- end, frequent table
game and slot patrons through its offering of private, limited-access facilities
and related amenities to premium patrons. While the Sands has strived to
maintain
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its position in this segment, the completion of the Sands' expansion in 1994 has
allowed the Sands to broaden its appeal to the mass drive-in patron to remain
competitive in this market segment.
Generally, the Sands has three types of patrons: high-end patrons, drive-in
patrons, and bus patrons. High-end patrons have gaming budgets of $5,000 or more
per visit, drive-in patrons typically live within a 200 mile radius of the Sands
and utilize the Sands' parking garage, and bus patrons are generally
day-travelers who purchase "ticket coin packages" which include bus
transportation to and from the casino and a specified amount of coins to use in
the casino.
In implementing the Sands' marketing and operating strategy, the Sands uses
modern casino information technology which includes table game and slot machine
monitoring systems, which enable the Sands to track and rate patrons' play
through the use of casino players' cards. These systems provide management with
the key characteristics of patrons' play as slot machines are connected with,
and information with respect to table games can be input into, its data base
monitoring system. When patrons use the casino player's card at slot machines or
table games, the information is immediately available to management and allows
management to implement marketing programs to recognize and reward patrons
during their visits to the casino. Certain of these marketing programs allow
patrons to automatically credit themselves with complimentaries based on their
levels of play. Such promotions and complimentaries include free meals, hotel
accommodations, retail merchandise, parking, and sweepstakes giveaways based on
slot machine patrons' gross wagering. Management believes that its ability to
reward its customers on a "same-visit" basis is valuable in developing a loyal
base of higher value patrons. Such systems also allow the Sands to monitor,
analyze, and control the granting of gaming credit, promotional expenses, and
other marketing costs.
Management uses its data bases to focus its marketing efforts on patrons
who have been identified as higher value patrons. Management believes that its
process of identifying higher value patrons, encouraging participation in its
casino player's card program, and tailoring promotions and special events to
cater to this market segment enhances the profitability of the Sands.
The Sands also markets to the "mass" casino patron market segment through
various forms of advertising media as well as through group and bus tour
packages. Once new patrons are introduced to the Sands' gaming facilities and
the casino player's card program, management uses its data base capabilities to
directly market to these patrons in an attempt to convert them into repeat
patrons.
COMPETITION. The Sands faces intense competition from the 11 other existing
Atlantic City casinos. According to reports of the Casino Commission, the twelve
Atlantic City casinos currently offer approximately 1.2 million square feet of
gaming space. Bally's Park Place opened a new parking and bus facility in 1998
adjoining Pacific Avenue and opened its "Wild West Casino" in 1997. Caesars'
Atlantic City has constructed a new entrance to its facility, on Pacific Avenue,
added additional casino space, and a new hotel tower in 1998. In addition,
several companies have announced plans to build and operate additional
casino/hotels over the next few years. For example, Mirage Resorts and Boyd
Gaming have announced plans for a resort complex consisting of a casino, a
hotel, several theaters and an upscale shopping concourse at a site located in
the Marina District. The anticipated opening of this project is early 2002.
Construction has commenced on a tunnel project connecting the Atlantic City
Expressway with the Marina District. Other individuals have also submitted
applications and have been qualified in New Jersey to hold casino licenses.
Legislation enacted during 1996 and 1993 requires the allocation of an
aggregate of $175 million of Casino Reinvestment Development Authority ("CRDA")
funds and credits to subsidize the construction of new hotel rooms by casinos in
Atlantic City. The CRDA is a governmental agency which administers
4
the statutorily mandated investments made by casino licensees. Competitors of
the Sands which have the financial resources and that can currently access such
funds and are capable of physically expanding their facilities so as to take
advantage of such subsidy may benefit disproportionately from such legislation.
Plans have been announced by other casino operators to complete expansions
within the required subsidy period. The expansion of existing gaming facilities
and the addition of new casinos could significantly increase the competitiveness
of the Atlantic City market.
In this highly competitive environment, each property's relative success is
affected by a great many factors that relate to its location and facilities.
These include availability and number of parking spaces, hotel accommodations,
proximity to the Boardwalk, proximity to other casino/hotels, and access to the
main expressway entering into Atlantic City. GBHC believes that in prior years
its operating strategy enabled the Sands to compete against most other Atlantic
City casino/hotels. However, many of its competitors have greater sources of
funding for capital improvements and financial resources for marketing and
promotional budgets than GBHC and, as a result, the Sands' facilities and
amenities have fallen behind many of the other casinos. In order to improve
GBHC's competitive position, GBHC sought the approval of the Bankruptcy Court
for a capital expenditure program to renovate the majority of its hotel rooms
and suites and to purchase approximately 700 slot machines. The capital
expenditure program in the amount of approximately $13.6 million was approved in
March, 1998. The renovations of the hotel suites has commenced and GBHC expects
to complete the renovation in 2000. Replacement and upgrading of slot machines
has commenced and is expected to be completed by the first half of 1999. In
addition, the lack of access to Pacific Avenue has hampered the Sands' efforts
to expand its "drive-in" patron base. Closing under the Option Agreement, which
is subject to Bankruptcy Court approval, will assist the Sands in expanding this
"drive-in" market.
Management estimates that a significant amount of the Sands' revenues is
derived from patrons living within a 120 mile radius of Atlantic City, New
Jersey, particularly from southeastern Pennsylvania, northern New Jersey, and
metropolitan New York City. Proposals to allow casino gaming in certain areas of
Pennsylvania and New York have been defeated within the past two years. If
casino gaming were to be legalized in those areas or in other venues that are
more convenient to those areas, it could have a material adverse effect on the
Sands. Gaming is currently conducted on Indian lands in nearby states, including
the Foxwoods and Mohegan Sun Casinos in Connecticut and the Turning Stone Casino
in Oneida, New York near Syracuse. In addition, slot machines are allowed at
race tracks in the State of Delaware. As discussed above, the Sands' is
currently in the process of upgrading slot machines with the purchase of 700
machines as allowed by the Bankruptcy Court approved capital expenditure
program.
INDUSTRY DEVELOPMENTS. A number of significant changes to the regulations
governing the casino industry have been approved by New Jersey regulators in
recent years. Significant deregulation of the industry began in 1995 with the
enactment of legislation amending the New Jersey Casino Control Act (the "Casino
Act") and has continued with additional rule modifications to stimulate industry
growth. Partly as a result of such regulatory changes, revenues have shown
small, but steady increases from $3.8 billion in 1996 to $3.9 billion in 1997
and to $4.0 billion in 1998.
Casino/hotel operators have also benefited in recent years from a trend
toward increased slot play as slot machines have increasingly become more
popular than table games with loyal and frequent patrons, as well as with
recreational and other casual visitors. Casino operators have been catering
increasingly to slot patrons through new forms of promotions and incentives such
as slot machines which are linked between the various casinos to pay out a
pooled jackpot, and through more attractive gaming machines. Slot machines
generally produce higher margins and profitability than table games because they
require less labor and have lower operating costs. As a result, slot machine
revenue growth has slightly outpaced table game revenue growth in recent years
and for 1998 slot win accounted for nearly 70% of total
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Atlantic City gaming win. Table games remain important, however, to a select
segment of gaming patrons, and to gaming ambience and a varied gaming
experience.
CASINO CREDIT. Casino operations are conducted on both a credit and a cash
basis. Gaming debts arising in Atlantic City in accordance with applicable
regulations are enforceable under New Jersey law. For the year ended December
31, 1998, gaming credit extended to Sands' customers accounted for approximately
23% of overall table game wagering, and table game wagering accounted for
approximately 18.4% of overall casino wagering during the period. At December
31, 1998, gaming receivables amounted to $18.3 million before allowances for
uncollectible gaming receivables amounting to $11.8 million. Management of the
Sands believes that the allowances for uncollectible gaming receivables are
adequate.
LICENSE AGREEMENT. GBCC entered into a 99-year license agreement during
1987 to use the trade name "Sands" in Atlantic City, New Jersey. GBHC's rights
to the trade name "Sands" (the "Trade Name") are derived from this 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 $275,000, $290,000 and $283,000 for the years
ended December 31, 1998, 1997 and 1996. 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 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.
THE SANDS MANAGEMENT CONTRACT. 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, 1998 and until decision on the Rejection Motion, NJMI
agreed to provide certain services to GBHC and GBHC agreed to pay a monthly fee
of $165,000, which was payable $122,000 on a monthly basis in arrears and
$43,000 per month upon confirmation of GBHC's plan of reorganization by the
Bankruptcy Court. On September 28, 1998, and as part of the Second Settlement
Agreement, the Bankruptcy Court approved the Rejection Motion. The current fees
under the Settlement Agreement have been paid and the deferred fees have been
accrued. As part of the Second Settlement Agreement, a rejection damages claim
of NJMI was preserved provided it was filed in the Bankruptcy Court within 30
days of the entry of the Order of the Bankruptcy Court on September 11, 1998
approving the Second Settlement Agreement. The rejection damages claim was not
filed and expired along with the corresponding avoiding powers causes of action
under the Bankruptcy Code of GBHC, as provided in the Second Settlement
Agreement. Accordingly, other than the deferred fees, no further management fees
will be paid under either the Management Agreement or the Settlement Agreement
except that NJMI possesses a disputed claim for prepetition management fees.
EMPLOYEES AND LABOR RELATIONS. In Atlantic City, all casino employees,
except certain hotel employees, must be licensed under the Casino Act. Due to
the seasonality of the operations of the Sands, the number of employees varies
during the course of the year. At December 31, 1998, there were
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approximately 3,000 employees at the Sands. The Sands has collective bargaining
agreements with three unions that represent approximately 1,000 employees,
substantially all of whom are represented by the Hotel, Restaurant Employees and
Bartenders International Union, AFL-CIO, Local 54. The collective bargaining
agreement with Local 54 expires in September 1999. Management considers its
labor relations to be good.
CASINO REGULATION
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Casino gaming is strictly regulated in Atlantic City under the Casino Act
and the regulations of the Casino Commission, which affect virtually all aspects
of the operations of the Sands. The Casino Act and regulations affecting
Atlantic City casino licensees concern primarily the financial stability,
integrity and character of casino operators, their employees, their debt and
equity security holders and others financially interested in casino operations;
the nature of casino/hotel facilities; the operation methods (including rules of
games and credit granting procedures); and financial and accounting practices
used in connection with casino operations. A number of these regulations require
practices that are different from those in casinos in Nevada and elsewhere, and
some of these regulations result in casino operating costs greater than those in
comparable facilities in Nevada and elsewhere.
CASINO LICENSES. The Casino Act requires that all casino owners and
management contractors be licensed by the Casino Commission and that all
employees (except for certain non-casino job positions), major shareholders and
other persons or entities financially interested in the casino operation be
either licensed or approved by the Casino Commission. A license is not
transferable and may be revoked or suspended under certain circumstances by the
Casino Commission. A plenary license authorizes the operation of a casino with
the games authorized in an operation certificate issued by the Casino
Commission, and the operation certificate may be issued only on a finding that
the casino conforms to the requirements of the Casino Act and applicable
regulations and that the casino is prepared to entertain the public. Under such
determination, GBHC has been issued a plenary casino license, and GBCC has been
approved as a holding company of a casino licensee.
The plenary license issued to the Sands was renewed by the Casino
Commission in September, 1996 and extended through September 30, 2000, subject
to review of the Sands' financial stability during 1997 and to the submission of
financial projections in 1998 and 1999 for calendar years 1999 and 2000,
respectively. The 1997 review took place and the 1999 financial projections were
filed and the Sands license will be up for renewal in 2000. Terms of the current
license require GBHC to comply with weekly and monthly financial reporting
requirements and to obtain prior Casino Commission approval of certain cash
transactions with affiliates. The Casino Commission may reopen licensing
hearings at any time.
The Casino Act provides for a casino license fee of not less than $200,000
based upon the cost of the investigation and consideration of the license
application, and a renewal fee of not less than $100,000 or $200,000 for a one
year or four year renewal, respectively, based upon the cost of maintaining
control and regulatory activities. In addition, a licensee must pay annual taxes
of 8% of casino win (as defined in the Casino Act), net of a provision for
uncollectible accounts of up to 4% of casino win ("Gross Revenue"). During the
years ended December 31, 1998, 1997 and 1996, the taxes assessed by, and the
license and other fees incurred by the Sands amounted to $21.5 million, $22.4
million and $23.5 million, respectively.
The Casino Act requires casino licensees to pay an investment alternative
tax of 2.5% of Gross Revenue (the "2.5% Tax") or to make quarterly deposits of
1.25% of quarterly Gross Revenue with the CRDA (the "Deposits"). The Deposits
are then used to purchase bonds at below-market interest rates from the CRDA or
to make qualified investments approved by the CRDA. The CRDA administers the
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statutorily mandated investments made by casino licensees and is required to
expend the monies received by it for eligible projects defined in the Casino
Act. The Sands has elected to make the Deposits with the CRDA rather than pay
the 2.5% Tax.
GBHC has, from time to time, donated certain amounts held in escrow by the
CRDA to fund CRDA sponsored projects. In return, the CRDA granted GBHC waivers
of certain of its Deposit obligations in future periods. GBHC made such
donations during the years ended December 31, 1998, 1997 and 1996 totaling
$146,000, $147,000 and $1.5 million, respectively, resulting in waivers granted
by the CRDA during 1998 and 1997 totaling $74,000 and $75,000, respectively. No
such waivers were granted during 1996; however, the donations were designated
for projects expected to benefit the community.
The Casino Act also imposes certain restrictions upon the ownership of
securities issued by a corporation that holds a casino license or is a holding
company of a corporate licensee. Among other restrictions, the sale, assignment,
transfer, pledge or other disposition of any security issued by a corporate
licensee or holding company is subject to the regulation of the Casino
Commission. In the case of corporate holding companies whose stock is publicly
traded, the Casino Commission may require divestiture of the security held by a
disqualified holder such as an officer, director or controlling stockholder who
is required to be qualified under the Casino Act.
Note holders are also subject to the qualification provisions of the Casino
Act and may, in the sole discretion of the Casino Commission, be required to
make filings, submit to regulatory proceedings and qualify under the Casino Act.
If an investor is an "Institutional Investor" such as a retirement fund for
governmental employees, a registered investment company or adviser, a collective
investment trust, or an insurance company, then, in the absence of a prima facie
showing by the New Jersey Division of Gaming Enforcement that the "Institutional
Investor" may be found unqualified, the Casino Commission shall grant a waiver
of this qualification requirement with respect to publicly traded debt or equity
securities if the investor will own (i) less than 10% of the common stock of the
company in question on a fully diluted basis, or (ii) less than 20% of such
company's overall indebtedness provided the investors owns less than 50% of an
outstanding issue of indebtedness of such company; the Casino Commission, upon a
showing of good cause, may, in its sole discretion, grant a waiver of
qualification to an "Institutional Investor" not satisfying the above percentage
criteria. An Institutional Investor must also purchase securities for investment
and have no intent to influence the management or operations of such company.
The Casino Commission may, in its sole discretion, grant a waiver of the
qualification requirement to investors not qualifying as "Institutional
Investors" under the Casino Act if such investors will own less than 5% of the
publicly traded common stock of such company on a fully diluted basis or less
than 15% of the publicly traded outstanding indebtedness of such company.
ITEM 2. PROPERTIES
The Sands is located in Atlantic City, New Jersey on approximately 4.8
acres of land one-half block from the Boardwalk at Brighton Park between Indiana
Avenue and Dr. Martin Luther King, Jr. Boulevard. The Sands facility currently
consists of a casino and simulcasting facility with approximately 73,000 square
feet of gaming space containing approximately 2,008 slot machines and
approximately 99 table games; a hotel with 532 rooms (including 59 suites); six
restaurants; two cocktail lounges; two private lounges for invited guests (the
Plaza Club and the Island Club); an 800-seat cabaret theater; retail space; an
adjacent nine-story executive office building with approximately 77,000 square
feet of office space for its executive, financial and administrative personnel;
the "People Mover", an elevated, enclosed, one-way moving sidewalk connecting
the Sands to the Boardwalk; and parking for approximately 1,750 vehicles.
Effective September 2, 1998, GBHC acquired the membership interests in Lieber, a
New Jersey
8
limited liability company which owns the Lieber Parcel adjacent to GBHC and GBHC
acquired and caused the Option Agreement on the Option Parcels to be assigned to
Lieber. 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. In addition,
a nearby building in Atlantic City that houses an auto shop facility and a
warehouse in Mystic Island, New Jersey also support the Sands' operations. In
March of 1998, GBHC commenced a $13.6 million capital expenditure program which
was approved by the Bankruptcy Court. This program includes the renovation of
the majority of its hotel rooms and suites and the purchase of approximately 700
slot machines.
On February 17, 1994, the Sands obtained $185,000,000 from GB Property
Funding, which issued $185,000,000 of first mortgage notes due January 15, 2004.
Interest on the First Mortgage Notes accrued at the rate of 10 7/8% per annum,
payable semiannually commencing July 15, 1994. Interest only was payable during
the first three years. Commencing on July 15, 1997, semiannual principal
payments of $2,500,000 were due on each interest payment date with the balance
due at maturity. Such semiannual payments could be made in cash or by tendering
First Mortgage Notes previously purchased or otherwise acquired by Holdings.
Holdings acquired $2,500,000 face amount of First Mortgage Notes at a discount
during May 1997, which it used during June 1997 to make its July 15, 1997
required principal payment. As a result of the filing under Chapter 11, the debt
service payments due subsequent to January 5, 1998 were not made. The accrual of
interest on the First Mortgage Notes for periods subsequent to the filing has
been suspended.
ITEM 3. LEGAL PROCEEDINGS
On January 5, 1998, the Debtors filed petitions for relief under Chapter 11
of the Bankruptcy Code in the Bankruptcy Court. The prior Boards of Directors
resigned on January 2, 1998 and new Boards of Directors were elected at that
time. Each company continues to operate in the ordinary course of business, as
set forth in the Bankruptcy Code, and each company's executive officers and
directors as of the date of the filing remain in office, subject to the
jurisdiction of the Bankruptcy Court, other than the following: as required by
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
J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On
May 11, 1998, August 10, 1998 and on November 9, 1998, as a result of motions
filed by the Debtors, the Bankruptcy Court extended the exclusive period during
which only the Debtors may file a plan of reorganization for 90 days until
August 10, 1998, for another 90 days until November 9, 1998, and for another 60
days until January 11, 1999, respectively. On January 11, 1999, the exclusivity
period expired and, as a result, any party in interest may file a plan of
reorganization.
On May 22, 1998, GBHC filed the Rejection Motion with the Bankruptcy Court.
The Management Agreement was suspended as a result of the Settlement Agreement
and was replaced with a services agreement until the decision on the Rejection
Motion. On September 28, 1998, and as part of the Second Settlement Agreement,
the Bankruptcy Court granted the Rejection Motion.
On July 27, 1998, GBHC filed an action in the Bankruptcy Court (the
"Action") against GBCC, certain affiliates of GBCC, and Jack E. Pratt, Edward T.
Pratt Jr. and William D. Pratt, former directors of GBHC and current directors
of GBCC (collectively, the "Defendants"), alleging, inter alia, usurpation of
corporate opportunities of GBHC and breach of fiduciary duty with respect to
GBHC, in connection with the acquisition of an option for certain land parcels
and the acquisition of a land parcel on Pacific Avenue in Atlantic City, New
Jersey adjoining the Sands (collectively, the "Parcels"), and seeking, inter
alia, an order enjoining the Defendants from transferring the Parcels to third
parties and requiring the Defendants to convey the Parcels to GBHC. The Action
also sought to enjoin the Defendants from using the NOL's
9
of the Debtors. Effective September 2, 1998, the parties entered into the Second
Settlement Agreement resolving, among other things, the Action. Under the Second
Settlement Agreement, among other things, GBHC agreed to be included in the
consolidated 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. The agreement also resulted in the noncash
settlement of certain outstanding intercompany transactions, and the transfer of
the membership interests in Lieber to GBHC and the assignment of the Option
Agreement for the Option Parcels to Lieber. 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. 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.
GBHC is a party in various legal proceedings with respect to the conduct of
casino and hotel operations. Although a possible range of losses can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of these proceedings should not have a material adverse
impact upon the consolidated financial position or results of operations of
Holdings and GBHC. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of the uncertainties
described above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matter was submitted to a vote of
security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
GB Property Funding's common stock, 1,000 shares with par value of $1.00
per share, is its sole voting security; all of the 1,000 shares outstanding are
owned by Holdings.
GBHC's common stock, 100 shares with no par value per share, is its sole
voting security; all of the 100 shares are owned by Holdings.
Holdings' common stock, 1,000 shares with par value of $1.00 per share, is
its sole voting security; all of the 1,000 shares were owned by PCC until
December 31, 1998. Effective after December 31, 1998, PCC transferred 21% of the
stock ownership in Holdings to PBV.
Neither GB Property Funding nor Holdings have paid any dividends in the
past and have no plans to pay any dividends in the future. GBHC is currently
restricted from the payment of dividends by the Casino Commission without prior
approval.
10
ITEM 6. SELECTED FINANCIAL DATA
GB PROPERTY FUNDING CORP. AND GB HOLDINGS, INC.
-----------------------------------------------
The following tables set forth selected financial information for GB
Property Funding Corp. and GB Holdings, Inc. and are qualified in their entirety
by, and should be read in conjunction with, GB Property Funding's and GB
Holdings' Financial Statements and notes thereto contained elsewhere herein. The
data as of December 31, 1998 and 1997 and for the years ended December 31, 1998,
1997, and 1996 have been derived from the audited financial statements of GB
Property Funding and GB Holdings contained elsewhere in Item 8.
GB PROPERTY FUNDING CORP.
STATEMENT OF OPERATIONS DATA: YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998(1) 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
Interest income .......... $ 221 $ 19,941 $ 20,119 $ 20,119 $ 17,548
Interest expense ......... (221) (19,941) (20,119) (20,119) (17,548)
-------- -------- -------- -------- --------
Net income ............... $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
BALANCE SHEET DATA: DECEMBER 31,
----------------------------------------------------------------
1998(1) 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
Total assets ............. $191,617 $191,653 $194,278 $194,278 $194,278
Total debt ............... 182,243 182,500 185,000 185,000 185,000
Shareholder's equity ..... 1 1 1 1 1
- ------------
(1) On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of New Jersey. The accrual
of interest on the First Mortgage Notes for periods subsequent to the
filing has been suspended.
11
GB HOLDINGS, INC.
STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 (1) 1997 1996 1995 1994 (2)
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Net revenues .......................................... $ 237,344 $ 256,255 $ 264,761 $ 283,950 $ 275,139
--------- --------- --------- --------- ---------
Expenses:
Departmental .................................... 202,532 215,907 235,285 223,631 215,081
General and administrative ...................... 12,497 17,409 18,486 23,021 23,439
Depreciation and amortization ................... 12,795 14,062 19,310 19,937 18,872
--------- --------- --------- --------- ---------
Total expenses ................................ 227,824 247,378 273,081 266,589 257,392
--------- --------- --------- --------- ---------
Income (loss) from operations ................... 9,520 8,877 (8,320) 17,361 17,747
--------- --------- --------- --------- ---------
Non-operating income (expense):
Interest income ................................. 961 1,680 1,590 1,808 2,186
Interest expense ................................ (313) (23,260) (22,236) (21,680) (21,053)
Gain on disposal of assets ...................... 252 59 13 56 73
--------- --------- --------- --------- ---------
Total non-operating income (expense), net .... 900 (21,521) (20,633) (19,816) (18,794)
--------- --------- --------- --------- ---------
Income (loss) before income taxes, cumulative effect of
accounting change, extraordinary and
other items ..................................... 10,420 (12,644) (28,953) (2,455) (1,047)
Valuation provision on affiliate receivables .......... -- (9,650) -- -- --
Write off deferred financing costs .................... -- (4,265) -- -- --
Reorganization costs .................................. (4,069) (505) -- -- --
--------- --------- --------- --------- ---------
Income (loss) before income taxes, cumulative effect of
accounting change and extraordinary item ........ 6,351 (27,064) (28,953) (2,455) (1,047)
Income tax (provision) benefit ........................ -- (10,902) (2,417) (186) (920)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of accounting
change and extraordinary item ................... 6,351 (37,966) (31,370) (2,641) (1,967)
Extraordinary item - early extinguishment of
debt, net of related tax benefits ............... -- 310 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ..................................... $ 6,351 $ (37,656) $ (31,370) $ (2,641) $ (1,967)
========= ========= ========= ========= =========
BALANCE SHEET DATA:
DECEMBER 31,
---------------------------------------------------------------------
1998 (1) 1997 1996 1995 1994 (2)
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Total assets .......................................... $ 199,161 $ 187,728 $ 224,438 $ 245,558 $ 245,721
Total debt ............................................ 198,234 205,932 203,942 195,453 195,463
Shareholder's (deficit) equity......................... (42,741) (58,600) (20,944) 10,426 13,067
- ----------
(1) On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of New Jersey. The accrual
of interest expense on the First Mortgage Notes, the Subordinated Notes (as
hereafter defined) and other affiliate advances for periods subsequent to
the filing has been suspended.
(2) Holdings acquired GBHC on February 17, 1994. The merger was accounted for
in a manner similar to a pooling of interests; accordingly, the
consolidated financial statements are presented as if the accounts have
always been combined. Holdings has no significant operations other than
those of GBHC.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements about
the business, financial condition and prospects of Holdings. The actual results
could differ materially from those indicated by the forward-looking statements
because of various risks and uncertainties including, among other things,
changes in competition, economic conditions, tax regulations, state regulations
applicable to the gaming industry in general or Holdings in particular, and
other risks indicated in Holdings' filings with the Securities and Exchange
Commission. Such risks and uncertainties are beyond management's ability to
control and, in many cases, can not be predicted by management. When used in
this Annual Report on Form 10-K, the words "believes", "estimates",
"anticipates" and similar expressions as they relate to Holdings or its
management are intended to identify forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES
Holdings owns GBHC which owns the Sands Hotel and Casino in Atlantic City.
Prior to 1996, the Sands' cash flow was sufficient to meet debt service
obligations and to fund a substantial portion of annual capital expenditures.
The Sands also used short-term borrowings to fund seasonal cash needs for
certain capital projects. However, over time, the competitive position of the
Sands was impaired, which was due, in part, to insufficient capital
expenditures. As a result, and due to adverse weather in the first quarter of
1996, declines in hold percentages in 1996, and increased marketing expenses in
1996 on an industry wide basis, cash flow decreased significantly in 1996 and
improved in 1997, but remained significantly below historical levels. These
declines in operating cash flow at the Sands resulted in the need for periodic
financial assistance from PCC and GBCC in order to meet debt service
obligations. Substantial additional financial assistance would have been
required to make the January 15, 1998 principal and interest payments due on the
First Mortgage Notes.
GBHC was unable to obtain additional borrowings from affiliates or other
sources and, accordingly, on January 5, 1998, the Debtors filed petitions
seeking protection under Chapter 11 of the Bankruptcy Code in the Bankruptcy
Court. The prior Boards of Directors resigned on January 2, 1998 and new Boards
of Directors were elected at that time. Each company continues to operate in the
ordinary course of business, as set forth in the Bankruptcy Code, and each
company's executive officers and directors as of the date of filing remain in
office, subject to the jurisdiction of the Bankruptcy Court, other than the
following: 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 J. Timothy Smith was elected as a Director of the
Debtors on August 3, 1998. On May 11, 1998, August 10, 1998 and on November 9,
1998, as a result of motions filed by the Debtors, the Bankruptcy Court extended
the exclusive period during which only the Debtors may file a plan of
reorganization for 90 days until August 10, 1998, for another 90 days until
November 9, 1998, and for another 60 days until January 11, 1999, respectively.
On January 11, 1999, the exclusivity period expired and, as a result, any party
in interest may file a plan of reorganization. Management is in the process of
seeking sponsor(s) for a plan of reorganization which requires confirmation by
the Bankruptcy Court in accordance with the Bankruptcy Code and approval by the
Casino Commission. There can be no assurance at this time that any plan of
reorganization, when submitted, will be confirmed by the Bankruptcy Court or
approved by the Casino Commission. In the event the plan of reorganization is
confirmed, continuation of the business thereafter is dependent on Holdings
ability to achieve successful future operations.
As a result of the Chapter 11 filings, GBHC has sufficient cash flow to
continue normal operations while it seeks to develop a plan of reorganization
which requires confirmation by the Bankruptcy Court
13
in accordance with the Bankruptcy Code and approval by the Casino Commission.
Capital expenditures, other than normal recurring capital expenditures in the
ordinary course of business, will require prior approval of the Bankruptcy
Court. In order to improve GBHC's competitive position, GBHC sought the approval
of the Bankruptcy Court for a capital expenditure program to renovate the
majority of its hotel rooms and suites and to purchase approximately 700 slot
machines. The capital expenditure program in the amount of approximately $13.6
million was approved in March, 1998. The renovations of the hotel suites has
commenced and GBHC expects to substantially complete the renovations in early
2000. Replacement and upgrading of slot machines has commenced and is expected
to be completed by the first half of 1999.
OPERATING ACTIVITIES
At December 31, 1998, GBHC had cash and cash equivalents of $23.8 million.
GBHC generated cash flow from operations of $20.9 million for 1998 compared to
$2.2 million during 1997. The 1997 period includes the payment of $20.1 million
in interest; the payment of such interest was suspended in 1998 by the Chapter
11 filing. GBHC utilized cash from its operations during 1998 to meet its
operating needs, to fund capital additions totaling $8.0 million, to make
obligatory investments of $2.6 million, and to purchase Lieber for $251,000. The
1998 cash flow from operations also includes the purchase by GBHC of the rights
under the Option Agreement for the Option Parcels for $1.3 million and $1
million to extend the closing on the Option Parcels. In the event of closing on
the Option Parcels, $2.0 million is to be applied against the purchase price,
or, to be forfeited as liquidated damages in the event of a failure of GBHC to
close.
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, which
are subject to reorganization, total scheduled maturities of long-term debt in
1999 are $73,000.
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 of the First
Mortgage Notes as reductions to the outstanding principal of the First Mortgage
Notes. During the year ended December 31, 1998, $257,000 has been remitted to
the Indenture Trustee as the proceeds on the sale of assets.
During the third quarter of 1996, GBCC borrowed a total of $6,500,000 from
Hollywood Casino Corporation ("HCC"), the parent company of GBCC, which GBCC
then loaned to GBHC to enable GBHC to make its debt service obligations and a
property tax payment. According to the terms of the corresponding note, such
borrowings accrued interest at the rate of 13-3/4% per annum payable quarterly
commencing October 1, 1996. During the first quarter of 1997, GBHC borrowed an
additional $1,500,000 from GBCC on similar stated terms. As part of the Second
Settlement Agreement, GBHC settled certain intercompany obligations on a noncash
basis. These loans 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.
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
14
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"). Repayment of the PCC Subordinated Note and the payment of the related
interest are subject to approval of the Casino Commission, any setoffs and
defenses available under the Bankruptcy Code and applicable law, and to the
terms of a plan of reorganization, which requires approval by the Bankruptcy
Court and approval by the Casino Commission. The accrual of interest on the PCC
Subordinated Note for periods subsequent to the filing under Chapter 11 has been
suspended.
INVESTING ACTIVITIES
Capital expenditures at the Sands during 1998 amounted to approximately
$8.0 million and management anticipates capital expenditures taking place in the
ordinary course of business during 1999 will be approximately $5.0 million. In
addition to capital expenditures in the ordinary course, anticipated capital
expenditures during 1999 include approximately $7.4 million of a two year
capital expenditure of $13.6 million approved by the Bankruptcy Court. Of this
$7.4 million, it is anticipated that $4.4 million will be expended on the
ongoing room and suite renovations and $3.0 million will be expended for slot
machines and related equipment.
The Sands is required by the New Jersey Casino Control Act to make certain
deposits with the CRDA, a governmental agency which administers the deposits
required by casino licensees under the Casino Act. Deposit requirements for 1998
totaled $2.6 million and are anticipated to be approximately $2.8 million during
1999.
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. The Lieber
Parcel is subject to a mortgage in the amount of $572,000 at December 31, 1998.
SUMMARY
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code. Accordingly,
there is significant doubt about Holdings' ability to continue as a going
concern. Management is in the process of seeking sponsor(s) for a reorganization
plan which requires confirmation by the Bankruptcy Court in accordance with the
Bankruptcy Code and approval by the Casino Commission. On May 11, 1998, August
10, 1998 and on November 9, 1998, as a result of motions filed by the Debtors,
the Bankruptcy Court extended the exclusive period during which only the Debtors
may file a plan of reorganization for 90 days until August 10, 1998, for another
90 days until November 9, 1998, and for another 60 days until January 11, 1999,
respectively. On January 11, 1999 the exclusivity period expired and, as a
result, any party in interest may file a plan of reorganization. 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. Management believes that
cash flows generated from operations during 1999 will be sufficient to meet its
operating plan.
15
RESULTS OF OPERATIONS
GENERAL
The Sands earned income from operations of $9.5 million for the year ended
December 31, 1998 compared to $8.9 million during 1997 and sustained a loss from
operations of $8.3 million in 1996. Operating results during 1998 were
positively impacted by higher table game hold percentages. The declines in
casino revenues were offset by operating efficiencies, management's ongoing
effort to discontinue certain marginally effective marketing programs, and by
the cessation of payment of the management fee. Although net revenues declined
during 1998 by $18.9 million (7.4%) as compared to 1997, operating expenses also
decreased significantly by $19.6 million (7.9%) for the same period. Such
operating expense decreases are due to reductions in salaries and related
benefits costs of $5.0 million (5.5%), and marketing and advertising costs of
$5.6 million (8.6%) resulting from managements efforts to control costs while
maintaining positive gross operating profit. Management fee expense decreased
$3.0 million (56.0%) as a result of the filing and granting of the Rejection
Motion. These decreases were slightly offset by an increase of $1.4 million in
additional provision for valuation allowance during 1998 for certain CRDA bond
investments due to the uncertainty of their realizable value. The negative
publicity surrounding the Sands filing for bankruptcy protection on January 5,
1998 could also have affected its operating results for the 1998 period.
Operating results during the first nine months of 1997 were also favorably
impacted by operating efficiencies and by management's decision to discontinue
certain aggressive marketing programs. Operating results were adversely affected
in 1996 by the advent of unprecedented and highly aggressive marketing programs
instituted by certain other Atlantic City casinos seeking to increase their
market share and to a lesser degree by severe winter snowstorms in January and
February of 1996.
16
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating
data relating to the Sands' operations:
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
REVENUES:
Table games $ 64,744 $ 74,083 $ 79,127
Slot machines 151,749 157,312 159,972
Other (1) 2,875 3,082 3,790
---------- ---------- ----------
Total $ 219,368 $ 234,477 $ 242,889
========== ========== ==========
TABLE GAMES:
Gross Wagering
(Drop) (2) $ 426,343 $ 524,040 $ 576,577
========== ========== ==========
Hold Percentages: (3, 4)
Sands 15.2% 14.1% 13.7%
Atlantic City 15.4% 15.0% 15.5%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $1,886,901 $1,916,350 $1,954,612
========== ========== ==========
Hold Percentages: (3, 4)
Sands 8.0% 8.2% 8.2%
Atlantic City 8.4% 8.4% 8.3%
- ----------
(1) Consists of revenues from poker and simulcast horse racing wagering.
(2) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (the "Drop") and coins wagered in
slot machines ("Handle").
(3) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
(4) The Sands' hold percentages are reflected on an accrual basis. Comparable
data for the Atlantic City gaming industry is not available; consequently,
industry percentages have been calculated based on information available
from the New Jersey Casino Control Commission.
Although the quantitative impact on wagering of GBHC's filing for
protection under Chapter 11 can not be estimated, management believes that the
negative publicity resulting from the filing has had an adverse effect on patron
volume.
17
Slot machine handle decreased $29.4 million (1.5%) during 1998 compared
with 1997 and $38.3 million (2%) during 1997 compared with 1996. The Sands'
decreases compare with increases in slot machine handle of 4.7% and 2.2%,
respectively, for all other Atlantic City casinos during the same periods. As a
result, the Sands' market share of slot machine play ( expressed as a percentage
of the Atlantic City industry aggregate slot machine handle) decreased to 5.6%
in 1998 from 5.9% in 1997 and 6.1% in 1996. Gaming space and the number of slot
machines have decreased slightly during 1998 at the Sands. Expansions of other
Atlantic City casinos resulted in an increase of approximately 76,000 square
feet of gaming space and approximately 1,670 additional slot machines at
December 31, 1998 compared to December 31, 1997. While the number of slot
machines has decreased slightly at the Sands during 1998, during the last half
of 1998 older slot machines have been replaced with new and more popular
machines as part of the Sands capital expenditure program which was approved by
the Bankruptcy Court. These replacements have had a positive impact on slot
machine handle; during the last six months of 1998 slot machine handle increased
$39.4 million (4.1%) compared to the last six months of 1997. This increase
during the last six months of 1998 could not offset the declines in slot handle
experienced during the first six months of 1998 as a result of competitive
pressures resulting from casino expansions and related marketing campaigns at
other properties. As a result of such competitive pressures, the Sands has
experienced a significant decrease (18.7%) in the number of bus passengers, a
market which historically plays slot machines. The below industry wide
performance experienced by the Sands during 1997 is a result of the same
competitive pressures resulting from casino expansions and related marketing
campaigns at other casino properties which lure the "mass" segment to the new
facility.
Table game drop at the Sands declined $97.7 million (18.6%) during 1998
compared with 1997 and $52.5 million (9.1%) during 1997 compared with 1996. The
Sands decreases compare with increases of 1% and 4%, respectively, in table game
drop for all other Atlantic City Casinos during the same periods. As a result,
the Sands table game market share decreased to 5.6% during 1998 from 6.8% during
1997 and from 7.7% during 1996. The Sands table game drop decreases during 1998
are attributable to declines in patron volume from the rated segment. This
decline reflects managements efforts to discontinue certain marginally effective
promotional activities directed toward less profitable market segments. During
1998, the number of table games decreased 16% at the Sands, compared with a
decrease of 2.3% at all other Atlantic City casinos. Also, competitive pressures
resulting from the offering of special odds for various table games and
competitive pressures on specific market segments by other Atlantic City casinos
have adversely effected drop for this period. The Sands decrease in table game
drop during 1997 as compared to 1996 is attributable to declines in patron
volume from both the rated and unrated segments. Expansions at other Atlantic
City casinos resulted in an increase of approximately 92,000 square feet of
gaming space and 73 tables at December 31, 1997 compared to December 31, 1996.
Gaming space at the Sands remained virtually unchanged since mid 1996 and the
number of tables decreased 3.1%.
REVENUES
Casino revenues at the Sands decreased by $15.1 million (6.4%) during 1998
compared with 1997 and by $8.4 million (3.5%) during 1997 compared with 1996.
Decreases in both slot machine and table game wagering and a slight decrease in
slot machine hold percentage during 1998 and 1997 were partially offset by
improvements in the table game hold percentage.
Rooms revenue decreased $491,000 (5.1%) during 1998 compared with 1997.
Rooms revenue did not change significantly during 1997 compared to 1996. The
decrease during 1998 is a result of decreases in occupancy levels partially
offset by an increase in the average daily rate charged on rooms. Food and
beverage revenues decreased $7.6 million (23%) during 1998 compared with 1997
and did not change significantly during 1997 compared with 1996. The decrease in
1998 is a result of reduced patron volume reflecting the curtailment in food and
beverage related promotional programs. Other revenues
18
decreased $356,000 (8.6%) during 1998 compared with 1997 and $1.6 million
(27.9%) during 1997 compared with 1996. These decreases are a result of a
reduction in theater entertainment.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs. As
a percentage of rooms, food and beverage and other revenues at the Sands, these
allowances decreased to 53.1% during 1998 from 53.4% during 1997 and 56.1%
during 1996. Such decreases are primarily attributable to reductions in certain
marketing programs and other promotional activities.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands decreased $13.0 million (6.5%) during 1998
compared to 1997 and by $19.2 million (8.8%) during 1997 compared to 1996. The
1998 decrease is a result of managements' ongoing efforts to create operating
efficiencies as well as a reduction in the allocation in rooms, food and
beverage, and other expenses to casino expense due to a reduction of promotional
activity. The decrease in 1997 as compared to 1996 is due to an unprecedented
and highly aggressive industry wide attempt during 1996 to increase market share
which resulted in significantly higher costs with respect to coin incentive
packages.
Rooms expense increased $584,000 (22.5%) during 1998 compared to 1997 and
by $171,000 (7.1%) during 1997 compared to 1996. These increases result from a
lower percentage of rooms being sold on a complimentary basis which has reduced
the allocation of room costs to the casino department. Food and beverage expense
decreased $817,000 (7.6%) during 1998 compared to 1997 and did not change
significantly during 1997 compared to 1996. The 1998 decrease reflects a
reduction in payroll, operating costs and promotional expenses in response to
declines in patron volume. Such cost savings have been partially offset by fewer
costs being allocated to the casino department due to reduced use of food
complementaries. Other expenses decreased $157,000 (5.7%) in 1998 from 1997 and
by $502,000 (15.4%) in 1997 from 1996. These decreases are due to cost savings
with respect to theater entertainment.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $4.9 million (28.2%) during
1998 compared to 1997 and by $1.1 million (5.8%) during 1997 compared to 1996.
Management fee expenses, including service fees under the Settlement Agreement,
incurred by the Sands decreased by $3.0 million (56%) during 1998 as a result of
a renegotiation and subsequent rejection of such fees due to the Chapter 11
filings. Other decreases reflect reductions in payroll and related benefits and
in equipment rentals, all of which have resulted from management's ongoing
efforts to create operating efficiencies.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense during 1998 decreased by $1.3 million
(9%) compared to 1997 and decreased $5.2 million (27.2%) in 1997 compared to
1996. The decrease in 1998 is attributable to certain assets becoming fully
depreciated during 1998 and the amortization of loan fees that were fully
written off at December 31, 1997. These decreases were slightly offset by an
increase of $1.4 million in additional provision for valuation allowance during
1998 for certain CRDA bond investments due to the uncertainty of their
realizable value. The 1997 decrease was a result of revising the estimated
useful building life effective October 1, 1996 and to the completion of the
amortization with respect to certain long lived assets during 1997.
19
INTEREST
Interest income decreased by $719,000 (42.8%) during 1998 compared with
1997 following a slight increase of $90,000 (5.7%) during 1997 compared with
1996. Interest earned on cash balances accumulated as a result of the Chapter 11
filing (i.e., from not making debt service payments) is reflected on the
accompanying consolidated financial statements as a reduction of reorganization
costs.
Interest expense decreased $22.9 million (98.7%) in 1998 compared to 1997.
As a result of the Chapter 11 filing, the accrual of interest expense on the
First Mortgage Notes, the Subordinated Notes (as hereafter defined) and other
affiliate advances for periods subsequent to the filing has been suspended.
Interest expense increased $1 million (4.6%) in 1997 compared to 1996 primarily
due to additional interest with respect to GBHC's borrowings from affiliates.
NONRECURRING ITEMS
At December 31, 1997, GBHC reserved the balance of an advance to an
affiliated company in the amount of $5.7 million together with interest
amounting to $4.0 million as collection of the receivables was uncertain. The
$5.7 million advance as well as interest amounting to $4.9 million remain fully
reserved at December 31, 1998.
Also at December 31, 1997, the remaining deferred financing costs
associated with the First Mortgage Notes ($4.3 million) were written off as a
result of GBHC's Chapter 11 filing.
INCOME TAX BENEFIT (PROVISION)
As part of the Second Settlement Agreement, Holdings' operations are
included in GBCC's consolidated federal income tax return for the years ended
December 31, 1997 and 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. Prior to 1997, Holdings was included in the consolidated
federal income tax return of Hollywood Casino Corporation ("HCC"), the parent
company of GBCC until HCC distributed the GBCC stock it owned to the
shareholders of HCC as a dividend on December 31, 1996 (the "Spin Off").
At December 31, 1998, Holdings and its subsidiaries have deferred tax
assets including net operating loss carryforwards ("NOL's"). The NOL's do not
expire before the year 2009 for federal tax purposes and the year 2001 for state
tax purposes. The availability of the NOL's and credit carryforwards may be
subject to the tax consequences of a plan of reorganization approved by the
Bankruptcy Court. Statement of Financial Accounting Standards No. 109 ("SFAS
109") requires that the tax benefit of NOL's and deferred tax assets resulting
from temporary differences be recorded as an asset and, to the extent that
management can not assess that the utilization of all or a portion of such NOL's
and deferred tax assets is more likely than not, requires the recording of a
valuation allowance. As a result of book and tax losses incurred in 1997 and the
Chapter 11 filing 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 December 31,
1998.
As part of the Second Settlement Agreement, GBHC settled certain
intercompany obligations on a noncash basis. Loans 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
20
an affiliate for the overpayment of federal income taxes under a previously
existing tax sharing agreement, were mutually released. As the deferred federal
tax asset had been previously fully reserved for as required by SFAS 109, this
mutual release resulted in the recording of a capital contribution in the amount
of $9,508,000 on the accompanying consolidated balance sheet at December 31,
1998.
EXTRAORDINARY ITEM
A subsidiary of Holdings acquired $2.5 million of First Mortgage notes at a
discount of $375,000 with which to make its scheduled July 1997 principal
payment (see "Liquidity and Capital Resources - Financing Activities"). Such
gain was partially offset by the write off of associated financing costs,
resulting in a net gain from early extinguishment of debt amounting to $310,000.
YEAR 2000 COMPLIANCE
In the Year 2000, the Sands' computer programs that have date sensitive
software may recognize a date using "00" as the Year 1900 rather than 2000. Such
an error could result in a system failure or miscalculations causing disruptions
of operations including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Management has initiated a program to prepare the Sands' computer systems
and applications for the Year 2000. The objective of this program is to
determine and assess the risks of the Year 2000 issue, and to plan and institute
mitigating actions to minimize those risks. The Sands has completed an
assessment and an inventory of its systems. Plans are in place and work is being
undertaken to test and implement changes where required. No significant
remediation has been identified. The appropriate vendors and suppliers have been
contacted as to their Year 2000 compliance. The costs of testing and conversion
have not been and are not expected to be material. All Year 2000 costs are
expected to be funded through operating cash flows. The Sands is in the process
of developing a contingency plan which includes the identification of
significant vendors which will be Year 2000 compliant to replace significant
vendors that will not be Year 2000 compliant. It is expected that this
contingency plan will be completed in a timely manner.
While management expects the Sands' 2000 date conversion projects to be
completed on a timely basis, the potential impact of systems outside of the
Sands' control, such as those of utility companies, phone and network systems,
and financial institutions, is difficult to assess. There can be no assurance
that the systems of other companies on whose systems the Sands relies will be
timely converted or that any such failure to convert by another company would
not have an adverse effect on the Sands' systems. The failure to correct a
material Year 2000 problem could result in an interruption in, or a failure of,
certain normal business activities or operations. Because of the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of Year 2000 readiness of third party suppliers, the Sands is unable
to determine at this time whether the consequences of Year 2000 failures will
have a material impact on the Sands results of operations, liquidity, and
financial condition.
REORGANIZATION AND OTHER RELATED COSTS
Reorganization and other related costs include costs associated with
Holdings' reorganization under Chapter 11, including, among other things,
professional fees, costs associated with the termination of agreements, and
other administrative costs. Also, costs in the amount of $942,000 associated
with a planned retheming of the Sands were expensed during the second and third
quarters of 1998. Due to the reorganization proceedings discussed above, this
project has been abandoned. As noted previously, interest
21
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 Holdings' operations for the first and fourth quarters are
traditionally less profitable than the other quarters of the fiscal year. In
addition, the Sands' operations may fluctuate significantly due to a number of
factors, including chance. Such seasonality and fluctuations may materially
affect Holdings' casino revenues and profitability.
22
ITEM 8. INDEX TO FINANCIAL STATEMENTS
PAGE
----
GB PROPERTY FUNDING CORP
Report of Independent Public Accountants to GB Property
Funding Corp. .................................................. 24
Balance Sheets of GB Property Funding Corp. as of
December 31, 1998 and 1997 ..................................... 25
Statements of Operations of GB Property Funding Corp.
for the Years Ended December 31, 1998, 1997 and 1996 ........... 26
Statements of Cash Flows of GB Property Funding Corp.
for the Years Ended December 31, 1998, 1997 and 1996 ........... 27
Notes to Financial Statements of GB Property Funding Corp. ........ 28
GB HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Public Accountants to GB Holdings, Inc.
and Subsidiaries ............................................... 33
Consolidated Balance Sheets of GB Holdings, Inc.
and Subsidiaries as of December 31, 1998 and 1997 .............. 34
Consolidated Statements of Operations of GB Holdings, Inc. ........
and Subsidiaries for the Years Ended
December 31, 1998, 1997 and 1996 ............................... 36
Consolidated Statement of Changes in Shareholder's Equity (Deficit)
of GB Holdings, Inc. and Subsidiaries for
the Three Years Ended December 31, 1998 ........................ 37
Consolidated Statements of Cash Flows of GB Holdings, Inc.
and Subsidiaries for the Years Ended
December 31, 1998, 1997 and 1996 .............................. 38
Notes to Consolidated Financial Statements of GB Holdings, Inc.
and Subsidiaries ............................................... 39
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To GB Property Funding Corp.:
We have audited the accompanying balance sheets of GB Property Funding
Corp. (the Company and a Delaware corporation) as of December 31, 1998 and 1997,
and the related statements of operations and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Company was formed for the purpose of issuing
$185,000,000 of First Mortgage Notes for the benefit of Greate Bay Hotel and
Casino, Inc., an affiliated company ("GBHC"). The Company loaned the proceeds
from the First Mortgage Notes to GBHC and, at December 31, 1998, has a note
receivable and related accrued interest receivable due from GBHC totaling
$191,616,000. The Company has no operations and the note receivable, the accrued
interest receivable and the mortgage lien on the assets of GBHC represent
virtually all of the Company's assets. During 1998, the Company, GBHC and GB
Holdings, Inc., the parent company of both the Company and GBHC, filed voluntary
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (the
"Bankruptcy Code"). As a result of the Chapter 11 filings, the First Mortgage
Notes and related accrued interest payable have been classified as liabilities
subject to compromise. To the extent that any proceeds are ultimately realized
from GBHC as a result of the resolution of the bankruptcy proceedings, such
amounts would be offered in full satisfaction of the First Mortgage Notes. No
provision for any loss relating to the uncollectibility of these receivables has
been reflected in the accompanying financial statements.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GB Property Funding Corp. as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
accompanying financial statements, on January 5, 1998, the Company filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code. These
matters, among others, raise substantial doubt about the Company's ability to
continue as a going concern. Management is in the process of seeking sponsor(s)
for a plan of reorganization, which will require confirmation by the Bankruptcy
Court in accordance with the Bankruptcy Code and approval by the New Jersey
Casino Control Commission. In the event the plan of reorganization is accepted,
continuation of the business thereafter is dependent on the Company's ability to
achieve successful future operations. The accompanying financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
April 13, 1999
24
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
BALANCE SHEETS
ASSETS
DECEMBER 31,
------------------------------
1998 1997
------------ ------------
Current asset:
Cash $ 1,000 $ 1,000
Interest receivable from affiliate 9,373,000 9,152,000
Note receivable from affiliate 182,243,000 182,500,000
------------ ------------
$191,617,000 $191,653,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accrued interest payable, non-current $ -- $ 9,152,000
------------ ------------
Long-term debt -- 182,500,000
------------ ------------
Liabilities subject to compromise:
Accrued interest payable 9,373,000 --
Long-term debt 182,243,000 --
------------ ------------
191,616,000 --
------------ ------------
Commitments and Contingencies
Shareholder's equity (Note 1):
Common stock, $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
------------ ------------
$191,617,000 $191,653,000
============ ============
The accompanying notes to financial statements
are an integral part of these balance sheets.
25
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues:
Interest income (Note 2) $ 221,000 $19,941,000 $20,119,000
Expenses:
Interest expense (contractual interest
of $19,844,000 in 1998) 221,000 19,941,000 20,119,000
----------- ----------- -----------
Net income $ -- $ -- $ --
=========== =========== ===========
The accompanying notes to financial statements
are an integral part of these statements.
26
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
OPERATING ACTIVITIES:
Net income $ -- $ -- $ --
Adjustments to reconcile net income to net
cash provided by operating activities:
(Increase) decrease in interest receivable from affiliate (221,000) 125,000 --
Increase (decrease) in accrued interest payable 221,000 (125,000) --
--------- --------- ---------
Net cash provided by operating activities -- -- --
Cash at beginning of year 1,000 1,000 1,000
--------- --------- ---------
Cash at end of year $ 1,000 $ 1,000 $ 1,000
========= ========= =========
The accompanying notes to financial statements
are an integral part of these statements.
27
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND OPERATIONS
GB Property Funding Corp. ("GB Property Funding"), a Delaware corporation,
was incorporated on September 29, 1993. GB Property Funding is a wholly owned
subsidiary of GB Holdings, Inc. ("Holdings"), a Delaware corporation which was a
wholly owned subsidiary of Pratt Casino Corporation ("PCC") through December 31,
1998, also a Delaware corporation. 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 Greate Bay Casino
Corporation ("GBCC"). PCC was incorporated during September 1993 and is wholly
owned by PPI Corporation, a New Jersey corporation and a wholly owned subsidiary
of GBCC. Holdings was incorporated in September 1993 and, on February 17, 1994,
acquired through capital contributions by its parent, all of the outstanding
capital stock of Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the
Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"). GB Property
Funding was formed for the purpose of borrowing $185,000,000 for the benefit of
GBHC; such debt was issued during February 1994 at the rate of 10 7/8% per annum
and the proceeds were loaned to GBHC (see Note 2).
GB Property Funding has no operations and is dependent on the repayment of
its note from GBHC for servicing its debt obligations (see Note 2).
Administrative services for GB Property Funding are provided by GBHC at no
charge. The cost of such services is not significant.
The operation of an Atlantic City casino/hotel is subject to significant
regulatory control. Under provisions of the New Jersey Casino Control Act, GBHC
is required to maintain a nontransferable license to operate a casino in
Atlantic City.
The accompanying financial statements have been prepared in accordance with
Statement of Position No. 90-7, "Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code," and include disclosure of liabilities
subject to compromise. On January 5, 1998, GB Property Funding, GBHC and
Holdings (collectively, the "Debtors") filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the District of New Jersey (the
"Bankruptcy Court"). Management is in the process of seeking sponsor(s) for a
plan of reorganization which requires confirmation by the Bankruptcy Court in
accordance with the Bankruptcy Code and approval by the New Jersey Casino
Control Commission (the "Casino Commission"). There can be no assurance at this
time that any plan of reorganization, when submitted, will be confirmed by the
Bankruptcy Court or approved by the Casino Commission. In the event 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
classification 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 $185,000,000 of First Mortgage Notes for the benefit of GBHC. GB
Property Funding loaned the proceeds from the First Mortgage Notes to GBHC and,
at December 31, 1998, has a note receivable and related accrued interest
receivable due from GBHC totaling $191,616,000. GB Property Funding has no
operations and the note receivable, the accrued interest receivable and the
mortgage lien on the assets of GBHC represent virtually all of the GB Property
Fundings' assets. As discussed above, during 1998 the Debtors filed voluntary
petitions for relief under Chapter 11 of the Bankruptcy Code. As a result of the
Chapter 11 filings, the
28
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Mortgage Notes and related accrued interest payable have been classified
as liabilities subject to compromise. To the extent that any proceeds are
ultimately realized from GBHC as a result of the resolution of the bankruptcy
proceedings, such amounts would be offered in full satisfaction of the First
Mortgage Notes. No provision for any loss relating to the uncollectibility of
these receivables has been reflected in the accompanying financial statements.
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 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.
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.
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.
29
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. GB Property Funding has adopted the provisions of SFAS
130. However, SFAS 130 provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. GB
Property Funding has no such other comprehensive income items for any period
presented. Accordingly, the presentation and disclosure requirements of SFAS 130
are not applicable.
(2) LONG-TERM DEBT
On February 17, 1994, GB Property Funding issued $185,000,000 of first
mortgage notes due January 15, 2004 (the "First Mortgage Notes"). Interest on
the First Mortgage Notes accrues at the rate of 10 7/8% per annum, payable
semiannually commencing July 15, 1994. Interest only was payable during the
first three years. Commencing on July 15, 1997, semiannual principal payments of
$2,500,000 were due on each interest payment date with the balance due at
maturity. Such semiannual payments may be made in cash or by tendering First
Mortgage Notes previously purchased or otherwise acquired by GB Property
Funding. GB Property Funding acquired $2,500,000 face amount of the First
Mortgage Notes which were used to make the July 15, 1997 required principal
payment. As a result of the filing under Chapter 11, debt service payments due
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 contains various provisions
which, among other things, restrict the ability of certain subsidiaries of GBCC
to pay dividends to GBCC, to merge, consolidate or sell substantially all of
their assets or to incur additional indebtedness beyond certain limitations. In
addition, the indenture requires the maintenance of certain cash balances and
requires minimum expenditures, as defined in the indenture, for property and
fixture renewals, replacements and betterments at the Sands. The proceeds of the
First Mortgage Notes were loaned to GBHC on the same terms and conditions.
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 of the First
Mortgage Notes as reductions to the outstanding principal of the First Mortgage
Notes. During the year ended December 31, 1998, $257,000 has been remitted to
the Indenture Trustee as the proceeds on the sale of assets.
No interest was paid or received with respect to the First Mortgage Notes
and the loan to GBHC during the year ended December 31, 1998. Interest paid and
received amounted to $20,066,000 and $20,119,000 for the years ended December
31, 1997 and 1996, respectively. Interest receivable and payable with respect to
the notes of $9,373,000 are included on the accompanying balance sheet at
December 31, 1998 in noncurrent assets and liabilities subject to compromise,
respectively, as such payments are subject to terms of a reorganization plan
which requires confirmation by the Bankruptcy Court. As a result of the Chapter
11 filing, any claim for post-petition interest is unenforceable unless
otherwise ordered by the Bankruptcy Court. Accordingly, GB Property Funding has
ceased the accrual of interest income as of the date of the Chapter 11 filing.
Accrued interest receivable and payable of $9,152,000 is included in the
accompanying balance sheet at December 31, 1997.
30
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAXES
As part of the Second Settlement Agreement, GB Property Funding is included
in GBCC's consolidated federal income tax return for the years ended December
31, 1998 and 1997. 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. 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.
The Internal Revenue Service is currently examining the consolidated federal
income tax returns of HCC for the years 1993 through 1996 in which GB Property
Funding was included. Management believes that the results of such examination
will not have a material adverse effect on the financial position or results of
operations of GB Property Funding.
(4) LEGAL PROCEEDINGS
On January 5, 1998, the Debtors filed petitions for relief under Chapter 11
of the Bankruptcy Code in the Bankruptcy Court. The prior Boards of Directors
resigned on January 2, 1998 and new Boards of Directors were elected at that
time. Each company continues to operate in the ordinary course of business, as
set forth in the Bankruptcy Code, and each company's executive officers and
directors as of the date of the filing remain in office, subject to the
jurisdiction of the Bankruptcy Court, other than the following: as required by
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
J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On
May 11, 1998, August 10, 1998 and November 9, 1998, as a result of motions filed
by the Debtors, the Bankruptcy Court extended the exclusive period during which
only the Debtors may file a plan of reorganization for 90 days until August 10,
1998, for another 90 days until November 9, 1998, and for another 60 days until
January 11, 1999, respectively. On January 11, 1999, the exclusivity period
expired and, as a result, any party in interest may file a plan of
reorganization.
(5) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of the estimated fair value of financial instruments is required
under SFAS No 107, "Disclosure About Fair Value of Financial Instruments." The
fair value estimates are made at discrete points in time based on relevant
market information and information about the financial instruments. These
estimates may be subjective in nature and involve uncertainties and significant
judgment and therefore cannot be determined with precision.
Cash is valued at the carrying amount which is the fair value.
As a result of the Chapter 11 filing, the First Mortgage Notes and related
accrued interest payable are subject to compromise and the fair value cannot be
determined. The value of the First Mortgage Notes is subject to a determination
of the valuation of the business of Holdings which will be, but has not yet been
established in the Chapter 11 proceedings and will be subject to the terms of a
plan of reorganization. Accordingly, the fair value of the corresponding note
and interest receivable from affiliate can not be
31
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
determined at this time. At December 31, 1997, the fair value of the note
receivable from affiliate and First Mortgage Notes was estimated based on the
quoted market prices for recent trades of the issue prior to year end. That
external valuation was based on a prepetition basis and is not reflective of an
external valuation on a post petition basis. At December 31, 1997, the fair
value of the corresponding interest receivable and interest payable was
estimated at the carrying amount, as there was no available market price for
these items that could be used to report external valuations. See also Note 1.
The estimated carrying amounts and fair values of GB Property Funding's
financial instruments are as follows:
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------- -----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ---------- ------------ ------------
Financial Assets:
Cash $ 1,000 $ 1,000 $ 1,000 $ 1,000
Interest receivable from
affiliate 9,373,000 n/a 9,152,000 9,152,000
Note receivable from
affiliate 182,243,000 n/a 182,500,000 152,388,000
Financial Liabilities:
Accrued interest payable 9,373,000 n/a 9,152,000 9,152,000
First Mortgage
Notes 182,243,000 n/a 182,500,000 152,388,000
(6) SUPPLEMENTAL CASH FLOW INFORMATION
During May 1997, GB Property Funding received First Mortgage Notes with a
face value of $2,500,000 from GBHC in settlement of its principal payment
obligation under the intercompany borrowing. GB Property Funding tendered such
First Mortgage Notes to the trustee in June 1997 in settlement of its principal
payment obligation. Both the receipt and tendering of the notes are excluded
from the accompanying statement of cash flows as non-cash transactions.
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 of the First
Mortgage Notes as reductions to the outstanding principal of the First Mortgage
Notes. For the year ending December 31, 1998, $257,000 has been remitted to the
Indenture Trustee as the proceeds on the sale of assets. This transaction has
also been excluded from the accompanying statement of cash flows as a non-cash
transaction.
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To GB Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of GB
Holdings, Inc. (the Company and a Delaware Corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in shareholder's equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GB Holdings, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced significant losses during 1997 and 1996 and has a net capital
deficiency of $42,741,000 at December 31, 1998. As discussed in Note 1 to the
accompanying consolidated financial statements, on January 5, 1998, the Company
filed a voluntary petition for relief under Chapter 11 of the U. S. Bankruptcy
Code ("the Bankruptcy Code"). These matters, among others, raise substantial
doubt about the Company's ability to continue as a going concern. Management is
in the process of seeking sponsor(s) for a plan of reorganization, which will
require confirmation by the Bankruptcy Court in accordance with the Bankruptcy
Code and approval by the New Jersey Casino Control Commission. In the event the
plan of reorganization is accepted, continuation of the business thereafter is
dependent on the Company'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 the
Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
April 13, 1999
33
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED