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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, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _________________________
Commission file number 33-69716
GB PROPERTY FUNDING CORP.
GB HOLDINGS, INC.
GREATE BAY HOTEL AND CASINO, INC.
- --------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2502290
DELAWARE 75-2502293
NEW JERSEY 22-2242014
- ------------------------------------ ------------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
c/o Sands Hotel & Casino
Indiana Avenue & Brighton Park
Atlantic City, New Jersey 08401
- ---------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (609) 441-4517
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, 2000, 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, 2000, 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
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 in turn was a wholly owned subsidiary of PPI Corporation ("PPI"), which is
wholly owned by Greate Bay Casino Corporation ("GBCC"). Effective after December
31, 1998, PCC transferred 21% of its stock ownership in Holdings to PBV, Inc.
("PBV"), a newly formed entity, controlled by certain stockholders of GBCC.
GBCC's common stock is listed on the OTC Bulletin Board Service under the
trading symbol "GEAAQ". As a result of a certain confirmed plan of
reorganization of PCC and others in October 1999, the remaining 79% stock
interest of PCC in Holdings was transferred to Greate Bay Holdings, LLC, whose
sole member as a result of the same reorganization is PPI ("GBLLC").
GB Property Funding was organized in September 1993 as a special purpose
subsidiary of Holdings for the purpose of borrowing funds through the issuance
of the First Mortgage Notes for the benefit of GBHC. GBHC owns the Sands Hotel
and Casino located in Atlantic City, New Jersey (the "Sands"). Substantially all
of Holdings' assets and operations relate to the Sands.
On January 5, 1998, Holdings, GB Property Funding and GBHC (collectively,
the "Debtors") filed a petition for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of New Jersey (the "Bankruptcy Court"). The prior Boards of
Directors resigned on January 2, 1998 and new Boards of Directors were elected
at that time. Each of the Debtor companies continues to operate in the ordinary
course of business, as set forth in the Bankruptcy Code. Each company's
executive officers and directors as of the date of the filing remain in office,
subject to the jurisdiction of the Bankruptcy Court, other than the following:
as required by the Settlement Agreement as defined below, Richard Knight
resigned as a Director, President, and Chief Executive Officer of the Debtors
effective July 8, 1998; John P. Belisle was elected President and Chief
Executive Officer of GBHC on July 28, 1998; and Jerome T. Smith was elected as a
Director of the Debtors on August 3, 1998. On November 1, 1999, John P. Belisle
resigned as President and Chief Executive Officer of GBHC. On November 5, 1999,
Alfred J. Luciani was elected President and Chief Executive Officer of GBHC. On
November 11, 1999, Jerome T. Smith, the independent member of the Board of
Directors of the Debtors, and one of the two independent members of the Audit
Committee of Holdings, citing a newly arisen potential conflict of interest,
resigned.
Effective September 2, 1998, GBHC acquired the membership interests in
Lieber Check Cashing LLC ("Lieber"), a New Jersey limited liability company that
owns a land parcel adjacent to GBHC (the "Lieber
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Parcel"). GBHC acquired and caused an option agreement on other adjacent land
parcels (the "Option Parcels") to be assigned to Lieber (the "Option
Agreement"). On September 20, 1999, the closing took place under the Option
Agreement and Lieber, whose sole member is GBHC, obtained title to the Option
Parcels one of which was subject to a lease (the "Lease") and a sub-lease for
the operation of a "Gold Store" (the "Sub-lease"). The Lieber Parcel and the
Option Parcels provide GBHC with an expansion opportunity and frontage on
Pacific Avenue, the principal street running parallel and closest to the
boardwalk in Atlantic City, New Jersey. The demolition of the existing
structures on the parcels was completed and construction of a new front entrance
to the Sands' facility has commenced. GBHC obtained the rights under the Lease
on March 27, 2000 for $371,000 and on the same date notified the operator of the
Gold Store that GBHC had elected to exercise a 90-day cancellation provision of
the Sub-lease and tendered to the sub-lessee a cancellation payment of
approximately $30,000. GBHC intends to demolish the Gold Store upon expiration
of the notice period and incorporate the land as part of its new front entrance.
GBHC also entered into an agreement with the entities controlling the Claridge
Hotel and Casino (the "Claridge"), subject to Bankruptcy Court (as hereinafter
defined) approval, to acquire the Claridge Administration Building ("CAB"),
which is situated between GBHC's existing main entrance and the new Pacific
Avenue entrance presently under construction. GBHC intends to demolish the CAB
and incorporate the land as part of the new front entrance. The purchase price
is $3.5 million, consisting of $1.5 million in cash at closing with the
remaining $2.0 million consideration tendered through the elimination of a
monthly license fee paid by the Claridge to GBHC under an agreement between the
Claridge and GBHC governing the development and operation of the "People Mover"
leading from the Boardwalk to the Sands and Claridge (the "PM Agreement") in the
amount of $50,000 per month for 40 months. GBHC and the Claridge also sought
Bankruptcy Court approval of the assumption of the PM Agreement, as modified. On
April 5, 2000, the Bankruptcy Court approved the acquisition of the CAB for the
purposes described and approved the joint assumption of the PM Agreement as
modified.
On January 11, 1999, the exclusivity period during which only the Debtors
could file a plan of reorganization expired and, as a result, any party in
interest could file a plan of reorganization. On June 1, 1999, the Debtors filed
with the Bankruptcy Court a plan of reorganization and disclosure statement,
ultimately filing a third modified plan of reorganization (the "Plan") and third
modified disclosure statement. On October 4, 1999, the Bankruptcy Court approved
the adequacy of the Disclosure Statement and a confirmation hearing on the Plan
was scheduled for December 17, 1999 (the "Confirmation Hearing").
On November 3, 1999, the Debtors received notice from Merrill Lynch Asset
Management ("MLAM") that MLAM and Park Place Entertainment Corporation ("PPE")
had reached agreement on a term sheet under which PPE would sponsor a plan of
reorganization of GBHC (the "Term Sheet"). MLAM represented that it and PPE
controlled approximately 53% of the First Mortgage Notes. MLAM requested that
the Debtors agree to seek to adjourn the Confirmation Hearing, and accept a
revised Plan incorporating the provisions of the Term Sheet. The Debtors agreed
to seek the adjournment. On November 9, 1999, the Bankruptcy Court granted the
adjournment and set December 1, 1999 as a status conference for a report by the
Debtors on the status of their due diligence and evaluation of the provisions of
the Term Sheet. Following the December 1, 1999 status conference, the Bankruptcy
Court set December 22, 1999 as a final status conference for the Debtors to
report on their due diligence and evaluation of the Term Sheet. Entities
controlled by Mr. Carl Icahn ("Icahn") submitted a competing bid for a Plan of
Reorganization of the Debtors prior to the December 22, 1999 status conference.
The Bankruptcy Court decided at the status conference that PPE and Icahn should
submit competing Plans of Reorganization and Supplemental Disclosure Statements
with the Debtors submitting a Master Disclosure Statement by January 18, 2000,
and that the Bankruptcy Court would conduct a hearing on February 16, 2000 to
consider the adequacy of the Disclosure Statements. Icahn filed a joint Plan
with the Official Committee of
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Unsecured Creditors (the "Committee") on January 18, 2000, and PPE also filed a
Plan on the same date. The Bankruptcy Court conducted a hearing on the adequacy
of the Disclosure Statements on February 16, 2000. The Bankruptcy Court directed
Icahn and the Committee and PPE to file amended Plans and Supplemental
Disclosure Statements with their final economic offers to the creditors by March
6, 2000, and scheduled a further adequacy hearing for March 23, 2000. At that
hearing, the Bankruptcy Court directed Icahn and the Committee and PPE to make
certain revisions to their amended Plans and Supplemental Disclosure Statements
and file them on March 31, 2000, and scheduled April 5, 2000 as a hearing date
for the Bankruptcy Court to determine if any further changes to the Supplemental
Disclosure Statements would be directed to be made by the Bankruptcy Court. At
the hearing on April 5, 2000, the Bankruptcy Court approved the Debtors' Master
Disclosure Statement, approved the Supplemental Disclosure Statements of Icahn
and the Committee and of PPE subject to their making certain revisions, and
established June 5, 2000, as the deadline for the creditors to deliver their
votes for or against the Plans and June 19, 2000 as the beginning of the
confirmation hearing.
A Plan requires confirmation by the Bankruptcy Court and approval by the
New Jersey Casino Control Commission (the "Casino Commission"). There can be no
assurance at this time that a Plan will be confirmed by the Bankruptcy Court and
approved by the Casino Commission. In the event a Plan is confirmed,
continuation of the business thereafter is dependent on GBHC's ability to
achieve successful future operations. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that may be necessary should GBHC be unable to continue as a going
concern. Although management has not made a determination whether an impairment
of the carrying value currently exists, future adjustments to the carrying
amount of GBHC's assets may be required with respect to the fresh-start
reporting which would take place on the effective date of the confirmation of a
Plan.
A significant amount of the Sands' revenues are derived from patrons
living in northern New Jersey, southeastern Pennsylvania and metropolitan New
York City. Competition in the Atlantic City gaming market is intense and
management believes that this competition will continue or intensify in the
future.
Prior to July 8, 1998, 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
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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 year ended December 31, 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
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. It
does this through a targeted capital improvements program and the use of
sophisticated information technology to monitor patron play, control certain
casino operating costs and target marketing efforts toward frequent visitors
with higher than average gaming budgets. Traditionally, the Sands has been
successful in its marketing efforts toward these premium patrons through its
offering of private, limited-access facilities and related amenities. While the
Sands has strived to maintain its market share within this segment, the
completion of the Sands' expansion in 1994 allowed the Sands to broaden its
appeal to the mass market, drive-in patron as well.
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 and coin packages" which include
bus transportation to and from the casino and a specified amount of coins to use
in the casino.
The Sands uses sophisticated information technology that enables it to
track and rate patrons' play through the use of an identification card, which it
issues to patrons ("casino players' card"). All Sands' slot machines are
connected with, and information with respect to table games activity can be
input into, a computer network. When patrons insert their casino player's cards
into slot machines or present them to supervisors at table games, meaningful
information, including amounts wagered and duration of play, is transmitted in
real-time to a casino management database. The information contained in the
database facilitates the implementation of targeted and cost effective marketing
programs, which appropriately recognize and reward patrons during current and
future visits to the Sands. 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, entertainment, retail merchandise, parking, and sweepstakes
giveaways. Management believes that its ability to reward its customers on a
"same-visit" basis is valuable in encouraging the loyalty of higher value
patrons. The computer systems also allow the Sands to monitor, analyze and
control the granting of gaming credit, promotional expenses and other marketing
costs.
Management focuses its marketing efforts on patrons who have been
identified by its casino management computer system as higher value patrons.
Management believes that its philosophy of encouraging participation
5
in its casino player's card program, using the information obtained thereby to
identify higher value patrons 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 and group and bus tour programs. Once new patrons
are introduced to the Sands' gaming facilities and the casino player's card
program, management uses its information technology capabilities to directly
market to these patrons to encourage their repeat patronage.
Competition. The Sands faces intense competition from the eleven 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 its "Wild West Casino" in
1997 and a new parking and bus facility adjoining Pacific Avenue in 1998.
Caesars' constructed a new entrance to its facility on Pacific Avenue, added
additional casino space and opened a new hotel tower in 1998. After completion
of the acquisition of Caesars by its parent company in December 1999, Bally's
commenced a project to connect Caesars to Bally's Park Place and to add slot
machines in the connecting space. In addition, several companies have announced
plans to build and operate additional casino/hotels over the next few years. For
example, Mirage Resorts, Incorporated and Boyd Gaming Inc. have announced plans
for a joint venture to construct a resort complex consisting of a large
casino-hotel, several theatres and an upscale shopping concourse at a site
located in the Marina District. The project is expected to open by 2003. In
connection with that project, construction is well underway on a tunnel to
connect the Atlantic City Expressway with the Marina District. Other casino
companies, including MGM Grand, Inc. and individuals have submitted applications
and have been qualified in New Jersey to hold casino licenses.
The Casino Reinvestment Development Authority ("CRDA") is a governmental
agency that administers the statutorily mandated investments required to be
funded by casino licensees. Legislation enacted during 1993 and 1996 allocated
an aggregate of $175 million of CRDA funds and credits to subsidize and
encourage the construction of additional hotel rooms by Atlantic City casino
licensees. Competitors of the Sands that have the financial resources to
construct hotel rooms can take advantage of such credits more readily than the
Sands. The Sands has an approved hotel expansion program and confirmation of a
Plan of Reorganization may provide it with the resources to commence such a
project. 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 will continue to increase competition
within the Atlantic City market.
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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 the number of parking spaces and hotel rooms it possesses,
proximity to Pacific Avenue, the Boardwalk and to other casino/hotels and access
to the main expressway entering 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 financial
resources for capital improvements and marketing and promotional activities 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 Bankruptcy Court approved the capital
expenditure program in the amount of approximately $13.6 million in March 1998.
The renovation of the hotel rooms and suites is ongoing and GBHC expects to
complete the renovation in 2000. The replacement and upgrading of slot machines
has been completed. In addition, the lack of access to Pacific Avenue has
hampered the Sands' efforts to expand its "drive-in" patron base. However, as
discussed above, the Sands has purchased land parcels on Pacific Avenue. The
demolition of the existing structures has been completed and construction of a
new front entrance to the Sands' facility has commenced with completion expected
by June 2000.
A significant amount of the Sands' revenues is derived from patrons living
within a 120-mile radius of Atlantic City, New Jersey, particularly northern New
Jersey, southeastern Pennsylvania, and metropolitan New York City. Proposals to
allow casino gaming in certain areas of Pennsylvania and New York have been
defeated within the past three 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 racetracks in the State of Delaware and
the allowed number of such machines was increased in 1999.
Industry Developments. New Jersey regulators have approved a number of
significant changes to the regulations governing the casino industry 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, industry-wide revenues in New
Jersey have shown small, but steady increases from $3.9 billion in 1997, to $4.0
billion in 1998 and to $4.1 billion in 1999.
Casino/hotel operators have also benefited in recent years from a trend
toward increased slot play as slot machines have become increasingly more
popular than table games particularly with frequent patrons but also 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 that are linked among the various casinos enabling the pay out
of large pooled jackpots, and through more attractive and entertaining 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 outpaced table game revenue growth in
recent years. In 1999, according to Casino Commission filings, slot win
accounted for nearly 72% of total Atlantic City gaming win. Table games remain
important, however, to a select segment of gaming patrons and they help create
gaming ambience and a varied gaming experience.
Casino Credit. Casino operations are conducted on both a credit and a cash
basis. Patron gaming debts incurred in accordance with the Casino Act are
enforceable under New Jersey law. For the year ended December
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31, 1999, gaming credit extended to Sands' table game patrons accounted for
approximately 27% of overall table game wagering, and table game wagering
accounted for approximately 18.9% of overall casino wagering during the period.
At December 31, 1999, gaming receivables amounted to $19.9 million before an
allowance for uncollectible gaming receivables of $11.2 million. Management
believes that such allowance is 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 $278,000, $275,000 and $290,000 for the years
ended December 31, 1999, 1998 and 1997. 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.
"362(a), to send a letter to the licensor purporting to terminate the license
agreement. GBHC opposed the motion and the motion was denied by Order of the
Bankruptcy Court dated March 2, 1999. On March 10, 1999, GBCC took an appeal to
the United States District Court for the District of New Jersey. On June 10,
1999, the United States District Court for the District of New Jersey affirmed
the Bankruptcy Court's decision. On July 13, 1999, GBCC filed an appeal with the
United States Court of Appeals for the Third Circuit. GBCC and GBHC filed a
motion with the Third Circuit on March 23, 2000, seeking an adjournment of the
briefing schedule in the appeal based on the belief that the likelihood of the
confirmation of either the Icahn/Committee or PPE Plan in the near future by the
Bankruptcy Court will eliminate the automatic stay by the effective date of a
Plan, will moot the issue raised by GBCC in the appeal and will permit GBCC to
seek to terminate the license agreement if it still chooses to do so.
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 a decision was rendered 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 claim for pre-petition
management fees, which was settled for an unsecured claim in the amount of
$75,000 and which was transferred to GBLLC along with the claim for the deferred
fees.
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Employees and Labor Relations. In Atlantic City, all 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, 1999, the Sands had approximately
3,000 employees. The Sands has collective bargaining agreements with three
unions that represent approximately 1,000 employees, most 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 2004. Management considers its labor relations to be good.
Casino Regulation
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 related 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 and 2000 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 gaming debts of up to 4% of casino win ("Gross Revenue"). During
the years ended December 31, 1999, 1998 and 1997, the taxes and the license and
other fees incurred by the Sands amounted to $22.2 million, $21.5 million and
$22.4 million, respectively.
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The Casino Act also requires casino licensees to pay an investment
alternative tax of 2.5% of Gross Revenue (the "2.5% Tax") or, in lieu thereof,
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 statutorily mandated investments required to be
funded by casino licensees and is required to expend the monies received by it
for eligible projects as 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 future Deposit obligations. GBHC made such donations during
the years ended December 31, 1999, 1998 and 1997 totaling $176,000, $146,000 and
$147,000, respectively, resulting in waivers being granted by the CRDA in those
years totaling $90,000, $74,000 and $75,000, respectively.
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. The Casino Commission may require divestiture of any 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 of parent companies or affiliates 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 6.1
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 2,001 slot machines and
approximately 100 table games; a hotel with 532 rooms (including 59 suites); six
restaurants; one cocktail lounge; two private lounges for invited guests; an
800-seat cabaret theater; retail space; an adjacent nine-story office building
with approximately 77,000 square feet of
10
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 a garage and surface parking for approximately 1,750
vehicles.
Effective September 2, 1998, GBHC acquired the membership interests in
Lieber, a New Jersey 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. The acquisition of the Lease, the cancellation of the Sub-lease and
the approval of the acquisition of the CAB augment that expansion opportunity.
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 that was approved by the Bankruptcy Court. This program included the
ongoing renovation of the majority of its hotel rooms and suites and the since
completed purchase of approximately 700 slot machines.
On February 17, 1994, the Sands obtained the net proceeds from the sale by
GB Property Funding of $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. Thereafter, semiannual principal payments of
$2,500,000 were due on each interest payment date with the balance due at
maturity. Such semiannual payments could be made in cash or by tendering First
Mortgage Notes previously purchased or otherwise acquired by 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.
11
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. 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
Jerome T. Smith was elected as a Director of the Debtors on August 3, 1998. On
November 1, 1999, John P. Belisle resigned as President and Chief Executive
Officer of GBHC. On November 5, 1999, Alfred J. Luciani was elected President
and Chief Executive Officer of GBHC. On November 11, 1999, Jerome T. Smith, the
independent member of the Boards of Directors of the Debtors, and one of the two
independent members of the Audit Committee of Holdings, citing a newly arisen
potential conflict of interest, resigned. On January 11, 1999, the exclusivity
period during which only the Debtors could file a plan of reorganization expired
and, as a result, any party in interest can file a plan of reorganization.
On 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 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.
12
GBHC has filed tax appeals with the New Jersey Tax Court challenging the
amount of its real property assessments for calendar years 1996, 1997, 1998,
1999 and 2000. The City of Atlantic City has also appealed the amount of the
assessments for the years 1996 through 1999.
GBHC is a party in various legal proceedings with respect to the conduct
of casino and hotel operations. Although a possible range of losses cannot be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of these proceedings should not have a material adverse
impact upon the consolidated financial position or results of operations of
Holdings and GBHC. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of the uncertainties
described above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999, 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 a par value of $1.00
per share, is its sole voting security; all 1,000 shares are owned by Holdings.
GBHC's common stock, 100 shares with no par value per share, is its sole
voting security; all 100 shares are owned by Holdings.
Holdings' common stock, 1,000 shares with a par value of $1.00 per share,
is its sole voting security. All 1,000 shares were owned by PCC until December
31, 1998. Effective after December 31, 1998, PCC transferred 21% of its stock
ownership in Holdings to PBV. As a result of a confirmed Plan of Reorganization
of PCC and others in October 1999, the remaining 79% stock interest of PCC in
Holdings was transferred to GBLLC.
Neither GB Property Funding nor Holdings have paid any dividends in the
past and have no plans to pay any in the future. GBHC is currently restricted
from the payment of dividends by the Casino Commission without prior approval.
13
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, 1999 and 1998 and for the years ended December 31, 1999,
1998, and 1997 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,
------------------------------------------------------------------------------------
1999 1998 (1) 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands)
Interest income ...................... $ -- $ 221 $ 19,941 $ 20,119 $ 20,119
Interest expense ..................... -- (221) (19,941) (20,119) (20,119)
--------- --------- --------- --------- ---------
Net income ........................... $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
Balance Sheet Data: December 31,
------------------------------------------------------------------------------------
1999 1998 (1) 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands)
Total assets ......................... $ 191,354 $ 191,617 $ 191,653 $ 194,278 $ 194,278
Total debt ........................... 181,980 182,243 182,500 185,000 185,000
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.
14
GB HOLDINGS, INC.
Statement of Operations Data:
Year Ended December 31,
---------------------------------------------------------------------
1999 1998 (1) 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands)
Net revenues ............................................ $ 246,895 $ 237,344 $ 256,255 $ 264,761 $ 283,950
--------- --------- --------- --------- ---------
Expenses:
Departmental ...................................... 215,272 202,532 215,907 235,285 223,631
General and administrative ........................ 10,586 12,497 17,409 18,486 23,021
Depreciation and amortization ..................... 16,215 12,795 14,062 19,310 19,937
--------- --------- --------- --------- ---------
Total Expenses ............................... 242,073 227,824 247,378 273,081 266,589
--------- --------- --------- --------- ---------
Income (loss) from operations ..................... 4,822 9,520 8,877 (8,320) 17,361
--------- --------- --------- --------- ---------
Non-operating income (expense):
Interest income ................................... 649 961 1,680 1,590 1,808
Interest expense .................................. (295) (313) (23,260) (22,236) (21,680)
Reorganization costs .............................. (2,154) (4,069) (505) -- --
Gain on disposal of assets ........................ 259 252 59 13 56
--------- --------- --------- --------- ---------
Total non-operating expense, net ............. (1,541) (3,169) (22,026) (20,633) (19,816)
--------- --------- --------- --------- ---------
Income (loss) before income taxes,
extraordinary and other items ..................... 3,281 6,351 (13,149) (28,953) (2,455)
Valuation provision on affiliate receivables ............ -- -- (9,650) -- --
Write off deferred financing costs ...................... -- -- (4,265) -- --
--------- --------- --------- --------- ---------
Income (loss) before income taxes,
and extraordinary item ............................ 3,281 6,351 (27,064) (28,953) (2,455)
Income tax provision .................................... (133) -- (10,902) (2,417) (186)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ................. 3,148 6,351 (37,966) (31,370) (2,641)
Extraordinary item - early extinguishment of
debt, net of related tax benefits ................. -- -- 310 -- --
Net income (loss) ....................................... $ 3,148 $ 6,351 $ (37,656) $ (31,370) $ (2,641)
========= ========= ========= ========= =========
Balance Sheet Data:
December 31,
---------------------------------------------------------------------
1999 1998 (1) 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands)
Total assets ............................................ $ 208,416 $ 199,148 $ 187,728 $ 224,438 $ 245,558
Total debt .............................................. 197,898 198,234 205,932 203,942 195,453
Shareholder's (deficit) equity .......................... (39,593) (42,741) (58,600) (20,944) 10,426
- -----------------
(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.
15
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, cannot 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
(the "Sands"). Prior to 1996, the Sands' cash flow from operations was
sufficient to meet debt service obligations and to fund a substantial portion of
annual capital expenditures. In addition, the Sands used short-term borrowings
as necessary to fund seasonal cash needs and for certain capital projects. After
1995, however, the competitive position of the Sands became impaired, which was
due, in part, to insufficient capital expenditures particularly compared to
certain competing Atlantic City casinos. In 1996, due to adverse weather in the
first quarter, a decline in both table games and slot hold percentages and
increased industry competition resulting in higher marketing expenditures, the
Sands cash flow decreased significantly compared to prior years. While cash flow
improved in 1997, it remained significantly below historical levels. These
declines in operating cash flow at the Sands resulted in the need for periodic
financial assistance from PCC and GBCC in order for GBHC to meet its debt
service obligations. Substantial additional financial assistance would have been
required to make the January 15, 1998 principal and interest payments due on the
First Mortgage Notes.
GBHC was unable to obtain additional borrowings from affiliates or other
sources and, accordingly, on January 5, 1998, the Debtors filed petitions
seeking protection under Chapter 11 of the Bankruptcy Code. Each company
continues to operate in the ordinary course of business, as set forth in the
Bankruptcy Code. Each company's executive officers and directors as of the date
of filing remain in office, subject to the jurisdiction of the Bankruptcy Court,
other than the following: as required under the Settlement Agreement, Richard
Knight resigned as a Director, President, and Chief Executive Officer of the
Debtors effective July 8, 1998; John P. Belisle was elected President and Chief
Executive Officer of GBHC on July 28, 1998; and Jerome T. Smith was elected as a
Director of the Debtors on August 3, 1998. On November 1, 1999, John P. Belisle
resigned as President and Chief Executive Officer of GBHC. On November 5, 1999,
Alfred J. Luciani was elected President and Chief Executive Officer of GBHC. On
November 11, 1999, Jerome T. Smith, the independent member of the Boards of
Directors of the Debtors, and one of the two independent members of the Audit
Committee of Holdings, citing a newly arisen potential conflict of interest,
resigned.
On January 11, 1999, the exclusivity period during which only the Debtors
could file a plan of reorganization expired and, as a result, any party in
interest could file a plan of reorganization. On June 1, 1999, the Debtors filed
with the Bankruptcy Court a plan of reorganization and disclosure statement,
ultimately filing a third modified plan of reorganization (the "Plan") and third
modified disclosure statement. On October 4, 1999,
16
the Bankruptcy Court approved the adequacy of the Disclosure Statement and a
confirmation hearing on the Plan was scheduled for December 17, 1999 (the
"Confirmation Hearing").
On November 3, 1999, the Debtors received notice from Merrill Lynch Asset
Management ("MLAM") that MLAM and Park Place Entertainment Corporation ("PPE")
had reached agreement on a term sheet under which PPE would sponsor a plan of
reorganization of GBHC (the "Term Sheet"). MLAM represented that it and PPE
controlled approximately 53% of the First Mortgage Notes. MLAM requested that
the Debtors agree to seek to adjourn the Confirmation Hearing, and accept a
revised Plan incorporating the provisions of the Term Sheet. The Debtors agreed
to seek the adjournment. On November 9, 1999, the Bankruptcy Court granted the
adjournment and set December 1, 1999 as a status conference for a report by the
Debtors on the status of their due diligence and evaluation of the provisions of
the Term Sheet. Following the December 1, 1999 status conference, the Bankruptcy
Court set December 22, 1999 as a final status conference for the Debtors to
report on their due diligence and evaluation of the Term Sheet. Entities
controlled by Carl Icahn ("Icahn") submitted a competing bid for a Plan of
Reorganization of the Debtors prior to the December 22, 1999 status conference.
The Bankruptcy court decided at the status conference that PPE and Icahn should
submit competing Plans of Reorganization and Supplemental Disclosure Statements
with the Debtors submitting a Master Disclosure Statement by January 18, 2000,
and that the Bankruptcy Court would conduct a hearing on February 16, 2000 to
consider the adequacy of the Disclosure Statements. Icahn filed a joint Plan
with the Official Committee of Unsecured Creditors (the "Committee") on January
18, 2000, and PPE also filed a Plan on the same date. The Bankruptcy Court
conducted a hearing on the adequacy of the Disclosure Statements on February 16,
2000. The Bankruptcy Court directed Icahn and the Committee and PPE to file
amended Plans and Supplemental Disclosure Statements with their final economic
offers to the creditors by March 6, 2000, and scheduled a further adequacy
hearing for March 23, 2000. At that hearing, the Bankruptcy Court directed Icahn
and the Committee and PPE to make certain revisions to their amended Plans and
Supplemental Disclosure Statements and file them on March 31, 2000, and
scheduled April 5, 2000 as a hearing date for the Bankruptcy Court to determine
if any further changes to the Supplemental Disclosure Statements would be
directed to be made by the Bankruptcy Court. At the hearing on April 5, 2000,
the Bankruptcy court approved the Debtors' Master Disclosure Statements,
approved the Supplemental Disclosure Statements of Icahn and the Committee and
of PPE subject to their making certain revisions, and established June 5, 2000,
as the deadline for creditors to deliver their votes for or against the Plans
and June 19, 2000, as the beginning of the confirmation hearing.
A Plan requires confirmation by the Bankruptcy Court and approval by the
New Jersey Casino Control Commission (the "Casino Commission"). There can be no
assurance at this time that a plan will be confirmed by the Bankruptcy Court and
approved by the Casino Commission. In the event a plan is confirmed,
continuation of the business thereafter is dependent on GBHC's ability to
achieve successful future operations. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should GBHC be unable to continue as a going
concern. Although management has not made a determination whether an impairment
of the carrying value currently exists, future adjustments to the carrying
amount of GBHC's assets may be required with respect to the fresh-start
reporting which would take place on the effective date of the confirmation of
the Plan.
Operating Activities
At December 31, 1999, GBHC had cash and cash equivalents of $20.9 million.
GBHC generated cash flow from operations of $18.6 million for the year ended
December 31, 1999 compared to $20.9 million for the year
17
ended December 31,1998. GBHC utilized cash generated by its operations, in part,
during 1999 to fund capital additions of $10.7 million, to close on the Option
Agreement and obtain the Option Parcels in the amount of $8.0 million, and to
make obligatory investments of $2.8 million.
Financing Activities
Semiannual principal payments of $2.5 million, which became due commencing
in July 1997 with respect to the First Mortgage Notes, have been suspended as a
result of the Chapter 11 filing. Exclusive of the First Mortgage Notes and the
Subordinated Notes, which are subject to reorganization, total scheduled
maturities of long-term debt in 2000 are $79,000.
Under an order of the Bankruptcy Court, permitting the disposition of
furniture and equipment in the ordinary course of business, any payments
received by GBHC for the sale of such assets, which are part of the security for
the First Mortgage Notes, must be remitted to the Indenture Trustee as
reductions to the outstanding principal of the First Mortgage Notes. Proceeds
from the sale of such assets, amounting to $263,000 and $257,000 for the years
ended December 31, 1999 and 1998, respectively, were remitted to the Indenture
Trustee.
Investing Activities
Capital expenditures at the Sands during 1999 amounted to approximately
$18.7 million and management anticipates that capital expenditures in the
ordinary course of business during 2000 will be approximately $7.9 million. In
addition, it is estimated that approximately $1.7 million of the $13.6 million
approved by the Bankruptcy Court in March 1998 for, among other things, ongoing
room and suite renovations and $5.7 million for the ongoing construction of the
new front entrance to the Sands facility will be expended in 2000.
Effective September 2, 1998, and as part of the Second Settlement
Agreement, GBHC acquired the membership interests in Lieber from affiliates of
GBCC for $251,000. GBHC also caused Lieber to acquire the rights under the
Option Agreement for the Option Parcels from another affiliate of GBCC for
payment of $1.3 million and a payment of $500,000 at confirmation of a plan of
reorganization. During September 1998, GBHC provided Lieber with $1 million,
which Lieber paid to the owner of the Option Parcels to extend the closing under
the Option Agreement for the Option Parcels to September 30, 1999. On May 10,
1999, the Bankruptcy Court approved the Closing Motion filed by GBHC seeking
approval to close on the Option Agreement. On May 10, 1999, $500,000 was paid to
the owner of the Option Parcels to accelerate the closing on the Option Parcels
to September 20, 1999. The purchase price of the Option Parcels was $10 million,
$2.5 million of which was paid prior to closing and $7.5 million of which was
due at closing. On September 20, 1999, the closing took place under the Option
Agreement and Lieber, whose sole member is GBHC, obtained title to the Option
Parcels one of which was subject to a lease (the "Lease") and a sub-lease for
the operation of a "Gold Store" (the "Sub-lease") Demolition of the existing
structures was completed and construction of a new front entrance to the Sands'
facility has commenced. The new front entrance is expected to be completed by
June 2000. GBHC obtained the rights under the Lease on March 27, 2000 for
$371,000 and on the same date notified the operator of the Gold Store that GBHC
had elected to exercise a 90-day cancellation provision of the Sub-lease and
tendered to the sub-lessee a cancellation payment of approximately $30,000. GBHC
intends to demolish the Gold Store upon expiration of the notice period and
incorporate the land as part of its new front entrance.
GBHC also entered into an agreement with the entities controlling the
Claridge Hotel and Casino (the "Claridge"), subject to Bankruptcy Court (as
hereinafter defined) approval, to acquire the Claridge
18
Administration Building ("CAB"), which is situated between GBHC's existing main
entrance and the new Pacific Avenue entrance presently under construction. GBHC
intends to demolish the CAB and incorporate the land as part of the new front
entrance. The purchase price is $3.5 million, consisting of $1.5 million in cash
at closing with the remaining $2.0 million consideration tendered through the
elimination of a monthly license fee paid by the Claridge to GBHC under an
agreement between the Claridge and GBHC governing the development and operation
of the "People Mover" leading from the Boardwalk to the Sands and Claridge (the
"PM Agreement") in the amount of $50,000 per month for 40 months. GBHC and the
Claridge also sought Bankruptcy Court approval of the assumption of the PM
Agreement, as modified. On April 5, 2000, the Bankruptcy Court approved the
acquisition of the CAB for the purpose described and approved the joint
assumption of the PM Agreement as modified.
The Sands is required by the Casino Act to make certain deposits with the
CRDA. Such deposit requirements for 1999 totaled $2.8 million and are
anticipated to be approximately $3.0 million during 2000. The Sands has agreed
to donate certain of its future investment obligations to the CRDA in connection
with the construction related to the Atlantic City Boardwalk convention center.
The projected total donation will amount to $7.0 million, which will be paid
over the next 12 years based on an estimate of the Sands' future CRDA
obligations.
Summary
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code. Accordingly,
there is significant doubt about Holdings' ability to continue as a going
concern. A plan of reorganization requires confirmation by the Bankruptcy Court
and approval by the Casino Commission. As a result of the Chapter 11 filing, the
debt service payments due subsequent to January 5, 1998 were not made and the
accrual of interest on both the First Mortgage Notes and the Subordinated Notes
for periods subsequent to the filing has been suspended. Management believes
that cash flows generated from operations during 2000 will be sufficient to meet
its operating plan and provide for scheduled capital expenditures.
19
RESULTS OF OPERATIONS
General
The Sands income from operations for the year ended December 31, 1999, was
$4.8 million compared to $9.5 million in 1998 and $8.9 million in 1997.
Operating results during 1999 were positively impacted by increased table drop
and slot handle. The increased volume of play was slightly offset, however, by
decreased table and slot hold percentages in 1999 compared to 1998. Although net
revenues increased in 1999 by $9.6 million (4.0%) as compared to 1998, operating
expenses increased by $14.3 million (6.3%) for the same period. Such operating
expense increases were due to increases in marketing and promotional costs of
$5.4 million (9.1%), salaries and related benefits of $3.9 million (4.5%), and
depreciation and amortization of $3.4 million (26.7%) partially offset by a
decrease in management fee expense of $2.4 million. The negative publicity
surrounding the Sands filing for bankruptcy protection on January 5, 1998
affected operating results for both 1999 and 1998.
20
Gaming Operations
The following table sets forth certain unaudited financial and operating
data relating to the Sands' and all other Atlantic City casinos' capacities,
volume of play, hold percentages and revenues:
Year ended December 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
($000)
Units: (at year-end)
Table Games - Sands 100 105 125
- Atlantic City (ex. Sands) 1,268 1,333 1,365
Slot Machines - Sands 2,001 2,015 2,023
- Atlantic City 33,722 33,446 31,769
Gross Wagering (1)
Table Games - Sands $ 461,512 $ 426,343 $ 524,040
- Atlantic City 7,182,588 7,211,706 7,143,709
Slot Machines - Sands 1,985,311 1,886,901 1,916,350
- Atlantic City 33,935,558 31,925,805 30,508,426
Hold Percentages (2) (3)
Table Games - Sands 14.60% 15.20% 14.10%
- Atlantic City 15.40% 15.40% 15.00%
Slot Machines - Sands 7.90% 8.00% 8.20%
- Atlantic City 8.20% 8.40% 8.40%
Revenues (2)
Table Games - Sands $ 67,301 $ 64,744 $ 74,083
- Atlantic City 1,104,835 1,109,111 1,076,461
Slot Machines - Sands 157,141 151,749 157,312
- Atlantic City 2,795,221 2,668,533 2,559,864
Other (4) - Sands 3,033 2,875 3,082
- Atlantic City N/A N/A N/A
(1) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (the "Drop") and coins wagered
in slot machines ("Handle").
(2) The Sands' hold percentages and revenues are reflected on an accrual
basis. Comparable accrual basis data for the remainder of the Atlantic
City gaming industry as a whole is not available; consequently, industry
hold percentages and revenues are based on information available from the
Casino Commission and are possibly higher than if computed on the accrual
basis.
(3) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the
"hold percentage."
(4) Consists of revenues from poker and simulcast horse racing wagering.
Comparable information for the remainder of the Atlantic City gaming
industry is not available.
21
Patron Gaming Volume
Although the ongoing quantitative impact on wagering of GBHC's filing for
protection under Chapter 11 cannot be estimated, management believes that the
negative publicity resulting from the filing has had an adverse effect on patron
gaming volume in both 1999 and 1998.
Table game drop at the Sands increased by $35.2 million (8.2%) in 1999
compared to 1998 after a decrease of $97.7 million (18.6%) in 1998 compared to
1997. By comparison, according to Casino Commission reports, table game drop at
all other Atlantic City casinos during the same periods reflected a decrease of
.4% and an increase of 1%, respectively. As a result, the Sands table game
market share (expressed as a percentage of the entire Atlantic City gaming
industry (the "industry") aggregate table game drop) increased to 6.0% during
1999 from 5.6% in 1998 after decreasing from 6.8% in 1997. The Sands table game
drop increase in 1999 is attributable to an increased volume of play from
patrons whose wagering is tracked and whose level of play generally entitles
them to a varying level of rewards, including cash and/or complimentary rooms,
food, beverage, entertainment and gifts ("rated players"). During 1999, the
number of table games decreased 4.8% at the Sands, compared with a decrease of
4.9% at all other Atlantic City casinos. Competitive pressures resulting from
the offering of special odds for various table games and programs designed to
attract specific market segments by other Atlantic City casinos adversely
affected table games drop in 1998. Aggregate gaming space at all other Atlantic
City casinos increased by approximately 4,500 square feet at December 31, 1999,
compared to December 31, 1998. The amount of gaming space at the Sands has
remained virtually unchanged since mid-1996.
Slot machine handle increased $98.4 million (5.2%) in 1999 compared to
1998 after decreasing $29.4 million (1.5%) in 1998 compared to 1997. By
comparison, the percentage increase in slot machine handle for all other
Atlantic City casinos in 1999 vs. 1998 was 6.3%. In 1998 compared to 1997, as
compared to the decrease at the Sands, slot machine handle increased 4.6% for
all other Atlantic City casinos. As a result of lagging the market in growth in
both 1998 and 1999, the Sands' market share of slot machine handle as a
percentage of total industry slot handle, decreased to 5.5% in 1999 from 5.6% in
1998 and 5.9% in 1997. The increased Sands slot handle during 1999 is primarily
attributable to an increased volume of play from rated players although the
volume of unrated slot play increased as well. The amount of available gaming
space did not change at the Sands in 1999, but the number of slot machines
decreased slightly as compared to 1998 and 1997. On an industry-wide basis, both
total available gaming space and the number of slot machines increased slightly
in 1999 compared to 1998. While the number of slot machines decreased slightly
at the Sands during 1999, during the last half of 1998 and in 1999 approximately
700 older, less popular slot machines were replaced with new and more popular
machines as part of the Sands capital expenditure program approved by the
Bankruptcy Court in March 1998.
22
Revenues
Casino revenues at the Sands increased by $8.1 million (3.7%) in 1999
compared to 1998 and decreased by $15.1 million (6.4%) in 1998 compared to 1997.
Increases in both table game and slot machine wagering were partially offset by
decreases in table game and slot machine hold percentages in 1999 compared to
1998. Decreases in both table game and slot machine wagering and a slight
decrease in slot machine hold percentage during 1998 and 1997 were partially
offset by an increase in the table game hold percentage in 1998 vs. 1997.
Rooms' revenue increased $73,000 (.8%) in 1999 compared to 1998 and
decreased $491,000 (5.1%) in 1998 compared to 1997. The increase during 1999 is
a result of higher occupancy partially offset by a decrease in the average daily
room rate (ADR), while the decrease in 1998 compared to 1997 is a result of
decreased occupancy partially offset by an increase in the ADR.
Food and beverage revenues increased $2.5 million (9.8%) in 1999 compared
to1998 and decreased $7.6 million (23%) in 1998 compared to 1997. The revenue
growth in 1999 compared to 1998 was due to an increase in both the number of
covers and in revenue per cover ("average check"). The revenue decrease in 1998
compared with 1997 resulted from fewer covers reflecting a curtailment in food
and beverage related promotional programs.
Other revenues increased $2.2 million (58.2%) in 1999 compared to 1998 and
decreased $356,000 (8.6%) in 1998 compared to 1997. The increase in 1999
resulted from an increase in the number of theatre entertainment offerings and
the opening of a gift shop. The decrease in 1998 compared to 1997 resulted from
a reduction in theatre entertainment offerings.
Promotional Allowances
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs. As
a percentage of rooms, food and beverage and other revenues at the Sands, these
allowances increased to 54.9% in 1999 from 53.1% in 1998 and 53.4% in 1997. The
increase in 1999 is primarily attributable to changes in marketing programs and
other promotional activities aimed at increasing gaming volume from rated
players.
Departmental Expenses
Casino expenses at the Sands increased $11.2 million (6.0%) in 1999
compared to 1998 and decreased by $13.0 million (6.5%) in 1998 compared to 1997.
The increase in 1999 was a result of increased expenditures for marketing and
advertising related to the Sands desire to develop programs and create market
awareness for the purpose of driving additional patron volume. This increase in
expenditures and related patron volume activity also resulted in an increase in
the allocation of rooms, food and beverage and other expenses to casino
expenses. The majority of these increases occurred during the first nine months
of 1999, as the direction of the Sands shifted to developing the additional
volume into more profitable business. These cost increases were slightly offset
by a decrease in incentive programs involving coin giveaways. The decrease in
1998 was a result, in part, of previous management, under the Management
Agreement, reducing marketing expenditures during the first half of 1998, which
had the negative impact of significantly reducing patron volume.
23
Rooms expense decreased $316,000 (10.0%) in 1999 compared to 1998 and
increased by $584,000 (22.5%) in 1998 compared to 1997. The 1999 decrease
resulted from an increase in the allocation of rooms expense to casino expense
due to a higher percentage of rooms being utilized on a complimentary basis. The
1998 increase resulted from a lower percentage of rooms being utilized on a
complimentary basis, which reduced the allocation of room costs to casino
expenses.
Food and beverage expense increased $276,000 (2.8%) in 1999 compared to
1998 and decreased $817,000 (7.6%) in 1998 compared to 1997. The increase in
1999 was due to increased food and beverage volume and related variable costs
due to increased casino patronage. These increases were offset by the increase
in the allocation of food and beverage costs to casino expense. The decrease in
1998 reflects a reduction in payroll, operating costs and promotional expenses
resulting from a decline in patron volume. Such cost savings were partially
offset by fewer costs being allocated to casino expenses due to the reduced use
of food and beverage complimentaries.
Other expenses increased $1.6 million (62.9%) in 1999 compared to 1998 and
decreased by $157,000 (5.7%) in 1998 compared to1997. The 1999 increase resulted
from increased costs associated with increased theatre entertainment and
additional costs of goods relating to merchandise sold by a new gift shop. These
increases were offset by the increase in the allocation of other expenses to
casino expense. The decrease in 1998 was due to cost savings with respect to a
reduced amount theatre entertainment.
General and Administrative Expenses
General and administrative expenses decreased $1.9 million (15.3%) in 1999
compared to 1998 and by $4.9 million (28.2%) in 1998 compared to 1997.
Management fees incurred by the Sands decreased by $2.4 million in 1999 compared
to 1998 and $3.0 million in 1998 compared to 1997. These reductions resulted
from the filing of the Rejection Motion and the Settlement Agreement and Second
Settlement Agreement. The decrease in 1999 was partially offset by increased
wages and benefits, particularly in the Facilities department, due to deferred
maintenance in recent years.
Depreciation and Amortization
Depreciation and amortization expense increased by $3.4 million (26.7%) in
1999 compared to 1998 and decreased by $1.3 million (9%) in 1998 compared to
1997. The increase in 1999 was due to the expense associated with the
recognition of the present value of a future donation liability to the CRDA and
the write-off of a deferred asset related to a previous CRDA donation in the
amount of $765,000. The decrease in 1998 is attributable to certain assets
becoming fully depreciated during 1998 and the elimination of the amortization
of loan origination and related fees that were fully written-off at December 31,
1997. These expense reductions were somewhat offset by an increase of $1.4
million in the valuation allowance for certain CRDA bond investments due to the
uncertainty of their realizable value.
24
Interest Income and Expense
Interest income decreased by $312,000 (32.5%) in 1999 compared to 1998 and
by $719,000 (42.8%) in 1998 compared to 1997. The decrease in 1999 was because
interest earned in 1998 included a one-time interest payment on an obligatory
investment. Interest earned on cash balances accumulated as a result of the
Chapter 11 filing (i.e., from not making debt service payments) is reflected in
the accompanying consolidated financial statements as a reduction of
reorganization costs.
Interest expense decreased $18,000 (5.8%) in 1999 compared to 1998 and
$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.
Non-recurring Items
At December 31, 1997, GBHC reserved as uncollectible the balance of an
advance to an affiliated company in the amount of $5.7 million together with
interest amounting to $4.0 million. The $5.7 million advance as well as accrued
interest amounting to $5.8 million remains fully reserved at December 31, 1999.
Income Tax Provision
Prior to 1997, Holdings was included in the consolidated federal income
tax return of HCC, the parent company of GBCC until HCC distributed the GBCC
stock it owned to its shareholders as a dividend on December 31, 1996. As part
of the Second Settlement Agreement (see Note 1), Holdings' operations are
included in GBCC's consolidated federal income tax return for the years ended
December 31, 1997 and 1998. Effective after December 31, 1998, PCC transferred
21% of the stock ownership in Holdings to PBV, effecting the deconsolidation of
Holdings from the GBCC group for federal income tax purposes. Accordingly,
beginning in 1999, Holdings and its subsidiaries' provisions for federal income
taxes will be calculated and paid on a consolidated basis with Holdings and GB
Funding.
At December 31, 1999, GBHC has deferred tax assets including net operating
loss and credit carryforwards. The net operating losses ("NOL's") do not expire
before the year 2012 for federal tax purposes and the year 2003 for state tax
purposes. A portion of the credit carryforwards, if not utilized, will expire in
the year 2000, and each year thereafter through 2004. The remaining credit
carryforwards do not expire until the year 2019. The availability of the NOL's
and credit carryforwards will be subject to the tax consequences of a plan of
reorganization approved by the Bankruptcy Court. In addition, the Second
Settlement Agreement provides that GBCC may utilize NOL's of GBHC through
December 31, 1998 to offset taxable income of GBCC and other members of the
consolidated tax group. Representatives of HCC and GBCC originally advised GBHC
in March 1999 that GBHC should have approximately $13 million in NOL's available
subsequent to December 31, 1998. Subsequent adjustments recognized by GBHC and
reported to GBCC attributable to the year ended December 31, 1997, reduced the
available NOL's. GBCC advised GBHC in February 2000 that a portion of the
Debtors' NOL's were utilized in the 1998 GBCC group consolidated federal income
tax return. However, GBCC also notified GBHC in February 2000 that all of the
Debtors' NOL's attributable to periods prior to January 1, 1997 will be utilized
to shield certain additional excess loss account adjustments attributable to the
Spin Off, which may result in available NOL's in 1999 being reduced to
approximately $4.4 million. GBHC is in the process of
25
examining the propriety of the use of its pre-1997 NOL's. GBHC expects that
these remaining NOL's will be utilized in the 1999 federal tax return, and if
not utilized therein, any remaining NOL's will be eliminated as a result of a
plan of reorganization. Statement of Financial Accounting Standards No. 109
("SFAS 109") requires that the tax benefit of NOL's and deferred tax assets
resulting from temporary differences be recorded as an asset and, to the extent
that management can not assess that the utilization of all or a portion of such
NOL's and deferred tax assets is more likely than not, requires the recording of
a valuation allowance. As a result of book and tax losses incurred in 1997 and
the filing under Chapter 11 by GBHC in January 1998, management is unable to
determine that realization of GBHC's deferred tax asset is more likely than not
and, thus, has provided a valuation allowance for the entire amount at December
31, 1999. The Debtors are dependent upon receipt of information from HCC and
GBCC as to the operations of their affiliates and the impact of those operations
on the former HCC and GBCC consolidated groups' NOL's.
As part of the Second Settlement Agreement, GBHC settled certain
intercompany obligations on a non-cash basis. A loan to GBHC from GBCC, totaling
$8,000,000 along with accrued interest totaling $1,508,000, and a deferred
federal tax asset of GBHC's, totaling $10,902,000, representing a claim against
an affiliate for the overpayment of federal income taxes under a previously
existing tax sharing agreement, were mutually released. As the deferred federal
tax asset had been previously fully reserved as required by SFAS 109, this
mutual release resulted in the recording of a capital contribution in the amount
of $9,508,000 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 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 for the year
ended December 31, 1997.
Year 2000 Compliance
Management completed on a timely basis a comprehensive program to prepare
the Sands' computer systems and applications for a smooth transition to the Year
2000. The objective of this program was to determine and assess the risks of the
Year 2000 issues and to plan and institute mitigating actions to minimize those
risks. An assessment and inventory of systems, computer applications and
software programs was completed and changes implemented where required. The
Sands developed a contingency plan that included the identification of
significant vendors that would be Year 2000 compliant to replace significant
vendors that would not be Year 2000 compliant. The costs associated with testing
and converting systems were not material. All Year 2000 costs were funded
through operating cash flow. Because of these preparations, the Sands did not
experience any significant disruptions in its operations as a result of the
transition to the Year 2000. Additionally, there are no claims pending or, to
our knowledge, threatened against us arising out of the Year 2000 issue.
26
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 $262,000 associated
with a planned re-theming of the Sands and related expansions opportunities were
expensed during the fourth quarter of 1999. Due to the reorganization
proceedings discussed above, this project has been abandoned. As noted
previously, interest income on cash accumulated during the reorganization is
reflected as a reduction to reorganization and other related costs.
Inflation
Management believes that in the near term, modest inflation, together with
increasing competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
Seasonality
Historically, the Sands' operations have been highly seasonal in nature,
with the peak activity occurring from May to September. Consequently, the
results of operations for the first and fourth quarters are traditionally less
profitable than the other quarters of the fiscal year. In addition, the Sands'
operations may fluctuate significantly due to a number of factors, including
chance. Such seasonality and fluctuations may materially affect casino revenues
and profitability.
27
ITEM 8. INDEX TO FINANCIAL STATEMENTS
Page
----
GB Property Funding Corp.
Report of Independent Public Accountants............................. 29
Balance Sheets of GB Property Funding Corp. as of
December 31, 1999 and 1998.......................................... 30
Statements of Operations of GB Property Funding Corp.
for the Years Ended December 31, 1999, 1998 and 1997................ 31
Statements of Cash Flows of GB Property Funding Corp.
for the Years Ended December 31, 1999, 1998 and 1997................ 32
Notes to Financial Statements of GB Property Funding Corp............ 33
GB Holdings, Inc. and Subsidiaries
Report of Independent Public Accountants............................. 39
Consolidated Balance Sheets of GB Holdings, Inc.
and Subsidiaries as of December 31, 1999 and 1998................... 40
Consolidated Statements of Operations of GB Holdings, Inc.
and Subsidiaries for the Years Ended
December 31, 1999, 1998 and 1997.................................... 42
Consolidated Statement of Changes in Shareholder's Deficit
of GB Holdings, Inc. and Subsidiaries for
the Three Years Ended December 31, 1999............................. 43
Consolidated Statements of Cash Flows of GB Holdings, Inc.
and Subsidiaries for the Years Ended
December 31, 1999, 1998 and 1997 .................................. 44
Notes to Consolidated Financial Statements of GB Holdings, Inc.
and Subsidiaries ................................................... 45
28
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, 1999 and 1998,
and the related statements of operations and cash flows for each of the three
years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999, has a note
receivable and related accrued interest receivable due from GBHC totaling
$191,353,000. 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
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. A plan of reorganization requires confirmation by
the Bankruptcy Court in accordance with the Bankruptcy Code and approval by the
New Jersey Casino Control Commission. In the event a 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
February 11, 2000
29
GB PROPERTY FUNDING CORP.
(Debtor-in-Possession, wholly owned by GB Holdings, Inc.)
BALANCE SHEETS
ASSETS
December 31,
---------------------------
1999 1999
------------ ------------
Current Asset:
Cash $ 1,000 $ 1,000
Interest receivable from affiliate 9,373,000 9,373,000
Note receivable from affiliate 181,980,000 182,243,000
------------ ------------
$191,354,000 $191,617,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities Subject to Compromise:
Accrued interest payable $ 9,373,000 $ 9,373,000
Long-term debt 181,980,000 182,243,000
------------ ------------
191,353,000 191,616,000
Commitments and Contingncies
Shareholder's Equity:
Common stock, $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
------------ ------------
$191,354,000 $191,617,000
============ ============
The accompanying notes are an
integral part of these financial statements
30
GB PROPERTY FUNDING CORP.
(Debtor-in-Possession, wholly owned by GB Holdings, Inc.)
STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues:
Interest income (Note 2) $ -- $ 221,000 $19,941,000
Expenses:
Interest expense (contractual interest
of $19,806,000 and $19,844,000,
in 1999 and 1998, respectively) -- 221,000 19,941,000
----------- ----------- -----------
Net income $ -- $ -- $ --
=========== =========== ===========
The accompanying notes are an
integral part of these financial statements.
31
GB PROPERTY FUNDING CORP.
(Debtor-in-Possession, wholly owned by GB Holdings, Inc.)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------
1999 1998 1997
--------- --------- ---------
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 are an
integral part of these financial statements.
32
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. Holdings
was a wholly owned subsidiary of Pratt Casino Corporation ("PCC"), also a
Delaware corporation, through December 31, 1998. Effective after December 31,
1998, PCC transferred 21% of the stock ownership of Holdings to PBV, Inc.
("PBV"), a newly formed entity, controlled by certain stockholders of Greate Bay
Casino Corporation ("GBCC"). PCC was incorporated in September 1993 and was a
wholly owned subsidiary of PPI Corporation ("PPI"), a New Jersey corporation and
a wholly owned subsidiary of GBCC. As a result of a certain confirmed plan of
reorganization of PCC and others in October 1999, the remaining 79% stock
interest of PCC in Holdings was transferred to Greate Bay Holdings, LLC
("GBLLC"), whose sole member as a result of the same reorganization is PPI.
Holdings was incorporated in September 1993 and, on February 17, 1994, acquired,
through a capital contribution by its then parent, all of the outstanding
capital stock of Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the
Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"). GB Property
Funding was formed for the purpose of borrowing $185,000,000 of First Mortgage
Notes (the "First Mortgage Notes") for the benefit of GBHC; such debt was issued
in February 1994 bearing interest at the rate of 10 7/8% per annum. All of the
proceeds were loaned to GBHC (see Note 2).
GB Property Funding has no operations and is dependent on the repayment of
its note from GBHC for servicing its debt obligations (see Note 2).
Administrative services for GB Property Funding are provided by GBHC at no
charge. The cost of such services is not significant.
The operation of an Atlantic City casino/hotel is subject to significant
regulatory control. Under provisions of the Casino Act, GBHC is required to
maintain a non-transferable license to operate a casino in Atlantic City.
The accompanying financial statements have been prepared in accordance
with Statement of Position No. 90 -7, "Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code," and include disclosure of liabilities
subject to compromise. On January 5, 1998, GB Property Funding, GBHC and
Holdings (collectively, the "Debtors") filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the District of New Jersey (the
"Bankruptcy Court"). Each company continues to operate in the ordinary course of
business as set forth in the Bankruptcy Code.
On June 1, 1999, the Debtors filed with the Bankruptcy Court a plan of
reorganization and disclosure statement, ultimately filing a third modified plan
of reorganization (the "Plan") and third modified disclosure statement. On
October 4, 1999, the Bankruptcy Court approved the adequacy of the Disclosure
Statement and a confirmation hearing on the Plan was scheduled for December 17,
1999 (the "Confirmation Hearing").
33
GB PROPERTY FUNDING CORP.
(Debtor-in-Possession, wholly owned by GB Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS (Continued)
On November 3, 1999, the Debtors received notice from Merrill Lynch Asset
Management ("MLAM") that MLAM and Park Place Entertainment Corporation ("PPE")
had reached agreement on a term sheet under which PPE would sponsor a plan of
reorganization of GBHC (the "Term Sheet"). MLAM represented that it and PPE
controlled approximately 53% of the First Mortgage Notes. MLAM requested that
the Debtors agree to seek to adjourn the Confirmation Hearing, and accept a
revised Plan incorporating the provisions of the Term Sheet. The Debtors agreed
to seek the adjournment. On November 9, 1999, the Bankruptcy Court granted the
adjournment and set December 1, 1999 as a status conference for a report by the
Debtors on the status of their due diligence and evaluation of the provisions of
the Term Sheet. Following the December 1, 1999 status conference, the Bankruptcy
Court set December 22, 1999 as a final status conference for the Debtors to
report on their due diligence and evaluation of the Term Sheet. Entities
controlled by Mr. Carl Icahn ("Icahn") submitted a competing bid for a Plan of
Reorganization of the Debtors prior to the December 22, 1999 status conference.
The Bankruptcy court decided at the status conference that PPE and Icahn should
submit competing Plans of Reorganization and Supplemental Disclosure Statements
with the Debtors submitting a Master Disclosure Statement by January 18, 2000,
and that the Bankruptcy Court would conduct a hearing on February 16, 2000 to
consider the adequacy of the Disclosure Statements. Icahn filed a joint Plan
with the Official Committee of Unsecured Creditors (the "Committee") on January
18, 2000, and PPE also filed a Plan on the same date. The Bankruptcy Court
conducted a hearing on the adequacy of the Disclosure Statements on February 16,
2000. The Bankruptcy Court directed Icahn and the Committee and PPE to file
amended Plans and Supplemental Disclosure Statements with their final economic
offers to the creditors by March 6, 2000, and scheduled a further adequacy
hearing for March 23, 2000. At that hearing, the Bankruptcy Court directed Icahn
and the Committee and PPE to make certain revisions to their amended Plans and
Supplemental Disclosure Statements and file them on March 31, 2000, and
scheduled April 5, 2000 as a hearing date for the Bankruptcy Court to determine
if any further changes to the Supplemental Disclosure Statements would be
directed to be made by the Bankruptcy Court. At the hearing on April 5, 2000,
the Bankruptcy Court approved the Debtors' Master Disclosure Statements,
approved the Supplemental Disclosure Statements of Icahn and the Committee and
of PPE subject to their making certain revisions, and established June 5, 2000,
as the deadline for creditors to deliver their votes for or against the Plans
and June 19, 2000, as the beginning of the confirmation hearing.
A plan of reorganization requires confirmation by the Bankruptcy Court and
approval by the New Jersey Casino Control Commission (the "Casino Commission").
There can be no assurance at this time that any plan of reorganization will be
confirmed by the Bankruptcy Court or approved by the Casino Commission. In the
event a plan of reorganization is confirmed, continuation of the business
thereafter is dependent on GBHC's ability to achieve successful future
operations. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classifications of liabilities that might be necessary should GB
Property Funding be unable to continue as a going concern.
As discussed above, GB Property Funding was formed for the purpose of
issuing the First Mortgage Notes for the benefit of GBHC. GB Property Funding
loaned the proceeds from the First Mortgage Notes to GBHC and, at December 31,
1999, has a note receivable, together with interest accrued through January 5,
1998, due from GBHC totaling $191,353,000. GB Property Funding has no operations
and the note receivable
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GB PROPERTY FUNDING CORP.
(Debtor-in-Possession, wholly owned by GB Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS (Continued)
and the accrued interest receivable represents virtually all of GB Property
Fundings' assets. As discussed above, during 1998 the Debtors filed petitions
for relief under Chapter 11 of the Bankruptcy Code. As a result of the Chapter
11 filings, the First Mortgage Notes and related accrued interest payable have
been classified as liabilities subject to compromise. To the extent that any
proceeds are ultimately realized from GBHC as a result of the resolution of the
bankruptcy proceedings, such amounts would be offered in full satisfaction of
the First Mortgage Notes. No provision for any loss relating to the
uncollectibility of these receivables has been reflected in the accompanying
financial statements.
New Jersey Management, Inc. ("NJMI"), also a wholly owned subsidiary of
PCC, was responsible for the operations of the Sands under a management
agreement dated August 19, 1987, as amended, with GBHC (the "Management
Agreement"). On May 22, 1998, GBHC filed a motion with the Bankruptcy Court to
reject the Management Agreement (the "Rejection Motion"). GBCC, NJMI, and
certain of their affiliates, on one side, and the Debtors, on the other, entered
into an agreement on June 27, 1998, which was approved by the Bankruptcy Court
on July 7, 1998, and by the Casino Commission on July 8, 1998 (the "Settlement
Agreement"). Under the Settlement Agreement, among other things, the Management
Agreement was suspended and replaced with a services agreement until a decision
by the Bankruptcy Court on the Rejection Motion, and GBHC ceded ownership rights
to an affiliate of GBCC in, and obtained a perpetual license, from the same
affiliate, for the software used in its operations. On September 28, 1998, and
as a result of the Second Settlement Agreement, as defined below, the Bankruptcy
Court granted the Rejection Motion and, in conformity therewith, no further fees
will be paid under either the Management Agreement or the Settlement Agreement.
Effective September 2, 1998, GBHC acquired the membership interests in
Lieber Check Cashing LLC ("Lieber"), a New Jersey limited liability company
which owns a land parcel adjacent to GBHC (the "Lieber Parcel") and GBHC
acquired and caused an option agreement on other adjacent land parcels (the
"Option Parcels") to be assigned to Lieber (the "Option Agreement"). The Lieber
Parcel and the Option Parcels provided GBHC with an expansion opportunity and
frontage on Pacific Avenue, the principal street running parallel and closest to
the boardwalk in Atlantic City, New Jersey. On September 20, 1999, the closing
took place under the Option Agreement and Lieber, whose sole member is GBHC,
obtained title to the Option Parcels. The demolition of the existing structures
on the parcels was completed and construction of a new front entrance to the
Sands' facility has commenced with completion expected in June 2000.
On July 27, 1998, GBHC filed an adversary proceeding in the Bankruptcy
Court against GBCC, certain of its affiliates, and certain of the former
directors of GBHC (collectively the "Defendants") seeking to recover the Lieber
Parcel and the Option Agreement for the Option Parcels and to restrain the use
of its Net Operating Losses (the "NOL's"). Effective September 2, 1998, the
Debtors, on one side, and the Defendants, on the other, reached an agreement
resolving, among other things, the adversary proceeding (the "Second Settlement
Agreement"). Under the Second Settlement Agreement, among other things, the
Debtors agreed to be included in the consolidated federal income tax return of
GBCC for the years ended December 31, 1997 and 1998. GBCC agreed to allow the
Debtors to become deconsolidated from the GBCC group for federal income tax
purposes by causing PCC to transfer 21% of the stock ownership interest of PCC
in Holdings to a person other than any member of the GBCC group by December 31,
1998. In accordance with the Second Settlement
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GB PROPERTY FUNDING CORP