-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TXMfPBHSKBrV7tLgDtpMYGHg5hkp1LvNARZkLoj4++tEQa84W4Hs09IIhwADrje3 uU27FEczfoewAelnnWXSVA== 0000930661-98-001819.txt : 19980820 0000930661-98-001819.hdr.sgml : 19980820 ACCESSION NUMBER: 0000930661-98-001819 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980819 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GB PROPERTY FUNDING CORP CENTRAL INDEX KEY: 0000912906 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 752502290 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-69716 FILM NUMBER: 98694435 BUSINESS ADDRESS: STREET 1: C/O SANDS HOTEL & CASINO STREET 2: INDIANA AVE & BRIGHTON PARK 9TH FLOOR CITY: ATLANTIC CITY STATE: NJ ZIP: 08401 BUSINESS PHONE: 609-441-07 MAIL ADDRESS: STREET 1: C/O SANDS HOTEL & CASINO STREET 2: INDIANA AVE & BRIGHTON PARK 9TH FLOOR CITY: ATLANTIC CITY STATE: NJ ZIP: 08401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREATE BAY HOTEL & CASINO INC CENTRAL INDEX KEY: 0000906595 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 222242014 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-69716-02 FILM NUMBER: 98694436 BUSINESS ADDRESS: STREET 1: TWO GALLERIA TOWER SUITE 2200 13455 NOEL CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2143869777 MAIL ADDRESS: STREET 1: TWO GALLERIA TOWER SUITE 2200 STREET 2: 13455 NOEL ROAD CITY: DALLAS STATE: TX ZIP: 75240 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GB HOLDINGS INC CENTRAL INDEX KEY: 0000912926 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 752502293 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-69716-01 FILM NUMBER: 98694437 BUSINESS ADDRESS: STREET 1: TWO GALLERIA TOWER 13455 NOEL ROAD STREET 2: STE 2200 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2143869777 MAIL ADDRESS: STREET 1: TWO GALLERIA TOWER SUITE 2200 STREET 2: 13455 NOEL ROAD CITY: DALLAS STATE: TX ZIP: 75240 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1998 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to _______________________ Commission file number 33-69716 ------------------------------- GB PROPERTY FUNDING CORP. GB HOLDINGS, INC. GREATE BAY HOTEL AND CASINO, INC. - -------------------------------------------------------------------------------- (Exact name of each Registrant as specified in its charter) DELAWARE 75-2502290 DELAWARE 75-2502293 NEW JERSEY 22-2242014 - ----------------------------------------- ------------------------------------- (States or other jurisdictions of (I.R.S. Employer incorporation or organization) Identification No.'s) C/O SANDS HOTEL & CASINO INDIANA AVENUE & BRIGHTON PARK, 9TH FLOOR ATLANTIC CITY, NEW JERSEY 08401 - ----------------------------------------- ------------------------------------- (Address of principal executive offices) (Zip Code) (Registrants' telephone number, including area code): (609) 441-0704 --------------------------- (NOT APPLICABLE) - -------------------------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report.) Indicate by check mark whether each of the Registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date.
REGISTRANT CLASS OUTSTANDING AT AUGUST 17, 1998 - --------------------------------- ----------------------------- ------------------------------ GB Property Funding Corp. Common stock, $1.00 par value 1,000 shares GB Holdings, Inc. Common stock, $1.00 par value 1,000 shares Greate Bay Hotel and Casino, Inc. Common stock, no par value 100 shares
1 PART I: FINANCIAL INFORMATION - ------------------------------ INTRODUCTORY NOTES TO FINANCIAL STATEMENTS - ------------------------------------------ The outstanding securities consist of 10 7/8% First Mortgage Notes (the "10 7/8% First Mortgage Notes") in the original principal amount of $185,000,000 due January 15, 2004 issued by GB Property Funding Corp. ("GB Property Funding"). GB Property Funding's obligations are unconditionally guaranteed by GB Holdings, Inc. ("Holdings"), a Delaware corporation with principal executive offices at Indiana Avenue and Brighton Park, Atlantic City, New Jersey 08401, and by Greate Bay Hotel and Casino, Inc. ("GBHC"), a New Jersey corporation and a wholly owned subsidiary of Holdings with principal offices at 136 South Kentucky Avenue, Atlantic City, New Jersey 08401. GB Property Funding is wholly owned by Holdings. Holdings is a wholly owned subsidiary of Pratt Casino Corporation ("PCC"), which is an indirect, wholly owned subsidiary of Greate Bay Casino Corporation ("GBCC"). GBCC's common stock is listed on the OTC Bulletin Board Service under the trading symbol "GEAAQ". GB Property Funding was organized during September 1993 as a special purpose subsidiary of Holdings for the purpose of borrowing funds through the issuance of the 10 7/8% First Mortgage Notes for the benefit of GBHC. GBHC owns the Sands Hotel and Casino located in Atlantic City, New Jersey (the "Sands") . Substantially all of Holdings' assets and operations relate to the Sands. On January 5, 1998, Holdings, GB Property Funding and GBHC (collectively, the "Debtors") filed petitions for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). The prior Boards of Directors resigned on January 2, 1998 and new Boards of Directors were elected at that time. Each company continues to operate in the ordinary course of business, as set forth in the Bankruptcy Code, and each company's executive officers and directors as of the date of the filing remain in office, subject to the jurisdiction of the Bankruptcy Court, other than the following: Richard Knight resigned as a Director, President, and Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was elected President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On May 11, 1998, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998. The Debtors filed a motion with the Bankruptcy Court to extend the exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court reextended the period for another 90 days from August 10, 1998. New Jersey Management, Inc. ("NJMI"), which is also an indirect, wholly owned subsidiary of PCC, was responsible for the operations of the Sands under a management agreement dated August 19, 1987, as amended, with GBHC. On May 22, 1998, GBHC filed a motion with the Bankruptcy Court to reject the management agreement. GBCC, NJMI, and certain of their affiliates, on one side, and the Debtors, on the other, entered into an Agreement on June 27, 1998, which was approved by the Bankruptcy Court on July 7, 1998, and by the New Jersey Casino Control Commission on July 8, 1998 (the "Settlement Agreement"). Under the Settlement Agreement, among other things, the management agreement was suspended and replaced with a services agreement until a decision by the Bankruptcy Court on the motion to reject the management agreement, which is presently scheduled for September 28, 1998, and GBHC ceded ownership rights to an affiliate of GBCC in, and obtained a perpetual license for, the software used in its operations from the same affiliate of GBCC. Historically, the Sands' gaming operations have been highly seasonal in nature, with the peak activity occurring from May to September. Consequently, the results of operations for the three and six month periods ended June 30, 1998 are not necessarily indicative of the operating results to be reported for the full year. 2 The financial statements of GB Property Funding and the consolidated financial statements of Holdings as of June 30, 1998 and for the three and six month periods ended June 30, 1998 and 1997 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, their respective financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly their respective financial positions as of June 30, 1998, their respective results of operations for the three and six month periods ended June 30, 1998 and 1997 and their respective cash flows for the six month periods ended June 30, 1998 and 1997. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in GB Property Funding, Holdings and GBHC's 1997 Annual Report on Form 10-K. 3 GB PROPERTY FUNDING CORP. (DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.) BALANCE SHEETS (UNAUDITED)
ASSETS JUNE 30, DECEMBER 31, 1998 1997 ------------ ------------ Current asset: Cash $ 1,000 $ 1,000 Interest receivable from affiliate 9,373,000 9,152,000 Note receivable from affiliate 182,500,000 182,500,000 ------------ ------------ $191,874,000 $191,653,000 ============ ============ LIABILITIES AND SHAREHOLDER'S EQUITY Accrued interest payable, non-current $ - $ 9,152,000 ------------ ------------ Long-term debt - 182,500,000 ------------ ------------ Liabilities subject to compromise: Accrued interest payable 9,373,000 - Long-term debt 182,500,000 - ------------ ------------ 191,873,000 - ------------ ------------ Shareholder's equity (Note 1): Common stock, $1.00 par value per share, 1,000 shares authorized and outstanding 1,000 1,000 ------------ ------------ $191,874,000 $191,653,000 ============ ============
The accompanying introductory notes and notes to financial statements are an integral part of these balance sheets. 4 GB PROPERTY FUNDING CORP. (DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.) STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, ------------------------ 1998 1997 ----------- ----------- Revenues: Interest income (Note 2) $ - $ 4,988,000 Expenses: Interest expense (contractual interest of $4,961,000 in 1998) - 4,988,000 ----------- ----------- Net income $ - $ - =========== ===========
The accompanying introductory notes and notes to financial statements are an integral part of these financial statements. 5 GB PROPERTY FUNDING CORP. (DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.) STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------ 1998 1997 ----------- ----------- Revenues: Interest income (Note 2) $ 221,000 $10,018,000 Expenses: Interest expense (contractual interest of $9,923,000 in 1998) 221,000 10,018,000 ----------- ----------- Net income $ - $ - =========== ===========
The accompanying introductory notes and notes to financial statements are an integral part of these financial statements. 6 GB PROPERTY FUNDING CORP. (DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.) STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------- 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 period 1,000 1,000 --------- --------- Cash at end of period $ 1,000 $ 1,000 ========= =========
The accompanying introductory notes and notes to financial statements are an integral part of these financial statements. 7 GB PROPERTY FUNDING CORP. (DEBTOR-IN POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (1) ORGANIZATION AND OPERATIONS GB Property Funding Corp. ("GB Property Funding"), a Delaware corporation, was incorporated on September 29, 1993. GB Property Funding is a wholly owned subsidiary of GB Holdings, Inc. ("Holdings"), a Delaware corporation which is an indirect, wholly owned subsidiary of Greate Bay Casino Corporation ("GBCC"). Holdings was incorporated in September 1993 and, on February 17, 1994, acquired through capital contributions by its parent, all of the outstanding capital stock of Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"). GB Property Funding was formed for the purpose of borrowing $185,000,000 for the benefit of GBHC; such debt was issued during February 1994 at the rate of 10 7/8% per annum and the proceeds were loaned to GBHC (see Note 2). GB Property Funding has no operations and is dependent on the repayment of its note to GBHC for servicing its debt obligations (see Note 2). Administrative services for GB Property Funding are provided by GBHC at no charge. The cost of such services is not significant. The operation of an Atlantic City casino/hotel is subject to significant regulatory control. Under provisions of the New Jersey Casino Control Act, GBHC is required to maintain a nontransferable license to operate a casino in Atlantic City. The accompanying financial statements have been prepared in accordance with Statement of Position No. 90-7, "Financial Reporting By Entities in Reorganization Under the Bankruptcy Code," and include disclosure of liabilities subject to compromise. On January 5, 1998, GB Property Funding, GBHC and Holdings (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). GB Property Funding is dependent on repayment of its note from GBHC to meet its debt obligations. Management is in the process of developing a plan of reorganization that will be submitted to the Bankruptcy Court and GB Property Funding's creditors for their approval. In the event the plan of reorganization is accepted, continuation of the business thereafter is dependent on GBHC's ability to achieve successful future operations. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should GB Property Funding be unable to continue as a going concern. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 8 GB PROPERTY FUNDING CORP. (DEBTOR-IN POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Financial Accounting Standards Board has issued a new standard, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the presentation and disclosure of comprehensive income, which is defined as the change in a company's equity resulting from non-owner transactions and events. SFAS 130 became effective December 15, 1997 and requires the restatement of all prior periods presented. GB Property Funding has adopted the provisions of SFAS 130; however, the statement provides that an enterprise that has no items of other comprehensive income for any period presented need only report net income. GB Property Funding has no such other comprehensive income items for any period presented; accordingly, the presentation and disclosure requirements of SFAS 130 are not applicable. The financial statements as of June 30, 1998 and for the three and six month periods ended June 30, 1998 and 1997 have been prepared by GB Property Funding without audit. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of GB Property Funding as of June 30, 1998, and the results of its operations for the three and six month periods ended June 30, 1998 and 1997 and cash flows for the six month periods ended June 30, 1998 and 1997. (2) LONG-TERM DEBT On February 17, 1994, GB Property Funding issued $185,000,000 of non- recourse first mortgage notes due January 15, 2004 (the "10 7/8% First Mortgage Notes"). Interest on the notes accrues at the rate of 10 7/8% per annum, payable semiannually commencing July 15, 1994. Interest only was payable during the first three years. Commencing on July 15, 1997, semiannual principal payments of $2,500,000 are due on each interest payment date with the balance due at maturity. Such semiannual payments may be made in cash or by tendering to the trustee 10 7/8% First Mortgage Notes previously purchased or otherwise acquired by GB Property Funding. During May 1997, GB Property Funding acquired $2,500,000 face amount of 10 7/8% First Mortgage Notes which were used to make the July 15, 1997 required principal payment. As a result of the filing under Chapter 11, debt service payments due in January and July 1998 were not made. The accrual of interest on the 10 7/8% First Mortgage Notes for periods subsequent to the filing has been suspended. The indenture for the 10 7/8% First Mortgage Notes contains various provisions which, among other things, restrict the ability of certain subsidiaries of GBCC to pay dividends to GBCC, to merge, consolidate or sell substantially all of their assets or to incur additional indebtedness beyond certain limitations. In addition, the indenture requires the maintenance of certain cash balances and requires minimum expenditures, as defined in the indenture, for property and fixture renewals, replacements and betterments at the Sands. The proceeds of the 10 7/8% First Mortgage Notes were loaned to GBHC on the same terms and conditions. No interest was paid or received with respect to the 10 7/8% First Mortgage Notes and the loan to GBHC during the six month period ended June 30, 1998. Interest paid and received amounted to $10,143,000 during the six month period ended June 30, 1997. Interest receivable and payable with 9 GB PROPERTY FUNDING CORP. (DEBTOR-IN POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) respect to the notes are included on the accompanying balance sheet at June 30, 1998 in noncurrent assets and liabilities subject to compromise, respectively, as such payments are subject to terms of a reorganization plan which requires confirmation by the Bankruptcy Court. As a result of the Chapter 11 filing, any claim for post-petition interest is unenforceable unless otherwise ordered by the Bankruptcy Court. Accordingly GB Property Funding has ceased the accrual of interest income as of the date of the Chapter 11 filing. (3) INCOME TAXES Prior to 1997, GB Property Funding was included in the consolidated federal income tax return of Hollywood Casino Corporation ("HCC"), the parent company of GBCC until HCC distributed the GBCC stock it owned to the shareholders of HCC as a dividend on December 31, 1996. As a result of the Chapter 11 filing, and an action instituted by GBHC in the Bankruptcy Court against GBCC, certain affiliates of GBCC, Jack E. Pratt, Edward T. Pratt, Jr., and William D. Pratt, former directors of GBHC and current directors of GBCC (collectively, the "Defendants"), seeking to enjoin the Defendants from using the net operating losses of the Debtors, whether the Debtors file a consolidated federal tax return for 1997 with GBCC as members of a consolidated group is unresolved. (4) LITIGATION On January 5, 1998, the Debtors filed petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The prior Boards of Directors resigned on January 2, 1998 and new Boards of Directors were elected at that time. Each company continues to operate in the ordinary course of business, as set forth in the Bankruptcy Code, and each company's executive officers and directors as of the date of the filing remain in office, subject to the jurisdiction of the Bankruptcy Court, other than the following: Richard Knight resigned as a Director, President, and Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was elected President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On May 11, 1998, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998. The Debtors filed a motion with the Bankruptcy Court to extend the exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court reextended the period for another 90 days from August 10, 1998. 10 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS
JUNE 30, DECEMBER 31, 1998 1997 -------------- -------------- Current Assets: Cash and cash equivalents $ 22,298,000 $ 13,871,000 Accounts receivable, net of allowances of $12,791,000 and $14,955,000, respectively 7,040,000 7,794,000 Inventories 3,260,000 3,372,000 Due from affiliate 378,000 258,000 Refundable deposits and other current assets 4,100,000 2,793,000 ------------- ------------- Total current assets 37,076,000 28,088,000 ------------- ------------- Property and Equipment: Land 38,093,000 38,093,000 Buildings and improvements 185,508,000 185,508,000 Operating equipment 96,745,000 94,501,000 Construction in progress 3,108,000 2,433,000 ------------- ------------- 323,454,000 320,535,000 Less - accumulated depreciation and amortization (177,850,000) (172,819,000) ------------- ------------- Net property and equipment 145,604,000 147,716,000 ------------- ------------- Other Assets: Obligatory investments 8,779,000 7,910,000 Other assets 3,592,000 4,014,000 ------------- ------------- Total other assets 12,371,000 11,924,000 ------------- ------------- $ 195,051,000 $ 187,728,000 ============= =============
The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated balance sheets. 11 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) CONSOLIDATED BALANCE SHEETS (UNAUDITED) LIABILITIES AND SHAREHOLDER'S DEFICIT
JUNE 30, DECEMBER 31, 1998 1997 ------------- ------------- Current Liabilities Not Subject to Compromise: Current maturities of long-term debt $ 14,000 $ 14,000 Accounts payable 4,056,000 6,366,000 Accrued liabilities - Salaries and wages 4,460,000 4,824,000 Interest - 4,000 Insurance 716,000 2,984,000 Other 7,467,000 6,510,000 Due to affiliates 772,000 456,000 Other current liabilities 2,913,000 3,959,000 ------------ ------------ Total current liabilities 20,398,000 25,117,000 ------------ ------------ Liabilities Subject to Compromise (Note 4) 228,242,000 - ------------ ------------ Accrued Interest Payable - 9,152,000 ------------ ------------ Long-Term Debt 412,000 192,918,000 ------------ ------------ Other Noncurrent Liabilities 1,345,000 1,187,000 ------------ ------------ Due to Affiliates - 17,954,000 ------------ ------------ Commitments and Contingencies Shareholder's Deficit: Common stock, $1.00 par value per share; 1,000 shares authorized and outstanding 1,000 1,000 Additional paid-in capital 18,438,000 18,438,000 Accumulated deficit (73,785,000) (77,039,000) ------------ ------------ Total shareholder's deficit (55,346,000) (58,600,000) ------------ ------------ $195,051,000 $187,728,000 ============ ============
The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated balance sheets. 12 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, -------------------------- 1998 1997 ------------ ------------ Revenues: Casino $54,085,000 $61,823,000 Rooms 2,325,000 2,455,000 Food and beverage 6,146,000 8,457,000 Other 971,000 947,000 ----------- ----------- 63,527,000 73,682,000 Less - promotional allowances (5,074,000) (6,201,000) ----------- ----------- Net revenues 58,453,000 67,481,000 ----------- ----------- Expenses: Casino 46,233,000 51,396,000 Rooms 917,000 671,000 Food and beverage 2,441,000 2,881,000 Other 623,000 616,000 General and administrative 3,134,000 4,653,000 Depreciation and amortization 2,926,000 3,659,000 ----------- ----------- Total expenses 56,274,000 63,876,000 ----------- ----------- Income from operations 2,179,000 3,605,000 ----------- ----------- Non-operating income (expense): Interest income 181,000 453,000 Interest expense (contractual interest of $5,799,000 in 1998) (11,000) (5,826,000) Gain on disposal of assets - 17,000 ----------- ----------- Total non-operating income (expense), net 170,000 (5,356,000) ----------- ----------- Income (loss) before income taxes, extraordinary and other items 2,349,000 (1,751,000) Income tax provision - - ----------- ----------- Income (loss) before extraordinary and other items 2,349,000 (1,751,000) Reorganization and other related costs (1,730,000) - ----------- ----------- Income (loss) before extraordinary item 619,000 (1,751,000) Gain on early extinguishment of debt - 310,000 ----------- ----------- Net income (loss) $ 619,000 $(1,441,000) =========== ===========
The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated statements. 13 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------------- 1998 1997 ------------- ------------- Revenues: Casino $105,518,000 $120,153,000 Rooms 4,362,000 4,692,000 Food and beverage 11,795,000 16,377,000 Other 1,848,000 1,912,000 ------------ ------------ 123,523,000 143,134,000 Less - promotional allowances (9,457,000) (12,456,000) ------------ ------------ Net revenues 114,066,000 130,678,000 ------------ ------------ Expenses: Casino 88,013,000 100,405,000 Rooms 1,662,000 1,267,000 Food and beverage 4,806,000 5,220,000 Other 1,018,000 1,145,000 General and administrative 7,115,000 9,313,000 Depreciation and amortization 5,825,000 7,533,000 ------------ ------------ Total expenses 108,439,000 124,883,000 ------------ ------------ Income from operations 5,627,000 5,795,000 ------------ ------------ Non-operating income (expense): Interest income 709,000 825,000 Interest expense (contractual interest of $11,595,000 in 1998) (279,000) (11,656,000) Gain on disposal of assets 28,000 24,000 ------------ ------------ Total non-operating expense, net 458,000 (10,807,000) ------------ ------------ Income (loss) before income taxes, extraordinary and other items 6,085,000 (5,012,000) Income tax provision - - ------------ ------------ Income (loss) before extraordinary and other items 6,085,000 (5,012,000) Reorganization and other related costs (2,831,000) - ------------ ------------ Income (loss) before extraordinary item 3,254,000 (5,012,000) Gain on early extinguishment of debt - 310,000 ------------ ------------ Net income (loss) $ 3,254,000 $ (4,702,000) ============ ============
The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated statements. 14 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------------- 1998 1997 ----------------- ------------ OPERATING ACTIVITIES: Net income (loss) $ 3,254,000 $(4,702,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary item - (310,000) Write-off reorganization-related costs 881,000 - Depreciation and amortization 5,825,000 7,533,000 Gain on disposal of assets (28,000) (24,000) Provision for doubtful accounts 742,000 1,559,000 Decrease (increase) in accounts receivable 12,000 (554,000) Increase in accounts payable and accrued expenses 3,770,000 216,000 Net change in other current assets and liabilities (1,431,000) (1,313,000) Net change in other noncurrent assets and liabilities - (474,000) ----------- ----------- Net cash provided by operating activities 13,025,000 1,931,000 ----------- ----------- INVESTING ACTIVITIES: Purchase of property and equipment (3,394,000) (1,279,000) Proceeds from disposal of assets 28,000 24,000 Obligatory investments (1,226,000) (1,333,000) ----------- ----------- Net cash used in investing activities (4,592,000) (2,588,000) ----------- ----------- FINANCING ACTIVITIES: Repayments on credit facilities - (2,000,000) Borrowings from affiliates - 6,500,000 Repayments of long-term debt (6,000) (2,131,000) ----------- ----------- Net cash (used in) provided by financing activities (6,000) 2,369,000 ----------- ----------- Net increase in cash and cash equivalents 8,427,000 1,712,000 Cash and cash equivalents at beginning of period 13,871,000 15,624,000 ----------- ----------- Cash and cash equivalents at end of period $22,298,000 $17,336,000 =========== ===========
The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated statements. 15 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION GB Holdings, Inc. ("Holdings") is a Delaware corporation and a wholly owned subsidiary of Pratt Casino Corporation ("PCC"), also a Delaware corporation. PCC was incorporated during September 1993 and is wholly owned by PPI Corporation, a New Jersey corporation and a wholly owned subsidiary of Greate Bay Casino Corporation ("GBCC"). On February 17, 1994, Holdings acquired Greate Bay Hotel and Casino, Inc. ("GBHC"), a New Jersey corporation, through a capital contribution by its parent. GBHC's principal business activity is its ownership of the Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"). GB Property Funding Corp. ("GB Property Funding"), a Delaware corporation and a wholly owned subsidiary of Holdings, was incorporated in September 1993 for the purpose of borrowing funds through the issuance of $185,000,000 of ten-year, nonrecourse first mortgage notes for the benefit of GBHC; such debt was issued in February 1994 at the rate of 10 7/8% per annum and the proceeds were loaned to GBHC (see Note 3). Holdings has no operating activities and its only significant asset is its investment in GBHC. The accompanying consolidated financial statements include the accounts and operations of Holdings, GBHC and GB Property Funding; all significant intercompany balances and transactions have been eliminated. GBHC estimates that a significant amount of the Sands' revenues are derived from patrons living in southeastern Pennsylvania, northern New Jersey and metropolitan New York City. Competition in the Atlantic City gaming market is intense and management believes that this competition will continue or intensify in the future. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying consolidated financial statements have been prepared in accordance with Statement of Position No. 90-7, "Financial Reporting By Entities in Reorganization under the Bankruptcy Code," and include disclosure of liabilities subject to compromise (see Note 4). Holdings has experienced significant losses over the last two years and has a net capital deficiency of $55,346,000 at June 30, 1998. On January 5, 1998, Holdings, GBHC and GB Property Funding (collectively, the "Debtors") filed petitions for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). The prior Boards of Directors resigned on January 2, 1998 and new Boards of Directors were elected at that time. Each company continues to operate in the ordinary course of business, as set forth in the Bankruptcy Code, and each company's executive officers and directors as of the date of the filing remain in office, subject to the jurisdiction of the Bankruptcy Court, other than the following: Richard Knight resigned as a Director, President, and Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was elected 16 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On May 11, 1998, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998. The Debtors filed a motion with the Bankruptcy Court to extend the exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court reextended the period for another 90 days from August 10, 1998. Management is in the process of developing a plan of reorganization that will be submitted to the Bankruptcy Court and Holdings' creditors for their approval. In the event the plan of reorganization is accepted, continuation of the business thereafter is dependent on Holdings ability to achieve successful future operations. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should Holdings be unable to continue a going concern. New Jersey Management, Inc. ("NJMI"), also a wholly owned subsidiary of PCC, was responsible for the operations of the Sands under a management agreement dated August 19, 1987, as amended, with GBHC. On May 22, 1998, GBHC filed a motion with the Bankruptcy Court to reject the management agreement. GBCC, NJMI, and certain of their affiliates, on one side, and the Debtors, on the other, entered into an Agreement on June 27, 1998, which was approved by the Bankruptcy Court on July 7, 1998, and by the New Jersey Casino Control Commission (the "Casino Commission") on July 8, 1998 (the "Settlement Agreement"). Under the Settlement Agreement, among other things, the management agreement was suspended and replaced with a services agreement until a decision by the Bankruptcy Court on the motion to reject the management agreement, which is presently scheduled for September 28, 1998, and GBHC ceded ownership rights to an affiliate of GBCC in, and obtained a perpetual license for, the software used in its operations from the same affiliate of GBCC. GBHC is self insured for a portion of its general liability, certain health care and other liability exposures. Accrued insurance includes estimates of such accrued liabilities based on an evaluation of the merits of individual claims and historical claims experience; accordingly, GBHC's ultimate liability may differ from the amounts accrued. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" requires, among other things, that an entity review its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. As discussed above, GBHC filed for protection under the Bankruptcy Code and management is currently preparing its plan of reorganization. Although management has not made a determination whether an impairment of the carrying value currently exists, future adjustments to the carrying amount of GBHC's assets are possible with respect to the fresh-start reporting which would take place at the confirmation date of a plan of reorganization approved by the Bankruptcy Court. 17 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Financial Accounting Standards Board has issued a new standard, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the presentation and disclosure of comprehensive income, which is defined as the change in a company's equity resulting from non-owner transactions and events. SFAS 130 became effective December 15, 1997 and requires the restatement of all prior periods presented. Holdings has adopted the provisions of SFAS 130; however, the statement provides that an enterprise that has no items of other comprehensive income for any period presented need only report net income. Holdings has no such other comprehensive income items for any period presented; accordingly, the presentation and disclosure requirements of SFAS 130 are not applicable. The consolidated financial statements as of June 30, 1998 and for the three and six month periods ended June 30, 1998 and 1997 have been prepared by Holdings without audit. In the opinion of management, these consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position of Holdings as of June 30, 1998, the results of its operations for the three and six month periods ended June 30, 1998 and 1997 and cash flows for the six month periods ended June 30, 1998 and 1997. (2) SHORT-TERM CREDIT FACILITIES GBHC had a bank line of credit which was guaranteed to the extent of $2,000,000 by PCC, which pledged a certificate of deposit in the face amount of $2,000,000 as collateral for the line of credit. The line of credit was repaid upon maturity of the certificate of deposit during January 1997 with proceeds from affiliate borrowings and the line of credit was cancelled. (3) LONG-TERM DEBT AND PLEDGE OF ASSETS Substantially all of Holdings' and GBHC's assets are pledged in connection with their long-term indebtedness. On January 5, 1998, the Debtors filed petitions for relief under Chapter 11 of the Bankruptcy Code in Bankruptcy Court. The prior Boards of Directors resigned on January 2, 1998 and new Boards of Directors were elected at that time. Each company continues to operate in the ordinary course of business, as set forth in the Bankruptcy Code, and each company's executive officers and directors as of the date of the filing remain in office, subject to the jurisdiction of the Bankruptcy Court, other than the following: Richard Knight resigned as a Director, President, and Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was elected President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On May 11, 1998, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998. The Debtors filed a motion with the Bankruptcy Court to extend the exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court reextended the period for another 90 days from August 10, 1998. 18 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
JUNE 30, DECEMBER 31, 1998 1997 -------------- ------------- 10 7/8% first mortgage notes, due 2004 (a) $ 182,500,000 $182,500,000 14 5/8% affiliate loan, due 2005 (b) 10,000,000 10,000,000 Other 426,000 432,000 ------------- ------------ Total indebtedness 192,926,000 192,932,000 Less - current maturities (14,000) (14,000) Less - debt subject to compromise (Note 4) (192,500,000) - ------------- ------------ Total long-term debt $ 412,000 $192,918,000 ============= ============
- -------------------------- (a) On February 17, 1994, the Sands obtained $185,000,000 from GB Property Funding, which issued $185,000,000 of non-recourse first mortgage notes due January 15, 2004 (the "10 7/8% First Mortgage Notes"). Interest on the notes accrues at the rate of 10 7/8% per annum, payable semiannually commencing July 15, 1994. Interest only was payable during the first three years. Commencing on July 15, 1997, semiannual principal payments of $2,500,000 are due on each interest payment date with the balance due at maturity. Such semiannual payments may be made in cash or by tendering 10 7/8% First Mortgage Notes previously purchased or otherwise acquired by Holdings. Holdings acquired $2,500,000 face amount of 10 7/8% First Mortgage Notes at a discount during May 1997 which it used during June to make its July 15, 1997 required principal payment. As a result of the filing under Chapter 11, the debt service payments due in January and July 1998 were not made. The accrual of interest on the 10 7/8% First Mortgage Notes for periods subsequent to the filing has been suspended. The indenture for the 10 7/8% First Mortgage Notes contains various provisions which, among other things, restrict the ability of certain subsidiaries of GBCC to pay dividends to GBCC, to merge, consolidate or sell substantially all of their assets or to incur additional indebtedness beyond certain limitations. In addition, the indenture requires the maintenance of certain cash balances and requires minimum expenditures, as defined in the indenture, for property and fixture renewals, replacements and betterments at the Sands. (b) On February 17, 1994, GBHC issued a $10,000,000 subordinated promissory note to an affiliate. The note bears interest at the rate of 14 5/8% per annum, payable semiannually commencing August 17, 1994, subject to maintaining average daily cash balances required by the indenture for the 10 7/8% First Mortgage Notes, with the principal due in February 2005. As a result of such payment restrictions, interest has been paid only through February 17, 1996. The accrual of interest on the affiliate loan for periods subsequent to the filing under Chapter 11 has been suspended. 19 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) As a result of the Chapter 11 filing, principal payments with respect to the 10 7/8% First Mortgage Notes and the affiliate loan are subject to a plan of reorganization which requires confirmation by the Bankruptcy Court. Pending such reorganization, the entire amount of the 10 7/8% First Mortgage Notes and the affiliate loan are included in liabilities subject to compromise and in long-term debt on the accompanying consolidated balance sheets at June 30, 1998 and December 31, 1997, respectively. Scheduled payments of long-term debt as of June 30, 1998, exclusive of payments on the 10 7/8% First Mortgage Notes and the affiliate loan, are set forth below:
1998 (six months) $ 8,000 1999 14,000 2000 16,000 2001 17,000 2002 19,000 Thereafter 352,000 -------- Total $426,000 ========
Interest paid amounted to $21,000 and $10,186,000, respectively, during the six month periods ended June 30, 1998 and 1997. At December 31, 1997, accrued interest on the 10 7/8% First Mortgage Notes in the amount of $9,152,000 is presented as noncurrent accrued interest payable on the accompanying consolidated balance sheet. (4) LIABILITIES SUBJECT TO COMPROMISE Liabilities subject to compromise under Holdings' reorganization proceedings consist of the following at June 30, 1998:
Accounts payable and accrued liabilities $ 7,907,000 10 7/8% First Mortgage Notes (Note 3) 182,500,000 14 5/8% Affiliate Loan (Note 3) 10,000,000 Borrowings from affiliates (Note 6) 13,000,000 Accrued interest 14,364,000 Due to affiliate 471,000 ------------ Total $228,242,000 ============
(5) INCOME TAXES Prior to 1997, Holdings was included in the consolidated federal income tax return of Hollywood Casino Corporation ("HCC"), the parent company of GBCC until HCC distributed the GBCC stock it owned to the shareholders of HCC as a dividend on December 31, 1996. As a result of the Chapter 11 filing, and the Action described in Note 7 below relating to the net operating losses of the Debtors, whether 20 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) the Debtors file a consolidated federal tax return for 1997 with GBCC as members of a consolidated group is unresolved. Federal and state income tax provisions or benefits are based upon estimates of the results of operations for the current period and reflect the nondeductibility for income tax purposes of certain items, including certain amortization, meals and entertainment and other expenses. Holdings made no federal or state income tax payments during the six month periods ended June 30, 1998 and 1997. Deferred income taxes result primarily from the use of the allowance method rather than the direct write-off method for doubtful accounts, the use of accelerated methods of depreciation for federal and state income tax purposes and differences in the timing of deductions taken between tax and financial reporting purposes for contributions of and adjustments to the carrying value of certain investment obligations and for other accruals. At June 30, 1998, Holdings and its subsidiaries have deferred tax assets including net operating loss carryforwards ("NOL's"). The NOL's do not expire before the year 2009 for federal tax purposes and the year 2001 for state tax purposes. The availability of the NOL's and credit carryforwards will further be subject to the tax consequences of a plan of reorganization approved by the Bankruptcy Court. Statement of Financial Accounting Standards No. 109 ("SFAS 109") requires that the tax benefit of NOL's and deferred tax assets resulting from temporary differences be recorded as an asset and, to the extent that management can not assess that the utilization of all or a portion of such NOL's and deferred tax assets is more likely than not, a valuation allowance should be recorded. As a result of book and tax losses incurred in 1997 and the filing under Chapter 11 by Holdings in January 1998, management is unable to determine that realization of Holdings' deferred tax asset is more likely than not and, thus, has provided a valuation allowance for the entire amount at June 30, 1998. Sales or purchases of Holdings' common stock could cause a "change of control", as defined in Section 382 of the Internal Revenue Code of 1986, as amended, which would limit the ability of Holdings to utilize these loss carryforwards in later tax periods. Should such a change of control occur, the amount of annual loss carryforwards available for use would most likely be substantially reduced. Future treasury regulations, administrative rulings or court decisions may also effect Holdings' future utilization of its loss carryforwards. Prior to 1997, Holdings was included in the consolidated federal income tax return of HCC. The Internal Revenue Service is currently examining the consolidated federal income tax returns of HCC for the years 1993 and 1994 in which Holdings' was included. Management believes that the results of such examination will not have a material adverse effect on the consolidated financial position or results of operations of Holdings. 21 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (6) TRANSACTIONS WITH RELATED PARTIES Prior to July 8, 1998, NJMI was responsible for the operations of the Sands under a management agreement with GBHC. Under such agreement, NJMI was entitled to receive annually (i) a basic consulting fee of 1.5% of "adjusted gross revenues," as defined, and (ii) incentive compensation of between 5% and 7.5% of gross operating profits in excess of certain stated amounts should annual "gross operating profits," as defined, exceed $5,000,000. On May 22, 1998, GBHC filed a motion with the Bankruptcy Court seeking to reject the existing management agreement with NJMI (the "Rejection Motion"). The Settlement Agreement partially resolving the Rejection Motion was entered into on June 27, 1998 and was approved by the Bankruptcy Court on July 7, 1998 and by the Casino Commission on July 8, 1998. Under the Settlement Agreement and effective as of May 1, 1998, NJMI continues to provide certain agreed upon services to GBHC at a monthly fee of $165,000 of which $122,000 will be paid on a monthly basis in arrears and the remaining $43,000 per month will be deferred and paid upon confirmation of GBHC's plan of reorganization by the Bankruptcy Court. Fees under the management agreement and the Settlement Agreement are included in general and administrative expenses on the accompanying consolidated financial statements and amounted to $744,000 and $1,497,000, respectively, during the three month periods ended June 30, 1998 and 1997 and $1,910,000 and $2,802,000, respectively, during the six month periods ended June 30, 1998 and 1997. Amounts payable under the Settlement Agreement to NJMI and included in due to affiliates on the accompanying consolidated balance sheet at June 30, 1998 amounted to $330,000 and an additional $22,000 calculated under the management agreement for April 1, 1998 is subject to defenses reserved under the Settlement Agreement. Management fees payable of $34,000 are included in due to affiliates on the accompanying consolidated balance sheet at December 31, 1997 and are subject to defenses reserved under the Settlement Agreement. Additional management fees payable of $145,000 are included in liabilities subject to compromise on the accompanying consolidated balance sheet at June 30, 1998 and are subject to the defenses reserved under the Settlement Agreement. GBHC's rights to the trade name "Sands" are derived from a license agreement between GBCC and an unaffiliated third party. Amounts payable by the Sands for these rights are equal to the amounts paid to the unaffiliated third party. Such charges amounted to $70,000 and $73,000, respectively, for the three month periods ended June 30, 1998 and 1997 and $131,000 and $140,000, respectively, during the six month periods ended June 30, 1998 and 1997. An advance from GBHC to another GBCC subsidiary in the amount of $5,672,000 was outstanding at both June 30, 1998 and December 31, 1997. Interest on the advance accrues at the rate of 16.5% per annum. The advance, together with accrued interest amounting to $4,446,000 and $3,978,000, respectively, are fully reserved as collection of the receivables is uncertain. 22 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) During the third quarter of 1996, GBCC borrowed a total of $6,500,000 from HCC which it then loaned to GBHC to enable GBHC to make its debt service obligations and a property tax payment. According to the terms of the corresponding note, such borrowings accrue interest at the rate of 13 3/4% per annum payable quarterly commencing October 1, 1996. During the first quarter of 1997, GBHC borrowed an additional $1,500,000 from GBCC on similar stated terms. GBHC also borrowed $5,000,000 from another subsidiary of GBCC during January 1997 at the stated rate of 14 5/8% per annum payable semiannually commencing July 15, 1997. At June 30, 1998 and December 31, 1997, interest accrued on such loans amounted to $2,236,000 and $2,216,000, respectively, and is included in liabilities subject to compromise and in noncurrent amounts due to affiliates, respectively, on the accompanying consolidated balance sheets. Repayment of such borrowings from GBCC and the payment of the related interest are subject to approval of the Casino Commission and any setoffs and defenses available under the Bankruptcy Code and applicable law and to the terms of a plan of reorganization which requires approval by the Bankruptcy Court and approval by the Casino Commission. The accrual of interest on the affiliate advances for periods subsequent to the filing under Chapter 11 has been suspended. Net interest expense incurred with respect to affiliate advances and borrowings is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Net advances $ - $227,000 $20,000 $410,000 Affiliate loan (Note 3) - 366,000 16,000 731,000
Interest accrued on the Affiliate loan (Note 3) of $2,754,000 and $2,738,000, respectively, is included in liabilities subject to compromise and in noncurrent amounts due to affiliates, respectively, on the accompanying consolidated balance sheets at June 30, 1998 and December 31, 1997. GBHC performs certain services for other subsidiaries of GBCC and for HCC and its subsidiaries and invoices those companies for the Sands' cost of providing those services. Similarly, GBHC is charged for certain legal, accounting and other expenses incurred by GBCC and HCC and their respective subsidiaries that relate to the Sands' business. Such affiliate transactions are summarized below:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Billings to affiliates $ 68,000 $ 303,000 $ 138,000 $ 658,000 Charges from affiliates (160,000) (183,000) (391,000) (387,000)
23 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (7) LITIGATION On January 5, 1998, the Debtors filed petitions for relief under Chapter 11 of the Bankruptcy Code in Bankruptcy Court. The prior Boards of Directors resigned on January 2, 1998 and new Boards of Directors were elected at that time. Each company continues to operate in the ordinary course of business, as set forth in the Bankruptcy Code, and each company's executive officers and directors as of the date of the filing remain in office, subject to the jurisdiction of the Bankruptcy Court, other than the following: Richard Knight resigned as a Director, President, and Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was elected President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On May 11, 1998, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998. The Debtors filed a motion with the Bankruptcy Court to extend the exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court reextended the period for another 90 days from August 10, 1998. On May 22, 1998, GBHC filed the Rejection Motion with the Bankruptcy Court. The management agreement was suspended as a result of the Settlement Agreement and was replaced with a services agreement until the decision on the Rejection Motion, which is presently returnable September 28, 1998 (see Note 6). On July 27, 1998, GBHC filed an action in the Bankruptcy Court (the "Action") against GBCC, certain affiliates of GBCC, and Jack E. Pratt, Edward T. Pratt Jr. and William D. Pratt, former directors of GBHC and current directors of GBCC (collectively, the "Defendants"), alleging, inter alia, usurpation of corporate opportunities of GBHC and breach of fiduciary duty with respect to GBHC, in connection with the acquisition of an option for certain land parcels and the acquisition of a land parcel on Pacific Avenue in Atlantic City, New Jersey adjoining the Sands (the "Parcels"), and seeking, inter alia, an order enjoining the Defendants from transferring the Parcels to third parties and requiring the Defendants to convey the Parcels to GBHC. The Action also seeks to enjoin the Defendants from using the NOL's of the Debtors (see Note 5). On August 10, 1998, the Bankruptcy Court set a hearing date on the Action commencing October 7, 1998, with the understanding that the defendants would not transfer the Parcels prior to the hearing, and reserved August 24, 1998 to consider an interim request for relief with respect to the NOL's unless resolved by the parties prior thereto. GBHC is a party in various legal proceedings with respect to the conduct of casino and hotel operations. Although a possible range of loss can not be estimated, in the opinion of management, based upon the advice of counsel, settlement or resolution of these proceedings should not have a material adverse impact upon the consolidated financial position or results of operations of Holdings and GBHC. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainties described above. 24 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (8) RECLASSIFICATIONS Certain reclassifications were made to operating expenses as originally set forth in the consolidated statement of operations for the three month period ended March 31, 1998 to conform to the June 30, 1998 financial statement presentation. 25 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements about the business, financial condition and prospects of Holdings. The actual results could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, among other things, changes in competition, economic conditions, tax regulations, state regulations applicable to the gaming industry in general or Holdings in particular, and other risks indicated in Holdings' filings with the Securities and Exchange Commission. Such risks and uncertainties are beyond management's ability to control and, in many cases, can not be predicted by management. When used in this Quarterly Report on Form 10-Q, the words "believes", "estimates", "anticipates" and similar expressions as they relate to Holdings or its management are intended to identify forward-looking statements. LIQUIDITY AND CAPITAL RESOURCES Holdings owns GBHC which owns the Sands Hotel and Casino in Atlantic City. Prior to 1996, the Sands' cash flow was sufficient to meet debt service obligations and fund a substantial portion of annual capital expenditures. The Sands also used short-term borrowings to fund seasonal cash needs for certain capital projects. Beginning in early 1996 and continuing through 1997, declines in operating cash flow at the Sands resulted in the need for periodic financial assistance from PCC and GBCC in order to meet debt service obligations. Substantial additional financial assistance would have been required to make the January 15, 1998 principal and interest payments due on the 10 7/8% First Mortgage Notes. GBHC was unable to obtain additional borrowings from affiliates or other sources and, accordingly, on January 5, 1998, the Debtors filed petitions seeking protection under Chapter 11 of the Bankruptcy Code in Bankruptcy Court. The prior Boards of Directors resigned on January 2, 1998 and new Boards of Directors were elected at that time. Each company continues to operate in the ordinary course of business, as set forth in the Bankruptcy Code, and each company's executive officers and directors as of the date of filing remain in office, subject to the jurisdiction of the Bankruptcy Court, other than the following: Richard Knight resigned as a Director, President, and Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was elected President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On May 11, 1998, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998. The Debtors filed a motion with the Bankruptcy Court to extend the exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court reextended the period for another 90 days from August 10, 1998. As a result of the filings, the Sands has sufficient cash flow to continue normal operations while it seeks to develop a plan of reorganization for submission to its creditors and the Bankruptcy Court. Capital expenditures, other than normal recurring capital expenditures in the ordinary course of business, will require prior approval of the Bankruptcy Court. There can be no assurance at this time that GBHC's plan of reorganization, when submitted, will be accepted by its creditors or the Bankruptcy Court. 26 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OPERATING ACTIVITIES At June 30, 1998, GBHC had cash and cash equivalents of $22.3 million. During the six month period ended June 30, 1998, net cash provided by operating activities was $13 million compared with $1.9 million during the comparable 1997 period. The 1997 period includes the payment of $10.2 million in interest; the payment of such interest was suspended in 1998 by the Chapter 11 filing. GBHC utilized cash from operations, in part, during the first six months of 1998 to fund capital additions totaling $3.4 million and to make obligatory investments of $1.2 million. FINANCING ACTIVITIES Semiannual principal payments of $2.5 million which became due commencing in July 1997 with respect to the 10 7/8% First Mortgage Notes have been suspended as a result of the Chapter 11 filing. Exclusive of the 10 7/8% First Mortgage Notes and the $10 million affiliate loan, which are subject to reorganization, total scheduled maturities of long-term debt during the remainder of 1998 are $8,000. CAPITAL EXPENDITURES AND OBLIGATORY INVESTMENTS Capital expenditures at the Sands during the six month period ended June 30, 1998 amounted to $3.4 million and management anticipates capital expenditures during the remainder of 1998 will be approximately $7.4 million. In addition to capital expenditures in the ordinary course of business totaling approximately $2.9 million, capital expenditures during 1998 include approximately $7.9 million of a $13.6 million, two-year capital expenditure program approved by the Bankruptcy Court. Such plan consists of approximately $7.1 million for rooms renovations and $6.5 million for the replacement of slot machines. The Sands is required by the New Jersey Casino Control Act to make certain investments with the Casino Reinvestment Development Authority, a governmental agency which administers the statutorily mandated investments made by casino licensees. Deposit requirements for the first six months of 1998 totaled $1.2 million and are anticipated to be approximately $1.5 million during the remainder of 1998. SUMMARY On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions for relief under Chapter 11 of the United States Bankruptcy Code. Accordingly, there is significant doubt about Holdings' ability to continue as a going concern. Management is in the process of developing a reorganization plan that will be submitted to the Bankruptcy Court and to the companies' creditors for their approval. On May 11, 1998, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998. The Debtors filed a motion with the 27 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Bankruptcy Court to extend the exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court reextended the period for another 90 days from August 10, 1998. As a result of the filing, the debt service payments due in January 1998 and July 1998 were not made and the accrual of interest on the 10 7/8% First Mortgage Notes and on affiliate loans for periods subsequent to the filing has been suspended. RESULTS OF OPERATIONS GENERAL The Sands earned income from operations of $2.2 million and $5.6 million, respectively, during the three and six month periods ended June 30, 1998 compared to income from operations of $3.6 million and $5.8 million, respectively, reported for the three and six month periods ended June 30, 1997. Operating results during the second quarter of 1998 were negatively impacted by lower table game and slot machine hold percentages; such percentages directly impact casino revenues. The declines in casino revenues were somewhat offset by operating efficiencies and by management's ongoing efforts to discontinue certain marginally effective marketing programs. Although net revenues declined for the three and six month periods ended June 30, 1998 to $58.5 million and $114.1 million, respectively, from $67.5 million and $130.7 million, respectively, during the corresponding 1997 periods, operating expenses also decreased significantly by $7.6 million (11.9%) and $16.4 million (13.2%), respectively. Such operating expense decreases are due to reductions in salaries and related benefits costs of $2.1 million (9.1%) and $3.9 million (8.4%) for the three and six month periods, respectively, and marketing and advertising costs of $1.7 million (10.2%) and $5.5 million (17%), respectively, resulting from management's efforts to control costs while maintaining positive gross operating profit. The negative publicity surrounding the Sands' filing for bankruptcy protection on January 5, 1998 could also have affected its operating results for the 1998 periods. 28 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) GAMING OPERATIONS The following table sets forth certain unaudited financial and operating data relating to the Sands' operations:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- --------------------- 1998 1997 1998 1997 --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PERCENTAGES) REVENUES: Slot machines $ 38,806 $ 41,370 $ 72,599 $ 79,370 Table games 14,574 19,665 31,527 39,156 Other (1) 705 788 1,392 1,627 -------- -------- -------- -------- Total $ 54,085 $ 61,823 $105,518 $120,153 ======== ======== ======== ======== SLOT MACHINES: Gross Wagering (Handle) (2) $480,924 $505,719 $891,044 $959,909 ======== ======== ======== ======== Hold Percentages: (3, 4) Sands 8.1% 8.2% 8.1% 8.3% Atlantic City 8.4% 8.5% 8.3% 8.4% TABLE GAMES: Gross Wagering (Drop) (2) $107,634 $131,589 $203,279 $262,633 ======== ======== ======== ======== Hold Percentages: (3, 4) Sands 13.5% 14.9% 15.5% 14.9% Atlantic City 14.9% 14.7% 15.2% 15.2%
____________________________ (1) Consists of revenues from poker and simulcast horse racing wagering. (2) Gross wagering consists of the total value of chips purchased for table games (excluding poker) and keno wagering (collectively, the "drop") and coins wagered in slot machines ("handle"). (3) Casino revenues consist of the portion of gross wagering that a casino retains and, as a percentage of gross wagering, is referred to as the "hold percentage". (4) The Sands' hold percentages are reflected on an accrual basis. Comparable data for the Atlantic City gaming industry is not available; consequently, industry percentages have been calculated based on information made available from the New Jersey Casino Control Commission. 29 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Although the quantitative impact on wagering of GBHC's filing for protection under Chapter 11 can not be estimated, management believes that the negative publicity resulting from the filing has had an adverse effect on patron volume. Slot machine handle decreased $24.8 million (4.9%) and $68.9 million (7.2%), respectively, during the three and six month periods ended June 30, 1998 compared with the same periods of 1997. The Sands' decreases in slot machine handle compare with increases of 3.8% and 4.8%, respectively, in handle for all other Atlantic City casinos during the same time periods. As a result, the Sands' slot machine market share (expressed as a percentage of the Atlantic City industry aggregate slot machine handle) decreased to 5.7% and 5.4%, respectively, during the three and six month periods ended June 30, 1998 from 6.2% and 6.1%, respectively, during the same periods of 1997. Gaming space and the number of slot machines have decreased slightly at the Sands since the second quarter of 1997. Expansions of other Atlantic City casinos resulted in an increase of approximately 114,000 square feet of gaming space and 2,300 additional slot machines at June 30, 1998 compared to June 30, 1997. The below industry-wide performance in handle experienced by the Sands is a result of competitive pressures resulting from casino expansions and related marketing campaigns at other properties as well as to management's efforts to control costs by reducing "coin incentive programs" which directly impact slot handle. As a result of such competitive pressures, the Sands has experienced a significant decrease (20%) in the number of bus passengers, a market segment which historically plays slot machines. Table game drop at the Sands declined $24 million (18.2%) and $59.4 million (22.6%), respectively, during the three and six month periods ended June 30, 1998 compared with the same periods of 1997. The Sands' decreases compare to slight increases of 1.2% and 1.1%, respectively, in table drop for all other Atlantic City casinos during the same periods. As a result, the Sands' table game market share decreased to 5.7% and 5.5%, respectively, during the three and six month periods ended June 30, 1998 from 7% and 7.1%, respectively, during the same periods of 1997. The Sands' table game drop decreases are attributable to declines in patron volume from the rated segment. The decline in table game drop also reflects management's efforts to discontinue certain marginally effective promotional activities directed toward less profitable market segments. Other factors contributing to the decreases in table game drop include a 9.1% decrease in the number of table games at the Sands as well as additional competitive pressures resulting from the offering of special odds for various table games and competitive pressures on specific market segments by other Atlantic City casinos. REVENUES Casino revenues at the Sands, including poker and simulcast horse racing wagering revenues, decreased by $7.7 million (12.5%) and $14.6 million (12.2%), respectively, for the three and six month periods ended June 30, 1998 compared with the same periods of 1997. Decreases in both slot machine and table game wagering and slightly lower slot machine hold percentages were partially offset by the overall improvement in the table game hold percentage to 15.5% from 14.9% for the six month period. 30 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Rooms revenue decreased $130,000 (5.3%) and $330,000 (7%), respectively, during the three and six month periods 1998 compared to 1997. Such decreases were primarily due to decreases in occupancy levels partially offset by increases in the average daily rate charged on rooms. Food and beverage revenues decreased $2.3 million (27.3%) and $4.6 million (28%), respectively, during the three and six month periods ended June 30, 1998 compared with the prior year periods as a result of reduced patron volume reflecting the curtailment in food and beverage-related promotional programs. Other revenues did not change significantly during either of the three or six month periods ended June 30, 1998 compared to the prior year periods. Promotional allowances represent the estimated value of goods and services provided free of charge to casino customers under various marketing programs. As a percentage of rooms, food and beverage and other revenues at the Sands, these allowances increased to 53.7% during the three month period ended June 30, 1998 from 52.3%, during the same period of 1997. Such allowances decreased to 52.5% from 54.2% during the six month period ended June 30, 1998. The overall year to year decrease is primarily attributable to reductions in certain marketing programs and other promotional activities. DEPARTMENTAL EXPENSES Casino expenses at the Sands decreased $5.2 million (10%) and $12.4 million (12.3%), respectively, during the three and six month periods ended June 30, 1998 compared with the same 1997 periods reflecting the respective 12.5% and 12.2% decreases in casino revenues during the corresponding periods. Such decreases also reflect management's ongoing efforts to create operating efficiencies as well as a reduction in the allocation of rooms, food and beverage and other expenses to casino expense arising due to the aforementioned reduction in promotional allowances. Rooms expense increased $246,000 (36.7%) and $395,000 (31.2%), respectively, during the three and six month periods ended June 30, 1998 compared to the same periods of 1997. The increases result from a lower percentage of rooms being sold on a complimentary basis which has reduced the allocation of room costs to the casino department. Such increases have been partially offset by reduced costs associated with lower occupancy rates. Food and beverage expense decreased $440,000 (15.3%) and $414,000 (7.9%), respectively, during the three and six month periods ended June 30, 1998 compared with the same periods of 1997. The decreases result from reductions in payroll and promotional expenses during the second quarter in response to declines in patron volume. Such cost savings have been partially offset by fewer costs being allocated to the casino department due to reduced usage of food complimentaries. Other expenses did not change significantly during the second quarter of 1998 compared to the prior year, but decreased by $127,000 (11.1%) during the six month period ended June 30, 1998 compared to the 1997 period due to cost savings with respect to theater entertainment. 31 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) GENERAL AND ADMINISTRATIVE General and administrative expenses decreased $1.5 million (32.6%) and $2.2 million (23.6%), respectively, during the three and six month periods ended June 30, 1998 compared to the same periods of 1997. Management fee expenses, including service fees under the Settlement Agreement, incurred by the Sands decreased by $753,000 (50.3%) and $892,000 (31.8%), respectively, relative to management fees under the Management Agreement, during the three and six month periods during 1998 compared to the prior year periods as a result of a renegotiation of such fees due to the Chapter 11 filings. The remaining decreases reflect reductions in payroll and related benefits and in equipment rentals, all of which have resulted from management's ongoing efforts to create operating efficiencies. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense decreased by $733,000 (20%) and $1.7 million (22.7%), respectively, during the three and six month periods ended June 30, 1998 compared to the same periods of 1997 as a significant portion of assets acquired with respect to the Sands' expansion in 1994 became fully depreciated. Also, amortization of loan fees has decreased during 1998 as a result of such fees being written off at December 31, 1997 due to the bankruptcy filings. INTEREST Interest income decreased $272,000 (60%) and $116,000 (14.1%), respectively, during the three and six month periods ended June 30, 1998 compared to the same periods during 1997. Interest earned on cash balances accumulated as a result of the Chapter 11 filing (i.e. from not making debt service payments) is reflected on the accompanying consolidated financial statements as a reduction to reorganization costs. Interest expense decreased $5.8 million (99.8%) and $11.4 million (97.6%), respectively, during the three and six months ended June 30, 1998 compared to the same periods of the prior year. As discussed in Notes 3 and 6 to Holdings' consolidated financial statements, GB Property Funding, Holdings, and GBHC filed petitions for relief under Chapter 11 of the United States Bankruptcy Code on January 5, 1998. As a result, the accrual of interest expense on the 10 7/8% First Mortgage Notes, the affiliate loan and other affiliate advances for periods subsequent to the filing has been suspended. Had the accrual of such interest expense not been suspended, interest expense for the three and six month periods ended June 30, 1998 would have been $5.8 million and $11.6 million, respectively; these amounts are not significantly different from the corresponding amounts during the 1997 periods. 32 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INCOME TAX BENEFIT Prior to 1997, Holdings was included in the consolidated federal income tax return of Hollywood Casino Corporation ("HCC"), the parent company of GBCC until HCC distributed the GBCC stock it owned to the shareholders of HCC as a dividend on December 31, 1996. As a result of the Chapter 11 filing, and the Action described in Note 7 to the accompanying Notes to Consolidated Financial Statements of Holdings relating to the net operating losses of the Debtors, whether the Debtors file a consolidated federal tax return for 1997 with GBCC as members of a consolidated group is unresolved. As of June 30, 1998, Holdings and its subsidiaries have deferred tax assets including net operating loss carryforwards ("NOL's"). The NOL's do not expire before the year 2009 for federal tax purposes and the year 2001 for state tax purposes. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") requires that the tax benefit of NOL's and deferred tax assets resulting from temporary differences be recorded as an asset and, to the extent that management can not assess that the utilization of all or a portion of such NOL's and deferred tax assets is more likely than not, a valuation allowance should be recorded. Due to the continued availability of NOL's originating in prior years for federal and state tax purposes and the book and tax losses sustained in 1998 to date, management is unable to determine that the realization of such asset is more likely than not and, thus, has provided a valuation allowance for the entire deferred tax asset at June 30, 1998. REORGANIZATION AND OTHER RELATED COSTS Reorganization and other related costs include costs associated with Holdings' reorganization under Chapter 11, including, among other things, professional fees, costs associated with the termination of agreements and other administrative costs. Also, costs in the amount of $881,000 associated with a planned re-theming of the Sands were expensed during the second quarter of 1998. Due to the reorganization proceedings discussed above, this project has been abandoned. As noted previously, interest income on cash accumulated during the reorganization is reflected as a reduction to reorganization and other related costs ($161,000 and $244,000, respectively, for the three and six months ended June 30, 1998). YEAR 2000 COMPLIANCE In the year 2000, the Sands' computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than 2000. Such an error could result in a system failure or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions or engage in similar normal business activities. Management has initiated a program to prepare the Sands' computer systems and applications for the year 2000. The costs of testing and conversion are not expected to be material. Management expects 33 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) the Sands' 2000 date conversion projects to be completed on a timely basis. However, there can be no assurance that the systems of other companies on whose systems the Sands relies will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Sands' systems. INFLATION Management believes that in the near term, modest inflation, together with increasing competition within the gaming industry for qualified and experienced personnel, will continue to cause increases in operating expenses, particularly labor and employee benefits costs. SEASONALITY Historically, the Sands' operations have been highly seasonal in nature, with the peak activity occurring from May to September. Consequently, the results of Holdings' operations for the first and fourth quarters are traditionally less profitable than the other quarters of the fiscal year. In addition, the Sands' operations may fluctuate significantly due to a number of factors, including chance. Such seasonality and fluctuations may materially affect Holdings' casino revenues and profitability. 34 PART II: OTHER INFORMATION - --------------------------- ITEM 1. LEGAL PROCEEDINGS On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions for relief under Chapter 11 of the Bankruptcy Code in Bankruptcy Court. The prior Boards of Directors resigned on January 2, 1998 and new Boards of Directors were elected at that time. Each company continues to operate in the ordinary course of business, as set forth in the Bankruptcy Code, and each company's executive officers and directors as of the date of the filing remain in office, subject to the jurisdiction of the Bankruptcy Court, other than the following: Richard Knight resigned as a Director, President, and Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was elected President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On May 11, 1998, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998. The Debtors filed a motion with the Bankruptcy Court to extend the exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court reextended the period for another 90 days from August 10, 1998. ITEM 3. DEFAULTS UPON SENIOR SECURITIES As a result of the filings discussed in Item 1. above, $182,500,000 principal amount of 10 7/8% First Mortgage Notes issued by GB Property Funding are in default. Principal payments of $2,500,000 each due on January 15, 1998 and July 15, 1998 were not made. The accrual of interest on the 10 7/8% First Mortgage Notes for periods subsequent to the filings has been suspended; such interest on a contractual basis amounts to $21,667,000 as of August 17, 1998. ITEM 6.(a) - EXHIBITS 10.1 Agreement by and among GBHC, Holdings, GB Property Funding and Advanced Casino Systems International, Inc. ("ACSI"), on the one hand, and GBCC, NJMI, PCC, PRT Funding Corp., PPI Corporation, ACSC and HCC, on the other, dated June 27, 1998. 10.2 Software License Agreement by and between ACSC, ACSI, Computer Management Systems International, Inc. and GBHC dated June 27, 1998. ITEM 6.(b) - REPORTS ON FORM 8-K The Registrants did not file any reports on Form 8-K during the quarter ended June 30, 1998. SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, each of the Registrants has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GB HOLDINGS, INC. GB PROPERTY FUNDING CORP. ------------------------------------ Registrants Date: August 17, 1998 By:/s/ Timothy A. Ebling --------------- --------------------------------- Timothy A. Ebling Executive Vice President, Chief Financial Officer and Principal Accounting Officer 35 EX-10.1 2 SETTLEMENT AGREEMENT EXHIBIT 10.1 AGREEMENT This Agreement (herein so called) is entered into this 27th day of June, 1998 by and among Greate Bay Hotel and Casino, Inc. ("GBHC"), GB Holdings, Inc., ("GBH"), GB Property Funding Corp. ("GBPF") (collectively, the "Debtors"), and Advanced Casino Systems International, Inc. ("ACSI"), on the one hand, and Greate Bay Casino Corp., New Jersey Management, Inc., ("NJMI") Pratt Casino Corporation ("PCC"), PRT Funding Corp. ("PRT"), PPI Corporation ("PPI"), Advanced Casino Systems Corporation ("ACSC") (collectively, "GBCC"), and Hollywood Casino Corporation ("HCC"), on the other. R E C I T A L S A. On January 5, 1998, the Debtors commenced proceedings under Chapter 11 of Title 11 of the Unites States Code (the "Chapter 11 Proceedings") in the United States Bankruptcy Court for the District of New Jersey, Camden Vicinage. B. On May 22, 1998, the Debtors filed a Motion (hereinafter so called) in the Chapter 11 Proceedings seeking approval for the rejection of the Management Services Agreement, dated August 19, 1987, as amended (the "NJMI Agreement"), between GBHC and NJMI. C. The parties desire to compromise and settle certain issues that have arisen in connection with the Motion and as set forth in the Agreement. NOW, THEREFORE, the Debtors, ACSI, GBCC, and where applicable, HCC stipulate and agree as follows: 1. Except as provided in this paragraph one and in paragraph two below, the management of the Debtors will be under the control of the existing Board of Directors of the Debtors until the effective date of a plan of reorganization for GBHC ("Plan Confirmation"). Until Plan Confirmation, GBCC, including any newly created subsidiaries or affiliates, will not change the composition of the Board of Directors of any of the Debtors except upon Order and subject to the supervision and jurisdiction of the Bankruptcy Court. 2. Upon the effective date of this Agreement, Richard Knight will resign his positions as Chairman, President and Chief Executive Officer of the Debtors and their subsidiaries. 3. The second sentence of numbered paragraph 5 of that certain letter agreement dated May 26, 1998 between GBCC and the Debtors will remain in effect, and otherwise the letter agreement dated May 26, 1998 is superseded by this Agreement upon the effective date of this Agreement. 4. Upon approval of this Agreement by the Bankruptcy Court, and, if required, upon approval by the Casino Control Commission ("CCC") of the provisions of this paragraph, the NJMI Agreement will be suspended from May 1, 1998 until entry of a Final Order deciding the Motion ("the Interim Period"). GBCC and HCC shall fully support an application to the Bankruptcy Court for approval of this Agreement, and of any petition to the CCC. GBHC agrees to adjourn the Motion until Monday September 28, 1998, or such earliest date thereafter as may be accommodated by the Bankruptcy Court. GBHC and NJMI may negotiate an agreement to adjourn the Motion to a later date, but any party shall be free to terminate negotiations at any time, or to adopt any position in the course of negotiation in its sole and unreviewable discretion, without incurring any liability whatsoever, and without breach of this Agreement. During the Interim Period, NJMI shall have no other duties except for those duties specified in this Agreement. 5. The Current and Deferred Fees (hereafter defined) that are applicable during the Interim Period shall be in complete satisfaction of all claims accruing in favor of NJMI under the NJMI Agreement during the Interim Period, and shall not bind any of the parties hereto as to the reasonableness of the fees contained in the NJMI Agreement. NJMI through HCC shall provide the services set forth on Exhibit A (the "Services"), and the provision of such Services or the payments therefor shall not be offered into evidence or used in any manner in the hearing on the Motion or in any other proceeding except in respect of proceeding(s) to enforce the payment thereof. Upon any granting of the Motion and termination of the NJMI Agreement, NJMI and HCC agree to cooperate reasonably with the Debtors in effecting a smooth transition of the assumption of any Services by the Debtors and agree that such cooperation includes providing access to or copying of any and all related records. During the Interim Period, but in no event for any period after October 15, 1998, and only for so long as GBHC requests such services, HCC agrees to make Knight available as a consultant for (i) meetings at the Sands at mutually agreeable times to equal six days on site a month provided that each on site trip shall be a minimum of two days and (ii) at mutually agreeable times for reasonable telephone conferences and consultations in the ordinary course of business at the Sands ("Consulting Services"). During the Interim Period, GBHC agrees to reimburse Hollywood Casino Aurora, Inc. ("HCA") for 30% of Knight's salary, and to reimburse HCA for reasonable costs associated with the costs of performance of the Consulting Services, e.g., telephone and telecopier expense, transportation, meals, lodging, and similar expenses. To the extent that GBHC requests, but Knight does not provide, six days' on-site services in any calendar month, then GBHC's obligation to reimburse HCA for 30% of Knight's salary shall be proportionately reduced. In consideration of providing the Services and Consulting Services, and during the Interim Period, GBHC agrees to pay NJMI a fee of $122,000 in arrears on the last business day of each month (the "Current Fee") and a deferred fee in the amount of $43,000 per month (the "Deferred Fee") at Plan Confirmation. Any Current Fee otherwise due upon the effective date of this Agreement will be paid forthwith. 6. As requested by GBHC, ACSC agrees to continue to provide GBHC before and after Plan Confirmation with support, maintenance, and upgrades of all of the software or related hardware components presently supported, maintained, or provided by or through ACSC for GBHC (such software or hardware, collectively, the "Software") in accordance with the terms set forth on the agreement attached hereto as Exhibit B, which is incorporated herein as if fully set forth. ACSC will provide mailing services under the same terms and conditions as currently in effect for so long as (a) ACSC provides such services to other customers, (b) GBHC shall continue to request such services, and (c) GBHC has paid all fees and expenses then due and owing to ACSC for services rendered after GBHC's initial filing of a petition in the Chapter 11 Proceedings ("Post Petition") within 45 days of receipt of an invoice therefor and less any sums owed to GBHC by ACSC for services provided or expenses incurred Post Petition on behalf of ACSC. For the purpose of the preceding sentence, a customer includes HCA or HWCC - Tunica, Inc. 7. With respect to that certain Trademark License Agreement between HCC and GBHC with an Effective Date of July 8, 1997 (the "TLA"), HCC and GBHC acknowledge that HCC has provided notice to GBHC of its rejection of GBHC's notice of renewal in accordance with the TLA. Except as set forth in subsections (d) and (e) of this paragraph 7, GBHC will phase out the use of the Licensed Marks, and the Licensed Goods and Services, as such terms are defined in the TLA, and the name "Hollywood" in connection with the use of the Licensed Marks or in any signage under the TLA, within the six month period provided under Article 8.1 of the TLA. Notwithstanding any other provision of the TLA to the contrary, (a) GBHC shall be under no obligation to offer to sell to HCC any memorabilia owned by GBHC, (b) based on its prior use, GBHC shall be free to display memorabilia and the like within or on the premises of GBHC, except that nothing herein shall be deemed to have granted GBHC any rights to operate in a manner or style which conflicts with proprietary rights of HCC in any portion of GBHC's property provided that the "Epic Buffet", the "Studio Store", and the "Studio Cafe" can be maintained as provided in subsection (e) of this paragraph 7, (c) HCC shall, upon request of GBHC, deliver at the transportation cost of GBHC any memorabilia owned by GBHC and stored by HCC or its affiliates, (d) GBHC shall be free to use the Licensed Marks and Licensed Goods and Services limited to the slot club for a phase out period ending at the earlier to occur of June 30, 1999 or six months after Plan Confirmation, and (e) for an additional two year phase out period beyond the six month period otherwise provided, shall be free to continue to use the names "Epic Buffet," "Studio Store" and/or "Studio Cafe" in connection with restaurants or facilities bearing those names at GBHC, or in connection with advertising or promotions related thereto provided that GBHC adheres to the standards of quality control otherwise provided for in Article 2 of the TLA, and complies with Articles 3, 4, and 5 of the TLA (except that a change of control of the Sands resulting from either a sale or Plan Confirmation shall not require the prior approval of HCC in respect of the continuation of operations at the premises of the Sands otherwise provided herein), and GBHC may, at the expiration of the extended phase out period, continue to operate such restaurants and facilities by discontinuing the use of the words "Epic" and/or "Studio" from such restaurants and facilities. 8. With respect to that certain License Agreement originally between Hughes Properties, Inc. and Pratt Hotel Corporation dated May 19, 1987, relating to the use of the Trademark as defined therein (the "LA"), neither GBCC nor anyone acting in concert or on behalf of GBCC shall take any action seeking to terminate the LA or the rights of GBHC under the LA or otherwise at anytime before the earliest of December 15, 1998, Plan Confirmation, or 15 days prior to opening by the Venetian (formerly known as the Sands Hotel & Casino in Las Vegas, Nevada) of a hotel tower or casino for business. GBHC agrees that it will not assert that, by agreeing to the foregoing, GBCC has waived whatever right it may have to terminate the LA. 9. During the remaining or any renewal terms of their employment contracts, neither HCC, nor GBCC, nor any of their affiliates, nor any of their officers or directors, shall solicit Gary Luderitz, or Jack Przybylski to leave their employment with GBHC or to provide services as employees, consultants or otherwise, and none of the parties in this paragraph will object to a two year extension of the employment contract of Gary Luderitz. 10. This Agreement is without prejudice to any party's rights with respect to the NJMI Agreement or the Motion except as expressly set forth herein, may not be amended or modified in any respect except with the written consent of the parties hereto, is binding upon the successors and assigns of the parties and their successors in interest, and shall be interpreted in accordance with New Jersey law without regard to the conflicts of laws principles of New Jersey law. 11. This Agreement will be effective when executed by all of the parties hereto and when approved by the Bankruptcy Court and by the CCC, if required, as provided in paragraph 4 above. This Agreement may be executed in counterparts by the parties and a THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK telecopied signature is as effective as an original. ACCEPTED AND AGREED: Greate Bay Casino Corporation PPI Corporation BY: /s/ Edward T. Pratt III BY: /s/ Edward T. Pratt III ----------------------- ------------------------ Advanced Casino Systems Corp. Pratt Casino Corporation BY: /s/ Edward T. Pratt III BY: /s/ Edward T. Pratt III ----------------------- ------------------------ PRT Funding Corp. New Jersey Management, Inc. BY: /s/ Edward T. Pratt III BY: /s/ Edward T. Pratt III ----------------------- ------------------------ Hollywood Casino Corporation BY: /s/ Edward T. Pratt III ----------------------- Greate Bay Hotel and Casino, Inc GB Holdings, Inc. BY: /s/ Timothy A. Ebling BY: /s/ Timothy A. Ebling ----------------------- ------------------------ Advanced Casino Systems GB Property Funding Corp. International, Inc. BY: /s/ Timothy A. Ebling BY: /s/ Timothy A. Ebling ----------------------- ------------------------ EXHIBIT A - SERVICES -------------------- A) Regular Quarterly and Annual SEC Reporting and Compliance B) Chart of Accounts Maintenance C) Federal and State Tax Return Review Services D) Insurance Procurement Services - NJMI through HCC, shall procure and maintain the following insurance for GBHC, at GBHC's sole cost and expense: General Liability Property (including Business Interruption) Tail Flood Auto Liability Directors & Officers Umbrella Liability Pension Trust Liability Excess Liability Crime Workers Compensation Media/Memorabilia Non-owned Aviation Business Travel E) Surveillance Consultation Services F) 401K Services - Inclusion in the HCC and Subsidiaries Retirement Savings Plan on the same basis as currently exists, recognizing that a transition to a stand alone plan for GBHC must begin prior to September 30, 1998. EX-10.2 3 SOFTWARE LICENSE AGREEMENT EXHIBIT 10.2 -------------------------- SOFTWARE LICENSE AGREEMENT -------------------------- This SOFTWARE LICENSE AGREEMENT ("Agreement") is entered into as of the 27th day of June, 1998, by and between ADVANCED CASINO SYSTEMS CORPORATION ("ACSC"), ADVANCED CASINO SYSTEMS INTERNATIONAL, INC. ("ACSI"), COMPUTERIZED MANAGEMENT SYSTEMS INTERNATIONAL, INC. ("CMSI"), and GREATE BAY HOTEL AND CASINO, INC., t/a "Sands Hotel & Casino" ("Greate Bay"). W I T N E S S E T H: WHEREAS, ACSC is a corporation duly organized and existing under the laws of the State of Delaware and maintains its principal place of business at 200 Decadon Drive, Egg Harbor Township, New Jersey 08234-3899; and, WHEREAS, Greate Bay is a corporation duly organized and existing under the laws of the State of New Jersey and maintains its principal place of business at Indiana Avenue and Brighton Park, Atlantic City, New Jersey 08401; and WHEREAS, ACSI and CMSI are wholly owned subsidiaries of Greate Bay; and WHEREAS, ACSC presently licenses and Greate Bay presently utilizes a number of custom software systems and interfaces including but not limited to the following casino management systems: (i) an IBM AS/400 Casino Accounting and Management Application ("the Casino Accounting & Management System"), (ii) an IBM AS/400 Slot Accounting & Management Application (the "Slot Accounting System"), (iii) a Casino Player Tracking System, (iv) a Casino Sales and Marketing System, (v) a Table Marketing System, and (vi) a Slot Marketing System consisting of certain software programs (the "SMS Software") and certain proprietary hardware components ("the SMS Hardware") and intellectual property rights in the configuration of the SMS Software with and into the SMS Hardware and other commercially available hardware components ("the Configuration") (the SMS Software and the SMS Hardware and the Configuration are collectively referred to as the "the SMS"); and WHEREAS, both ACSC and Greate Bay desire to formalize the licensing of the systems as set forth below; NOW, THEREFORE, in consideration of the foregoing recitals and the promises, representations, warranties, and undertakings set forth in this Agreement, and intending to be legally bound thereby, ACSC, ACSI, CMSI and Greate Bay do hereby promise and agree as follows: 1. DEFINITION OF THE SOFTWARE AND THE SMS. For purposes of this Agreement, the "Software" shall consist of (i) the Casino Accounting & Management System as generally described on Exhibit "A"; (ii) the Slot Accounting System as generally described on Exhibit "B"; (iii) the Casino Player Tracking System as generally described on Exhibit "C"; (iv) the Casino Sales and Marketing System as generally described on Exhibit "D"; (v) the Table Marketing System as generally described on Exhibit "E", (vi) all other software systems and interfaces owned by ACSC and utilized by Greate Bay on its IBM AS/400 or on other hardware platforms as of the date of this Agreement, including by way of example and not limitation the Security Incident Reporting System, MIS Resource Request System, Cross System Backup, Data Acquisition, Employee Time and Attendance and Casino Analysis as generally described on Exhibit "F", and (vii) any trade secret or confidential information in relation to the Software. For purposes of this Agreement, "the SMS" shall consist of the SMS Software and the SMS Hardware as generally described on Exhibit "G" and the Configuration, and any and all communication protocol(s) now or hereafter developed by or on behalf of or used by ACSC to enable, facilitate or improve communications between the SMS and the slot machines of any and all slot machine manufacturers that are in ACSC's possession or control and for which ACSC has the legal right to provide to third parties ("the SMS Protocol"), and any trade secret or confidential information in relation to the SMS. Any and all intellectual property rights in the Software and the SMS, including any derivative modifications and extensions, shall hereafter be collectively referred to as "the Intellectual Property Rights". The Intellectual Property Rights expressly do not include Greate Bay's rights in any internal controls developed or hereafter developed by Greate Bay relating to the electronic drop feature of the SMS. 2. QUITCLAIM ASSIGNMENT/RELEASE. Greate Bay, CMSI and ACSI, on behalf of themselves, their predecessors, successors and assigns (collectively, the "Releasing Parties"), do hereby quitclaim and assign to ACSC any and all ownership rights the Releasing Parties may have in the Intellectual Property Rights, if any, without any warranty or covenants of title, and release ACSC and all of its affiliates from any claims any of the Releasing Parties may have related to the transfer by the Releasing Parties, or the assumption by ACSC, of the Intellectual Property Rights. Further, the Releasing Parties will cooperate with ACSC by communicating to ACSC any facts known to them regarding any such rights in the Intellectual Property Rights and by executing additional documents to evidence this assignment. The assignment and release in this Paragraph 2 shall survive the termination or breach of this Agreement. -2- 3. LICENSE GRANT. (a) License Rights Granted. Subject to the terms and conditions of this Agreement, ACSC hereby grants to Greate Bay and Greate Bay hereby accepts a perpetual, non-exclusive and transferable license under the Intellectual Property Rights owned or otherwise licensable by ACSC to use the Software and the SMS. (b) Geographical Restriction. Except as set forth in this Paragraph 3(b), Greate Bay may only use the Software and the SMS on machines, gaming equipment and computer equipment located and to be located, without limitation as to number, at Greate Bay's casino/hotel and Greate Bay's associated administrative properties in Atlantic City, New Jersey, as existing and configured as of the date of this Agreement and/or as may be reconfigured, added, expanded, constructed and/or reconstructed provided the same require not more than one casino license to operate (without regard to any management company) (collectively "the Licensed Facilities") from time to time during the term of this Agreement, or, for backup and disaster recovery purposes, at either a third party's location or a location controlled by Greate Bay, which location may be outside of Atlantic City. Nothing in this Agreement shall prohibit Greate Bay from using the Software and the SMS with alternate computer equipment at alternate computer installations in the event of processing failure or for the purpose of testing of such alternative computer equipment and installations regardless of location. In addition, nothing in this Agreement shall preclude Greate Bay from making a copy of the Software or the SMS Software and operating it on alternative processors for program development and testing purposes. (c) Responsibility of the Parties. Greate Bay shall be exclusively responsible for the supervision, management and control of the use of the Software and the SMS and any equipment in connection with which Greate Bay uses the Software or the SMS. 4. TERM OF LICENSE/AGREEMENT. The license granted under this Agreement is effective Nunc Pro Tunc from the first date ACSC or any predecessor in interest to ACSC claimed to acquire any ownership or other interest in the Intellectual Property Rights and shall remain in force in perpetuity. This license is non-cancelable, in whole or in part, by ACSC or any successor, in whole or in part, of the interest or business of ACSC, and any such successor must, as a condition of succession, expressly assume the obligations of this Agreement and, in the absence of an express assumption, any such successor will be deemed to have made such an assumption. Greate Bay may terminate the license granted under this Agreement and discontinue the use of the Software and/or the SMS, in whole or in part, or may discontinue the use of the Software and/or the SMS, or may elect not to use the services of ACSC, in whole or in part, as described in Paragraphs 6(c) and 6(d) without obligation to ACSC. -3- 5. OPERATING PROVISIONS. All use of the Software and the SMS (other than by or on behalf of any gaming authority) will be solely by Greate Bay's personnel or its agents or contractors, shall be subject to the obligations of confidentiality as set forth in Paragraph 10 of this Agreement, and distribution of the Software or the SMS, or any part thereof, or reference materials, including derivative modifications or extensions of them, is expressly prohibited, except for the Licensed Facilities and except as respects a gaming authority or persons acting on behalf of a gaming authority. Greate Bay shall not make or permit or otherwise allow others to print, copy, or divulge, in whole or in part, the Software or the SMS Software or the Configuration, in any form without the prior express written consent of ACSC. 6. PROVISION OF MATERIALS, UPDATES, HARDWARE, MAINTENANCE AND SUPPORT SERVICES AND SUPPLIER LISTS/EQUITABLE REMEDIES. (a) Terms for the period through Plan Confirmation/Sale. From the date of the signing of this Agreement until the date of the Confirmation of a Plan of Reorganization or a sale by Greate Bay of substantially all of its assets in Greate Bay's currently pending Chapter 11 proceeding, Case No. B98- 10001 ("the Chapter 11 Proceeding"), ACSC agrees to continue to provide the materials and updates as provided in paragraph 6(c), and hardware, and maintenance and Support Services, as hereinafter defined in Paragraph 6(d), for the Software and the SMS and such other requested services as are currently being provided by or through ACSC under the same economic terms and conditions as presently exist between ACSC and Greate Bay, so long as Greate Bay has paid all fees and expenses then due and owing to ACSC for services rendered after Greate Bay's initial filing of a petition in the Chapter 11 Proceeding ("Post Petition") within 45 days of receipt of an invoice therefor and less any sums owed to Greate Bay by ACSC for services provided or expenses incurred Post Petition on behalf of ACSC. (b) Terms for the period commencing with Plan Confirmation/Sale. Commencing with the date a Plan of Reorganization in the Chapter 11 Proceeding is confirmed by the Bankruptcy Court or an order is entered in the Chapter 11 Proceeding approving a sale by Greate Bay of substantially all its assets, ACSC agrees, for so long as ACSC provides such services to third parties or any of its affiliates, to provide the materials and updates, as hereinafter described in Paragraph 6(c), and the hardware, maintenance and Support Services as hereafter defined in paragraph 6(d), and the supplier lists described in Paragraph 6(e) and such other services as may now or hereafter be provided by ACSC to Greate Bay or affiliates or third parties as may be requested by Greate Bay under economic terms the same as, and other terms and conditions no less favorable than extended, in that certain Supplemental Agreement dated July 16, 1997 by and between Logical Solutions International, Inc. and Caesars World, Inc. (the "Caesars Agreement") without regard to quantity and volume discounts and without discrimination as to Greate Bay, -4- and, if such services are not provided for in the Caesars Agreement, then on terms no less favorable than would be offered by or through ACSC to ACSC's most favored customer and without discrimination as to Greate Bay. (c) Provision of Materials and Updates. Greate Bay may retain and, upon the signing of this Agreement to the extent Greate Bay is not in possession, ACSC shall provide Greate Bay with all basic materials, documentation manuals in printed and magnetic format, source codes, including but not limited to the source code for all systems and application programs running on the AS/400 and in the "HASS" file servers, the "Gearbox" PC's, the "Collector" Logic Board, and any other processor utilized in the SMS and the Software, and other documentation integral to the SMS Protocol or to the source codes or otherwise delineating and explaining the structure, organization, sequencing and operation of the source codes relating to the Software and the SMS (collectively the "Source Code") that are in ACSC's possession or control and for which ACSC has the legal right to provide copies to third parties. All Source Code will be provided in the highest form that allows modification. Notwithstanding the foregoing, the Source Code for the Operating System of the "Collector" Logic Board shall be placed in Escrow as provided in Paragraph 7 of this Agreement. During the term of this Agreement, ACSC shall make available to Greate Bay upon their completion copies of all modifications, improvements, or updates ("Updates") to the Software and/or the SMS at the same time or prior to the date on which ACSC makes such updates available to other customers of ACSC, and shall further provide Greate Bay no later than 10 days after request by Greate Bay, with copies of the Source Code for such Updates and revised copies of the Source Code for the entire Software and SMS which includes the Source Code for such Updates. Greate Bay shall have the right within the Licensed Facilities or at other locations authorized under this Agreement to full and unfettered use of the Source Code and may permanently install and maintain the Source Code in its computer system for its own internal use. (d) Provision of Hardware and Maintenance and Support Services. During the term of this Agreement and as may be requested by Greate Bay from time to time, ACSC shall provide Greate Bay, with SMS Hardware Components and Support Services for Software and SMS. Support Services means providing Updates, Required Additions and/or Changes (as defined below), providing Error Corrections (as hereinafter defined) in the Software and/or SMS and/or in the communication between the Software and/or SMS and other systems covered by this Agreement or as may be mutually agreed upon the parties, providing telephone support and providing programming and project management services and such other services as may be required via telephone and at Licensed Facilities to install, integrate, maintain and support the Software and SMS. The term Required Additions and/or Changes means all changes and additions that must be made to Software and/or SMS to keep it in compliance with statutory, -5- regulatory, and accounting practices changes. The term Error Correction means a modification, change or improvement to the Software or SMS that corrects an Error (as defined below). The term Error means a defect, deficiency or other problem with the Software or SMS that causes the Software or SMS to fail to operate in accordance with the documentation for the Software or SMS, to produce incorrect results, to damage data, to incorrectly store, retrieve, sort, present or calculate data, or to have a commercially unacceptable response time (i.e. time from input to producing a response). ACSC agrees that when Greate Bay reports an Error, ACSC will immediately commence work on an Error Correction and provide an Error Correction (i) as soon as reasonably possible if no commercially acceptable workaround is available to Great Bay or (ii) within a reasonable period of time if a commercially acceptable workaround is available or (iii) with the next Update or release of the Software or SMS if the Error is cosmetic or not material to the use of the Software or the SMS. ACSC agrees to provide Required Additions and/or Changes no later than two weeks prior to the effective date of such statutory, regulatory and/or accounting practices changes. (e) Provision of Supplier Lists. Upon the signing of this Agreement, ACSC shall provide Greate Bay with a list of SMS Hardware component suppliers and shall, upon any addition or change to such supplier list, provide Greate Bay with an updated list. In consideration of being provided with a list of SMS Hardware component suppliers, Greate Bay promises not to purchase SMS Hardware components directly from such suppliers absent a default by ACSC of its obligations under this Paragraph 6. (f) Equitable Remedies. The obligations of ACSC in this Paragraph 6 shall be specifically enforceable and ACSC agrees that (i) any breach of ACSC's obligations under this Paragraph 6 would cause irreparable injury to Greate Bay; (ii) Greate Bay would have an inadequate remedy at law for any such breach; (iii) the balance of interests and hardships would favor an injunction in favor of Greate Bay; (iv) the public interest would favor an injunction in favor of Greate Bay, and (v) ACSC will make no legal arguments that equitable relief is not an appropriate remedy in favor of Greate Bay in the event of a breach of ACSC's obligations under this Paragraph. 7. ESCROW OF THE "COLLECTOR" LOGIC BOARD SOURCE CODE. The Escrow Agent for the Source Code for the operating system of the "Collector" Logic Board shall be Greate Bay's General Counsel. ACSC shall cause the Source Code for the operating system of the "Collector" Logic Board to be deposited with the Escrow Agent within seven (7) days of signing this Agreement. The Escrow Agent shall acknowledge receipt of the Source Code and shall keep same in a safe secure location. Except as set forth below, the Escrow Agent shall not allow or permit any party or third party to have access to, copies of or information concerning the Source Code held in escrow. Upon receipt of written certification -6- from Greate Bay's Vice President-MIS that ACSC has either ceased doing business and there is no successor in interest that has assumed the obligations of ACSC or that ACSC is in default of its obligations under this Agreement, the Escrow Agent shall release the escrowed material to Greate Bay solely for the purpose of allowing Greate Bay to provide itself with support services and to effect the repair, replacement, maintenance and/or debugging of the "Collector" Logic Board as determined by Greate Bay. 8. INTELLECTUAL PROPERTY WARRANTIES. INDEMNIFICATION. ACSC represents and warrants that ACSC knows of no fact, circumstance or claim that the exercise of rights pursuant to this Agreement would infringe any valid and subsisting intellectual property right owned by any other persons. Greate Bay acknowledges and understands that Greate Bay must obtain licenses for the serial or other protocols from the respective game manufacturers necessary to interface the Software and the SMS with the games of each manufacturer. ACSC will defend at its expense or settle at its option, any action brought against Greate Bay to the extent that it is based on a claim that the Software, the SMS Hardware or the SMS Software or the Configuration, as used within the scope of this Agreement, infringes any copyright or United States patent. ACSC will pay any attorneys' fees, costs and damages awarded against or incurred by Greate Bay in such actions which are attributable to such claim provided that Greate Bay notifies ACSC in writing of the claim within five (5) calendar days of the service or other notification of such claim upon Greate Bay and ACSC fully controls the defense and settlement of such claims. Should the Software or the SMS or the SMS Software or the Configuration become, or, in ACSC's opinion, be likely to become the subject of a claim of infringement of a copyright or patent, ACSC may procure for Greate Bay the right to continue using the Software, the SMS or the SMS Software or the Configuration or replace or modify the Software, the SMS or the SMS Software or the Configuration to make it non- infringing, provided that no such replacement or modification shall decrease or adversely change the performance of the Software or SMS or the Configuration and further provided that no such replacement or modification shall cause Error. ACSC shall have no liability for any claim of copyright or patent infringement based on the use or combination of the Software, the SMS, SMS Software or the Configuration with programs or data not supplied by ACSC. Any indemnity provided herein shall not exceed and shall expressly be limited to Five Hundred Thousand Dollars ($500,000.00). 9. WARRANTY AND LIMITATIONS. (a) Warranty. ACSC warrants in favor of Greate Bay, SUBJECT TO THE REMEDY LIMITATIONS AND WARRANTY LIMITATIONS SET FORTH BELOW, that the Software or SMS -7- Software, for a period of one (1) year from the execution of this Agreement, will conform to ACSC's published specifications and warrants that ACSC has no knowledge that the Software or SMS Software has any programming errors or is unfit or unsuitable for use by Greate Bay. Such warranty is referred to herein as the "As-Documented Warranty." Greate Bay's sole remedies for any breach of the As-Documented Warranty, TO THE EXCLUSION OF ALL OTHER REMEDIES THEREFOR, IN CONTRACT, TORT, OR OTHERWISE, will be ACSC's obligation to modify the Software or SMS Software for Greate Bay, at no charge, so that it conforms to the published specifications. (b) Warranty Limitations. ACSC's warranties are limited and apply as follows: - ACSC's warranties do not extend to operation of the Software or the SMS on any hardware configuration, other than as supplied by or on behalf of ACSC and other than AS/400 hardware and model upgrades, provided the same are compatible with the AS/400 and industrial personal computers and all hardware specifications of ACSC for the SMS. - ACSC's warranties do not extend to operation of the Software or the SMS in conjunction with any computer program (e.g "terminate and stay resident" utility programs) other than as supplied by ACSC. - Except as may be expressly agreed in writing by ACSC, ACSC's warranties do not apply to any copy of the Software or the SMS that is modified by any person other than ACSC; to use of the Software or the SMS other than in accordance with the most current operating instructions provided by ACSC; to inoperability or bugs, in whole or in part, caused by defects, problems, or failures of software or hardware not meeting the hardware specifications of ACSC for the SMS or Software; or to bugs caused by negligence of any person except ACSC or its contractors. (c) Warranty Exclusions. Without limiting the generality of the limitations set forth above, ACSC's warranties do not include any warranty: - that the functions performed either by the Software or the SMS will operate in the combinations that may be selected for use by Greate Bay. - that the operation of the Software and the SMS will be error free in all circumstances. - that all defects in the Software and the SMS that are not material (as determined in the exercise of the good faith business judgment of Greate Bay after -8- consultation with ACSC) with respect to the functionality thereof will be corrected. - that the operation of the Software and the SMS will not be interrupted for short periods of time that do not exceed twenty- four (24) consecutive hours by reason of defects therein or by reason of default on the part of ACSC. - of any of the Software or the SMS or any part thereof as to which any person other than ACSC has made any modifications, without the express and specific written permission of ACSC. (d) Greate Bay Responsibilities. Without limiting the generality of the foregoing exclusions and limitations, Greate Bay will be exclusively responsible as between the parties for, AND ACSC MAKES NO WARRANTY OR REPRESENTATION WITH RESPECT TO: - determining whether the Software or the SMS will achieve the results desired by Greate Bay, notwithstanding such ACSC represents and warrants that it has no knowledge that the Software or the SMS when delivered to Greate Bay had or has any programming errors or is unfit or unsuitable for use by Greate Bay. - selecting, procuring, installing, operating, and maintaining computer hardware to run the Software. - ensuring the accuracy of any input data used with the Software or the SMS. - establishing adequate data backup provisions for backing up Greate Bay's data. - establishing adequate operational backup provisions (e.g., alternate manual operation plans) in the event of a defect or malfunction that impedes the anticipated operation of the Software or the SMS. (e) Disclaimer of All Other Warranties and Representations. The express warranties and express representations set forth in this Agreement are in lieu of, and ACSC DISCLAIMS, ANY AND ALL OTHER WARRANTIES, CONDITIONS, OR REPRESENTATIONS, EXPRESS OR IMPLIED, ORAL OR WRITTEN, WITH RESPECT TO THE SOFTWARE OR THE SMS OR ANY PART THEREOF, INCLUDING ANY AND ALL IMPLIED WARRANTIES OR CONDITIONS OF TITLE, NON-INFRINGEMENT, MERCHANTABILITY, OR FITNESS OR SUITABILITY FOR ANY PURPOSE (WHETHER OR NOT ACSC KNOWS, HAS REASON TO KNOW, HAS BEEN ADVISED, OR IS OTHERWISE IN FACT AWARE OF ANY SUCH PURPOSE), WHETHER ALLEGED TO ARISE BY LAW, BY REASON OF CUSTOM OR USAGE IN THE TRADE, OR BY COURSE OF -9- DEALING. IN ADDITION, ACSC EXPRESSLY DISCLAIMS ANY WARRANTY OR REPRESENTATION TO ANY PERSON OTHER THAN GREATE BAY WITH RESPECT TO THE SOFTWARE OR THE SMS. (f) Legal Compliance. ACSC agrees that it is responsible for submitting the SMS Hardware and SMS Software to the applicable gaming authorities in New Jersey having jurisdiction over the SMS for the approval of the logic of all or any portion of the SMS Software or the logic of any SMS Hardware components that are required prior to the installation of SMS or derivative modifications or extensions at the Licensed Facilities, except as provided in the next sentence. With respect to the Electronic Drop feature of the SMS ("EDrop"), ACSC will submit the EDropcode for approval, provided the applicable gaming authority has authorized implementation of EDrop on a conceptual basis either by established policy or published regulation. If approval of EDrop has been so authorized by the applicable gaming authority, ACSC will conform the logic of the EDrop code to any applicable and generally applied specifications of the gaming authority. Greate Bay agrees that it is solely responsible for all testing and internal control compliance with respect to the SMS, including, but not limited to, security of the computer system external to the SMS; provided, however, that ACSC agrees to provide any reasonable assistance requested of it by Greate Bay with respect to testing and internal control compliance. 10. CONFIDENTIAL/PROPRIETARY INFORMATION. (a) Confidential/Propriety Information. The parties acknowledge that the Software, the SMS, the Source Code and all other information supplied by ACSC in connection with this Agreement, including but not limited to any know- how or expertise, (collectively, the "Confidential Information"), will be deemed confidential/proprietary information of ACSC. Greate Bay agrees that it shall maintain the Confidential Information under secure conditions, using reasonable security measures and in any event not less than the same security procedures used by Greate Bay for the protection of its own confidential/proprietary information. (b) Non-disclosure Obligation. Except as may be requested or required by or on behalf of any gaming authority, Greate Bay shall not disclose any Confidential Information to any third party without the prior written consent of ACSC. Notwithstanding the foregoing, Greate Bay may make the Software or the SMS Software available, without ACSC's prior express consent, to any independent consultant or consulting group retained by Greate Bay solely for purposes specifically related to Greate Bay's permitted use, operation and application of the Software or the SMS, but only after such independent consultant or consulting group has executed a written confidentiality agreement pursuant to which it covenants to not use the Confidential Information except for Greate Bay as permitted herein and to not -10- disclose the Confidential Information under the same conditions of confidentiality contained herein. Notwithstanding the foregoing, Greate Bay may disclose appropriate portions of Confidential Information to those of its personnel who have a need to know the specific information in question in connection with Greate Bay's rights or the performance of obligations under this Agreement. All such personnel will be instructed by Greate Bay that the Confidential Information is subject to the obligation of confidentiality set forth by this Agreement. Notwithstanding the foregoing, Greate Bay may disclose Confidential Information to an entity that is not a competitor of ACSC and is offering (i) a Plan of Reorganization in the Chapter 11 Proceeding or (ii) to purchase control of Greate Bay, provided however, that any such entity shall enter into a non-disclosure agreement that requires such entity to protect such information in the same manner as is required by this Paragraph 10. (c) Equitable Remedies. The obligations of Greate Bay in this Paragraph 10 shall be specifically enforceable and Greate Bay agrees that (i) any breach of Greate Bay's obligations under this Paragraph 10 would cause irreparable injury to ACSC; (ii) ACSC would have an inadequate remedy at law for any such breach; (iii) the balance of interests and hardships would favor an injunction in favor of ACSC; (iv) the public interest would favor an injunction in favor of ACSC, and (v) Greate Bay will make no legal arguments that equitable relief is not an appropriate remedy in favor of ACSC in the event of a breach of Greate Bay's obligations under this Paragraph. 11. EXCLUSION OF INCIDENTAL AND CONSEQUENTIAL DAMAGES. NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY (NOR TO ANY PERSON CLAIMING RIGHTS DERIVED FROM THE OTHER PARTY'S RIGHTS) FOR INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE, OR EXEMPLARY DAMAGES OF ANY KIND, including lost profits or revenue, loss of business, or other economic damage, and further including injury to property, AS A RESULT OF BREACH OF ANY WARRANTY OR OTHER TERM OF THIS AGREEMENT, REGARDLESS OF WHETHER THE PARTY LIABLE OR ALLEGEDLY LIABLE WAS ADVISED OR HAD OTHER REASON TO KNOW OR IN FACT KNEW OF THE POSSIBILITY THEREOF. Independent of, severable from, and to be enforced independently of any other enforceable or unenforceable provision of this Agreement, IN NO EVENT SHALL ACSC's AGGREGATE LIABILITY TO GREATE BAY (INCLUDING TO ANY PERSON OR PERSONS WHOSE CLAIM OR CLAIMS ARE BASED ON OR DERIVED FROM A RIGHT OR RIGHT CLAIMED BY GREATE BAY), WITH RESPECT TO ANY AND ALL CLAIMS AT ANY AND ALL TIMES ARISING FROM OR RELATED TO THE SUBJECT MATTER OF THIS AGREEMENT, IN CONTRACT, TORT OR OTHERWISE, EXCEED ONE MILLION DOLLARS ($1,000,000.00). -11- 12. SPECIFIC PERFORMANCE. The obligations of Greate Bay in this Agreement shall be specifically enforceable by ACSC and Greate Bay agrees that (i) any breach of Greate Bay's obligations under this Agreement would cause irreparable injury to ACSC; (ii) ACSC would have an inadequate remedy at law for any such breach; (iii) the balance of interests and hardships would favor an injunction in favor of ACSC; (iv) the public interest would favor an injunction in favor of ACSC, and (v) Greate Bay will make no legal arguments that equitable relief is not an appropriate remedy in favor of ACSC in the event of a breach of Greate Bay's obligations under this Agreement. 13. ASSIGNMENT. Greate Bay may not assign any right under this Agreement and any purported assignment will be null and void and a breach of this Agreement. Notwithstanding the preceding sentence, a change of control of Greate Bay shall not constitute an assignment, and Greate Bay shall have the right to assign its rights under this Agreement to any person or entity acquiring substantially all of the assets of Greate Bay or at least 51 percent of the equity of Greate Bay through purchase, merger, or reorganization and any such person shall in turn have the right to assign to any other person coming within the exception provided in this sentence. ACSC shall have the right to assign its rights under this Agreement provided that any such assignee shall expressly assume ACSC's obligations to Greate Bay pursuant to this Agreement and that the assignment shall include sufficient Intellectual Property, personnel and other know how such that ACSC can reasonably expect the Assignee to be able to fulfill the obligations to Greate Bay under this Agreement. 14. AUTHORITY. Each party represents and warrants to the other that each party respectively has full right, power and authority to enter into this Agreement and the person executing this Agreement on its behalf has actual authority to do so. 15. PARTIAL INVALIDITY. If any one or more of the provisions of this Agreement should be ruled wholly or partly invalid or unenforceable by a court or other government body of competent jurisdiction, the validity and enforceability of all provisions of this Agreement not ruled to be invalid or unenforceable will be unaffected. 16. NOTICES. Notices hereunder will be delivered and effective as follows: Every notice required or contemplated by this Agreement to be given by either party may be delivered in person or may be sent by a nationally recognized overnight delivery courier, or by telecopier, or by express mail, or by -12- postage prepaid, certified or registered mail, addressed to the party whom it is intended at the following address: To Greate Bay, ACSI or CMSI: Greate Bay Hotel and Casino, Inc. Indiana Avenue and Brighton Park Atlantic City, New Jersey 08401 Attn: President Telecopier: 609-441-4624 With copy to: Greate Bay Hotel and Casino, Inc. Indiana Avenue and Brighton Park Atlantic City, New Jersey 08401 Attn: Executive Vice President - General Counsel Telecopier: 609-441-4937 To ACSC: Advanced Casino Systems Corporation 200 Decadon Drive Egg Harbor Township, New Jersey 08234-3899 Attn: President Telecopier:609-407-2473 With copy to: Greate Bay Casino Corporation Two Galleria Tower, Suite 2200 Dallas, Texas 75240 Attn: President Telecopier: 972-386-7411
Either party may change its address for notice by giving notice to the other party of the change. Any notice under this Agreement shall be deemed delivered when personally delivered, the date telecopied, if electronic confirmation of delivery is obtained and retained, the next business day after delivery to a nationally recognized courier service or express mail for overnight delivery, or three (3) days after any such notice is deposited with the United States Postal Service. 17. CHOICE OF LAW/FORUM SELECTION. This Agreement will be interpreted and enforced in accordance with the law of the State of New Jersey without regard to the choice of law principles of the State of New Jersey. Any action arising from this Agreement may only be instituted in the state or federal courts of the State of New Jersey. 18. ATTORNEY'S FEES. Except as otherwise provided in Paragraph 8 of this Agreement, in the event of any dispute arising out of or relating to this Agreement, or the alleged -13- breach thereof, each party will be responsible for and pay its own respective attorney's fees and expenses. 19. WAIVER. None of the terms of this Agreement, including this Paragraph 19 or any term, right or remedy hereunder shall be deemed waived unless such waiver is in writing and signed by party to be charged therewith and the parties hereby waive any basis to assert waiver by reason of any delay in asserting any such right or remedy or the benefit of any such term. 20. ENTIRE AGREEMENT/EFFECTIVE DATE. Except with respect to that certain Agreement between Greate Bay Hotel and Casino, Inc., GB Holdings, Inc. GB Property Funding Corp. and Advanced Casino Systems International, Inc., on one hand, and Greate Bay Casino Corp., New Jersey Management, Inc., Pratt Casino Corporation, PRT Funding Corp., PPI Corporation, Advanced Casino Systems Corporation, and Hollywood Casino Corporation, on the other, to which a form of this Agreement is an Exhibit ("the Settlement Agreement"), this Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter. No prior or contemporaneous representations, inducements, promises or agreements, oral or otherwise, between the parties with reference to the subject matter will be of any force or effect. No modification or amendment to this Agreement, including this Paragraph 20, will be valid or binding unless reduced to writing and duly executed by the party or parties to be bound. This Agreement may be executed in counterparts and a telecopied signature will be as effective as an original. This Agreement will be effective only when signed by all of the parties hereto and only upon and after the effective date of the Settlement Agreement, as set forth in Paragraph 11 thereof, and until such time all of the provisions of this Agreement will be deemed part of settlement discussions and inadmissible against any of the parties hereto. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] -14- IN WITNESS WHEREOF AND INTENDING TO BE LEGALLY BOUND the parties have executed this Agreement as of the date and year first above written. Attest: ADVANCED CASINO SYSTEMS CORPORATION /s/ Charles F. LaFrano III /s/ Lawrence C. Cole - -------------------------- ----------------------------------- Secretary Lawrence C. Cole President Attest: GREATE BAY HOTEL AND CASINO, INC. t/a "Sands Hotel & Casino" /s/ Frederick H. Kraus /s/ Timothy A. Ebling - -------------------------- ----------------------------------- Secretary Attest: ADVANCED CASINO SYSTEMS INTERNATIONAL, INC. /s/ Frederick H. Kraus /s/ Timothy A. Ebling - -------------------------- ----------------------------------- Secretary Attest: COMPUTERIZED MANAGEMENT SYSTEMS INTERNATIONAL, INC.. /s/ Frederick H. Kraus /s/ Timothy A. Ebling - -------------------------- ----------------------------------- Secretary -15- EXHIBIT "A" CASINO ACCOUNTING AND MANAGEMENT SYSTEM CASINO MANAGEMENT The casino management module provides both detailed and summarized information to executive level, casino management and administration and pit management. Through integration of the applications outlined as follows, management has access to both real time and historical performance information from a single source (or menu). TABLE ACCOUNTING & CREDIT This system integrates all aspects of table games and cage accounting in addition to patron credit activity. Additional controls provide automated and paper less casino credit account review via predefined "triggers" and electronic communications with service providers of casino and credit bureau information. EXHIBIT "B" SLOT ACCOUNTING AND MANAGEMENT APPLICATION SLOT ACCOUNTING & MANAGEMENT SYSTEM The Slot system is comprised of three modules; Slot Configuration - allows recording of individual game specifications and is used to maintain the SMS slot network. Future changes to floor configurations may be entered and activated as required. Slot Accounting - using the metered information received from SMS, this module provides complete accounting for all coin, currency and electronic fund transfers. Slot Data - provides historical and analytical information regarding game performance and may be accessed through numerous summary and detailed selection criteria. EXHIBIT "C" CASINO PLAYER TRACKING SYSTEM SUB-SET-RATINGS & COMPLEMENTARIES This application also performs as the primary information data bank of information specific to individual patrons gaming activity and profitability. Information from both table and slot activity is combined with the ability to view this information and either combined or independently. A complimentary decision process has been incorporated so that improved customer service may result by removing the requirement for executive decisions on all issuances. EXHIBIT "D" CASINO SALES AND MARKETING SYSTEM ACCOUNT MANAGEMENT This module provides the "housekeeping" functions required to maintain an accurate data bank of patron information for marketing purposes. It also serves to reduce cost specifically for the direct mail marketing application and purging of inactive patrons. EXTRACT MANAGEMENT This is a flexible and robust patron selection module used primarily to target specific segments of patrons for various marketing and/or analysis functions. The results of these extracts may be directed towards numerous forms of processing. GROUPS/INVITATION SYSTEM The primary purpose of the group system is to enable the analysis of profitability, both actual and potential, for up to twenty (20) user defined groups or event types. Expenses and/or complementaries may be charged direct to a patrons account or as a percentage of theoretical across all players within the group. Groups may also include Branch Offices and Junket Representatives with the ability to compute commissions. Historical analysis by group type or monthly rep performance is provided. The invitation module enables the booking of patrons responses to specific events (i.e. Head liner shows). Blocking of an event enables analysis based on invited segment(s). SWEEPSTAKES SYSTEM The sweepstakes system provided for the controlling and winner selection electronically for various promotional sweepstakes. Entries earned by patrons are automatically recorded with randomized winner selection based on event, date and time of day. If required entries may require pre- qualification. Linkage to the direct mail provides for notification of entries. EXHIBIT "E" TABLE MARKETING SYSTEM TABLE MARKETING SYSTEM (TMS) TMS was developed as an extension of the SMS for table games and utilizes the same network and controller boards (with function keypads and mark sense printers). The primary purposes of TMS consist of: a) control of complementaries at the table games; b) access to patron information for ratings, credit and tracking of cash transactions; and c) time and attendance for pit personnel. EXHIBIT "F" CASINO ANALYSIS This system provides the analysis department with information on patrons gaming history. Data extraction options allow flexibility in selecting patron segments for analysis, and an interface to the Group system allows group analysis. Data can be interpreted in report format, or downloaded to a PC for analysis utilizing PC based software, i.e. Foxpro. Selections from PC analysis can also be uploaded to the AS/400 to drive the Sales & Marketing extract system. MIS RESOURCE REQUEST SYSTEM The MIS Resource Request system allows the entry and tracking of requests for maintenance and new requests for Software, Hardware, and other services provided by MIS. The system utilizes control files to allow flexibility in establishing Application areas and allows tracking of the progress of a request from initial request entry through completion. For Software revisions, the system incorporates source and object movement to control the development/testing cycle and movement to a production environment. Tracking and reporting of man hours by request is also available. SECURITY INCIDENT REPORTING SYSTEM This system provides for the entry of Security Incident data to allow tracking and reporting of various types of incidents. Incidents can be tracked from initiation through closure, and some limited claim/settlement tracking is provided. CROSS SYSTEM BACKUP (CSB) This application is used in a multiple CPU environment to provide a 'hot' backup capability, for use in the event of a severe hardware failure. CSB utilizes the Journaling feature of the AS/400 to capture changes to designated application system files on a CPU, and transmits the changes to another CPU, where the CSB application on this CPU applies the changes to the application files residing on that CPU. EXHIBIT "G" SMS SMS/TM/ HARDWARE 1. NT SMS/TM/ slot Controller Board 256K Memory expandable to 1MB, 16TTL Inputs, 16 TTL Outputs 2. Card Reader Capable of reading standard swipe tracks 1 & 2, with red LED lit throat. Custom white exterior bezel. 3. Side Box (Optional) Enclosure for: a) card reader, b) display, c) keypad and d) back lit custom logo with tri-color LED. Additional mini fluorescent back lighting. 4. Keypad Overlay - Side Mount Includes keys zero (0) through (9), Clear, $ (dollar sign), Service, Promo (Promotion), and enter. Area for display and card reader precut. Area under card reader for back lighting verbiage and arrows, area for logo with back lighting, and additional area for verbiage with back lit miniature fluorescent. 5. Keypad Overlay - Slant Top Includes keys zero (0) through (9), Clear, $ (dollar sign), Service, Promo (Promotion), and enter. Size 19 1/2" L x 7/8" H. Area for display and card reader precut. Area above card reader for back lighting verbiage and arrows, area for logo with back lighting. 6. Tri Color LED Board 1" x 1" square board with Red, Green, and Yellow LED's used for back lighting logo. 7. Green LED Board 1/2" x 2 3/4" board controlled by card reader interface for back lighting card insert verbiage. 8. Graphic Display Overall dimensions 44.5mm H x 134.6 mm L, Dot matrix 64 x 256 pixels. 9. Base Top Board containing two (2) six pin molex connectors and two (2) RJ connections. 10. IBM Industrial Personal Computer(s) with arctic co-processor(s) - "Gearbox(s)" 11. Optic Isolator(s) with RS232 to RS422 connectors 12. IBM Industrial Personal Computer(s) - "HAS(s)" SMS/TM/ SOFTWARE 1. SMS_NT - Controller logic board program which contains specific interface logic based on game manufacturer specifications or ACSC proprietary bi- directional serial communications logic. Additional logic includes: a) NT Operating System, b) Security De-encryption, c) Peripheral device interface, d) Personalization parameter storage and verification, e) User diagnostics, f) Transaction recall, g) E-Drop/TM/, h) Marketing point algorithms. 2. RIC_MAIN - Artic card logic which controls the polling and messaging of transactions from and to slot machines and the IBM Industrial Personal Computer(s). 3. SU_MAIN - Primary logic program which controls the messaging from the network to the ARTIC ports. Additional logic includes: a) software downloading, b) transaction backup, c) file servers for: 1) asset configuration, 2) wiring configuration, and 3) transaction backup, d) TCP/IP connectivity and recoverability, e) graphical monitor data source, f) game metering, g) TCP/IP socket logic for sending and receiving transactions. 4. HASTCPIP - File Server control program which is the primary "HUB" for transactions within the network. Additional logic includes: a) network status monitor display, b) Network protocol translator (if required in LU6.2 environment), c) transaction backup file logic, d) in-house patron memory mapping, e) network verification for critical transaction processing, f) patron point transaction transfer logic. 5. PPS_SERV - File server logic which records and, as required computes points and balance information. Receives and transfers transaction to the HASTCPIP main server program. Performs time logic for patron being placed into and removed from memory. 6. ENCRYPT.EXE - Stand alone routine which is applied for compiling and encrypting SMS_NT programs which are subsequently downloaded to the NT controller board. Employs M68000 C Compiler/Assembler languages. Embeds encrypted passcode into the SMS_NT compiled program while simultaneously communicating the AS/400 for NT program verification and security. 7. TCPMON - Graphical monitor program which provides the following levels: a) Networked Gearboxes, b) Individual Gearbox and Artic ports, c) Individual Artic port, d) Individual slot machines. Each level contains the appropriate error conditions or interactive metered information. 8. AS/400 SMS/TM/ Application software for receiving, transmitting and processing of transactions bi-directionally to gaming devices. EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF GB PROPERTY FUNDING CORP. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000912906 GB PROPERTY FUNDING CORP. 1,000 3-MOS 6-MOS DEC-31-1998 DEC-31-1998 APR-01-1998 JAN-01-1998 JUN-30-1998 JUN-30-1998 1 1 0 0 0 0 0 0 0 0 1 1 0 0 0 0 191,874 191,874 0 0 182,500 182,500 0 0 0 0 1 1 0 0 191,874 191,874 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EX-27.2 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF GB HOLDINGS, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000912926 GB HOLDINGS INC. 1,000 3-MOS 6-MOS DEC-31-1998 DEC-31-1998 APR-01-1998 JAN-01-1998 JUN-30-1998 JUN-30-1998 22,298 22,298 0 0 19,831 19,831 12,791 12,791 3,260 3,260 37,076 37,076 323,454 323,454 177,850 177,850 195,051 195,051 20,398 20,398 192,912 192,912 0 0 0 0 1 1 (55,347) (55,347) 195,051 195,051 0 0 58,453 114,066 0 0 49,821 94,757 7,790 15,743 393 742 (170) (430) 619 3,254 0 0 619 3,254 0 0 0 0 0 0 619 3,254 0 0 0 0
EX-27.3 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF GB HOLDINGS, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000912926 GB HOLDINGS INC. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 19,705 0 21,462 13,834 3,248 33,554 322,298 175,340 192,640 18,561 192,915 0 0 1 (55,966) 192,640 0 55,613 0 44,936 7,953 349 (260) 2,635 0 2,635 0 0 0 2,635 0 0
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