-----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, DkY/a8+yorqjgx68ce4l0YWe3y3phrrrS8Kzrog/3stynceRmXiHV4ja4hdnbMgF hVe9URFYq90UoIezU3b2rQ== 0000950110-98-001323.txt : 19981118 0000950110-98-001323.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950110-98-001323 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98749832 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: 98749833 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: 98749834 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 SEPTEMBER 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) 441-4517 (NOT APPLICABLE) ----------------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report.) Indicate by check mark whether each of the Registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date.
REGISTRANT CLASS OUTSTANDING AT NOVEMBER 13, 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 "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 First Mortgage Notes for the benefit of GBHC. GBHC owns the Sands Hotel and Casino located in Atlantic City, New Jersey (the "Sands") . Substantially all of Holdings' assets and operations relate to the Sands. Effective September 2, 1998, GBHC acquired the membership interests in Lieber Check Cashing LLC ("Lieber"), a New Jersey limited liability company which owns a land parcel adjacent to GBHC (the "Lieber Parcel") and acquired and caused an option agreement on other adjacent land parcels (the "Option Parcels") to be assigned to Lieber. The Lieber Parcel and the Option Parcels provide GBHC with an expansion opportunity and frontage on Pacific Avenue, the principle street running parallel and closest to the boardwalk in Atlantic City, New Jersey. On January 5, 1998, Holdings, GB Property Funding and GBHC (collectively, the "Debtors") filed petitions for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). The prior Boards of Directors resigned on January 2, 1998 and new Boards of Directors were elected at that time. Each company continues to operate in the ordinary course of business, as set forth in the Bankruptcy Code, and each company's executive officers and directors as of the date of the filing remain in office, subject to the jurisdiction of the Bankruptcy Court, other than the following: as required by the Settlement Agreement, as defined below, Richard Knight resigned as a Director, President, and Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was elected President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On May 11, 1998, August 10, 1998 and November 9, 1998, as a result of motions filed by the Debtors, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998, for another 90 days until November 9, 1998, and for another 60 days until January 11, 1999, respectively. 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 (the "Management Agreement"). On May 22, 1998, GBHC filed a motion with the Bankruptcy Court to reject the Management Agreement (the "Rejection Motion"). GBCC, NJMI, and certain of their affiliates, on one side, and the Debtors, on the other, entered into an agreement on June 27, 1998, which was approved by the Bankruptcy Court on July 7, 1998, and by the 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 Rejection Motion, and GBHC ceded ownership rights to an affiliate of GBCC in, and obtained a perpetual license for, the software used in its operations from the same affiliate of GBCC. On September 28, 1998, and as a result of the Second Settlement 2 Agreement, as defined below, the Bankruptcy Court granted the Rejection Motion and as such, no further fees will be paid under either the Management Agreement or the Settlement Agreement. On July 27, 1998, GBHC filed an adversary proceeding in the Bankruptcy Court against GBCC, certain of its affiliates, and certain of the former directors of GBHC (collectively the "Defendants") seeking to recover the Lieber Parcel and the agreement for the Option Parcels and to restrain the use of its Net Operating Losses (the "NOL's"). Effective September 2, 1998, the Debtors, on one side, and the Defendants, on the other, entered into an agreement resolving, among other things, the adversary proceeding (the "Second Settlement Agreement"). Under the Second Settlement Agreement, among other things, the Debtors agreed to be included in the consolidated federal income tax return of GBCC for the years ended December 31, 1997 and 1998. GBCC agreed to allow the Debtors to become deconsolidated from the GBCC group for federal income tax purposes by causing PCC to transfer 21% of the stock ownership interest of PCC in Holdings to a person other than any member of the GBCC Group by December 31, 1998. 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. 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 nine month periods ended September 30, 1998 are not necessarily indicative of the operating results to be reported for the full year. The financial statements of GB Property Funding and the consolidated financial statements of Holdings as of September 30, 1998 and for the three and nine month periods ended September 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 September 30, 1998, their respective results of operations for the three and nine month periods ended September 30, 1998 and 1997 and their respective cash flows for the nine month periods ended September 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 SEPTEMBER 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 182,472,000 182,500,000 ------------ ------------ $191,846,000 $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 182,472,000 -- ------------ ------------ 191,845,000 -- ------------ ------------ Shareholder's equity (Note 1): Common stock, $1.00 par value per share, 1,000 shares authorized and outstanding 1,000 1,000 ------------ ------------ $191,846,000 $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 SEPTEMBER 30, ------------------------- 1998 1997 ------------ ---------- Revenues: Interest income (Note 2) $ -- $4,962,000 Expenses: Interest expense (contractual interest of $4,962,000 in 1998) -- 4,962,000 ------------ ---------- 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)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1998 1997 ----------- ----------- Revenues: Interest income (Note 2) $ 221,000 $14,980,000 Expenses: Interest expense (contractual interest of $14,885,000 in 1998) 221,000 14,980,000 ----------- ----------- 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)
NINE MONTHS ENDED SEPTEMBER 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) 5,086,000 Increase (decrease) in accrued interest payable 221,000 (5,086,000) ----------- ----------- 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 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"). Holdings was incorporated in September 1993 and, on February 17, 1994, acquired through capital contributions by its parent, all of the outstanding capital stock of Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"). GB Property Funding was formed for the purpose of borrowing $185,000,000 for the benefit of GBHC; such debt was issued during February 1994 at the rate of 10 7/8% per annum and the proceeds were loaned to GBHC (see Note 2). GB Property Funding has no operations and is dependent on the repayment of its note from GBHC for servicing its debt obligations (see Note 2). Administrative services for GB Property Funding are provided by GBHC at no charge. The cost of such services is not significant. The operation of an Atlantic City casino/hotel is subject to significant regulatory control. Under provisions of the New Jersey Casino Control Act, GBHC is required to maintain a nontransferable license to operate a casino in Atlantic City. The accompanying financial statements have been prepared in accordance with Statement of Position No. 90-7, "Financial Reporting By Entities in Reorganization Under the Bankruptcy Code," and include disclosure of liabilities subject to compromise. On January 5, 1998, GB Property Funding, GBHC and Holdings (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). GB Property Funding is dependent on repayment of its note from GBHC to meet its debt obligations. Management is in the process of seeking sponsor(s) for a plan of reorganization which requires confirmation by the Bankruptcy Court in accordance with the Bankruptcy Code and approval by the New Jersey Casino Control Casino Control Commission (the "Casino Commission"). 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. New Jersey Management, Inc. ("NJMI"), also a wholly owned subsidiary of PCC, was responsible for the operations of the Sands under a management agreement dated August 19, 1987, as amended, with GBHC (the "Management Agreement"). On May 22, 1998, GBHC filed a motion with the Bankruptcy 8 GB PROPERTY FUNDING CORP. (DEBTOR-IN POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) Court to reject the Management Agreement (the "Rejection Motion"). GBCC, NJMI, and certain of their affiliates, on one side, and the Debtors, on the other, entered into an agreement on June 27, 1998, which was approved by the Bankruptcy Court on July 7, 1998, and by the Casino Commission on July 8, 1998 (the "Settlement Agreement"). Under the Settlement Agreement, among other things, the Management Agreement was suspended and replaced with a services agreement until a decision by the Bankruptcy Court on the Rejection Motion, and GBHC ceded ownership rights to an affiliate of GBCC in, and obtained a perpetual license for, the software used in its operations from the same affiliate of GBCC. On September 28, 1998, and as a result of the Second Settlement Agreement, as defined below, the Bankruptcy Court granted the Rejection Motion and, as such, no further fees will be paid under either the Management Agreement or the Settlement Agreement. On July 27, 1998, GBHC filed an adversary proceeding in the Bankruptcy Court against GBCC, certain of its affiliates, and certain of the former directors of GBHC (collectively the "Defendants") seeking to recover the Lieber Parcel and the agreement for the Option Parcels and to restrain the use of its Net Operating Losses (the "NOL's"). Effective September 2, 1998, the Debtors, on one side, and the Defendants, on the other, reached an agreement resolving, among other things, the adversary proceeding (the "Second Settlement Agreement"). Under the Second Settlement Agreement, among other things, the Debtors agreed to be included in the consolidated federal income tax return of GBCC for the years ended December 31, 1997 and December 31, 1998. GBCC agreed to allow the Debtors to become deconsolidated from the GBCC group for federal income tax purposes by causing PCC to transfer 21% of the stock ownership interest of PCC in Holdings to a person other than any member of the GBCC Group by December 31, 1998. The agreement also resulted in the noncash settlement of certain outstanding intercompany transactions, and the transfer of the membership interests in Lieber and the assignment of the agreement for the Option Parcels to Lieber. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Financial Accounting Standards Board has issued a new standard, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the presentation and disclosure of comprehensive income, which is defined as the change in a company's equity resulting from non-owner transactions and events. SFAS 130 became effective December 15, 1997 and requires the restatement of all prior periods presented. GB Property Funding has adopted the provisions of SFAS 130. However, SFAS 130 provides that an enterprise that has no items of other comprehensive income for any period presented need only report net income. GB Property Funding has no such other comprehensive income items for any period presented. Accordingly, the presentation and disclosure requirements of SFAS 130 are not applicable. 9 GB PROPERTY FUNDING CORP. (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) The financial statements as of September 30, 1998 and for the three and nine month periods ended September 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 nine month periods ended September 30, 1998 and 1997 and cash flows for the nine month periods ended September 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 " First Mortgage Notes"). Interest on the First Mortgage Notes accrues at the rate of 10 7/8% per annum, payable semiannually commencing July 15, 1994. Interest only was payable during the first three years. Commencing on July 15, 1997, semiannual principal payments of $2,500,000 are due on each interest payment date with the balance due at maturity. Such semiannual payments may be made in cash or by tendering First Mortgage Notes previously purchased or otherwise acquired by GB Property Funding. GB Property Funding acquired $2,500,000 face amount of the First Mortgage Notes which were used to make the July 15, 1997 required principal payment. As a result of the filing under Chapter 11, debt service payments due in January and July 1998 were not made. The accrual of interest on the First Mortgage Notes for periods subsequent to the filing has been suspended. The indenture for the First Mortgage Notes contains various provisions which, among other things, restrict the ability of certain subsidiaries of GBCC to pay dividends to GBCC, to merge, consolidate or sell substantially all of their assets or to incur additional indebtedness beyond certain limitations. In addition, the indenture requires the maintenance of certain cash balances and requires minimum expenditures, as defined in the indenture, for property and fixture renewals, replacements and betterments at the Sands. The proceeds of the First Mortgage Notes were loaned to GBHC on the same terms and conditions. Under an order of the Bankruptcy Court, permitting the disposition of furniture and equipment in the ordinary course of business, any payments received by GBHC for the sale of such assets, which are part of the security for the First Mortgage Notes, must be remitted to the Indenture Trustee of the First Mortgage Notes as reductions to the outstanding principal of the First Mortgage Notes. During the current period, $28,000 has been remitted to the Indenture Trustee as the proceeds on the sale of equipment. No interest was paid or received with respect to the First Mortgage Notes and the loan to GBHC during the nine month period ended September 30, 1998. Interest paid and received amounted to $20,066,000 during the nine month period ended September 30, 1997. Interest receivable and payable with respect to the notes are included on the accompanying balance sheet at September 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 10 GB PROPERTY FUNDING CORP. (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 As part of the Second Settlement Agreement, GB Property Funding is included in GBCC's consolidated federal income tax return for the years ended December 31, 1997 and 1998. GBCC agreed to allow the Debtors to become deconsolidated from the GBCC group for federal income tax purposes by causing PCC to transfer 21% of the stock ownership interest of PCC in Holdings to a person other than any member of the GBCC group by December 31, 1998. 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. (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: as required by the Settlement Agreement, Richard Knight resigned as a Director, President, and Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was elected President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On May 11, 1998, August 10, 1998 and November 9, 1998, as a result of motions filed by the Debtors, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998, for another 90 days until November 9, 1998, and for another 60 days until January 11, 1999, respectively. 11 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------- Current Assets: Cash and cash equivalents $ 24,825,000 $ 13,871,000 Accounts receivable, net of allowances of $12,882,000 and $14,955,000, respectively 7,922,000 7,794,000 Inventories 3,291,000 3,372,000 Due from affiliate 385,000 258,000 Refundable deposits and other current assets 4,022,000 2,793,000 ------------- ------------- Total current assets 40,445,000 28,088,000 ------------- ------------- Property and Equipment: Land 38,929,000 38,093,000 Buildings and improvements 185,508,000 185,508,000 Operating equipment 98,069,000 94,501,000 Construction in progress 3,165,000 2,433,000 ------------- ------------- 325,671,000 320,535,000 Less - accumulated depreciation and amortization (179,797,000) (172,819,000) ------------- ------------- Net property and equipment 145,874,000 147,716,000 ------------- ------------- Other Assets: Obligatory investments 9,159,000 7,910,000 Other assets 6,342,000 4,014,000 ------------- ------------- Total other assets 15,501,000 11,924,000 ------------- ------------- $ 201,820,000 $ 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 BALANCE SHEETS (UNAUDITED) LIABILITIES AND SHAREHOLDER'S DEFICIT
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------- Current Liabilities Not Subject to Compromise: Current maturities of long-term debt $ 72,000 $ 14,000 Accounts payable 4,630,000 6,366,000 Accrued liabilities - Salaries and wages 4,440,000 4,824,000 Reorganization costs 2,131,000 152,000 Interest -- 4,000 Insurance 834,000 2,984,000 Other 6,464,000 6,358,000 Due to affiliates 1,112,000 456,000 Other current liabilities 3,160,000 3,959,000 ------------- ------------- Total current liabilities 22,843,000 25,117,000 ------------- ------------- Liabilities Subject to Compromise (Note 4) 218,685,000 -- ------------- ------------- Accrued Interest Payable -- 9,152,000 ------------- ------------- Long-Term Debt 937,000 192,918,000 ------------- ------------- Other Noncurrent Liabilities 1,234,000 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 27,946,000 18,438,000 Accumulated deficit (69,826,000) (77,039,000) ------------- ------------- Total shareholder's deficit (41,879,000) (58,600,000) ------------- ------------- $ 201,820,000 $ 187,728,000 ============= ============= The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated balance sheets.
13 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1998 1997 ------------ ------------ Revenues: Casino $ 60,995,000 $ 63,272,000 Rooms 2,606,000 2,713,000 Food and beverage 7,142,000 9,043,000 Other 892,000 1,175,000 ------------ ------------ 71,635,000 76,203,000 Less - promotional allowances (5,800,000) (6,962,000) ------------ ------------ Net revenues 65,835,000 69,241,000 ------------ ------------ Expenses: Casino 50,723,000 52,384,000 Rooms 779,000 630,000 Food and beverage 2,786,000 3,105,000 Other 796,000 908,000 General and administrative 2,992,000 4,813,000 Depreciation and amortization 2,760,000 3,350,000 ------------ ------------ Total expenses 60,836,000 65,190,000 ------------ ------------ Income from operations 4,999,000 4,051,000 ------------ ------------ Non-operating income (expense): Interest income 134,000 394,000 Interest expense (contractual interest of $5,524,000 in 1998) (14,000) (5,802,000) Gain on disposal of assets -- 22,000 ------------ ------------ Total non-operating income (expense), net 120,000 (5,386,000) ------------ ------------ Income (loss) before income taxes, extraordinary and other items 5,119,000 (1,335,000) Income tax provision -- -- ------------ ------------ Income (loss) before extraordinary and other items 5,119,000 (1,335,000) Reorganization and other related costs (1,159,000) -- ------------ ------------ Net income (loss) $ 3,960,000 $ (1,335,000) ============ ============ 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 OPERATIONS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 1998 1997 ------------- ------------- Revenues: Casino $ 166,513,000 $ 183,425,000 Rooms 6,968,000 7,405,000 Food and beverage 18,937,000 25,420,000 Other 2,740,000 3,087,000 ------------- ------------- 195,158,000 219,337,000 Less - promotional allowances (15,257,000) (19,418,000) ------------- ------------- Net revenues 179,901,000 199,919,000 ------------- ------------- Expenses: Casino 138,737,000 152,789,000 Rooms 2,441,000 1,897,000 Food and beverage 7,592,000 8,325,000 Other 1,814,000 2,053,000 General and administrative 10,107,000 14,126,000 Depreciation and amortization 8,585,000 10,883,000 ------------- ------------- Total expenses 169,276,000 190,073,000 ------------- ------------- Income from operations 10,625,000 9,846,000 ------------- ------------- Non-operating income (expense): Interest income 843,000 1,219,000 Interest expense (contractual interest of $16,577,000 in 1998) (293,000) (17,458,000) Gain on disposal of assets 28,000 46,000 ------------- ------------- Total non-operating income (expense), net 578,000 (16,193,000) ------------- ------------- Income (loss) before income taxes, extraordinary and other items 11,203,000 (6,347,000) Income tax provision -- -- ------------- ------------- Income (loss) before extraordinary and other items 11,203,000 (6,347,000) Reorganization and other related costs (3,990,000) -- ------------- ------------- Income (loss) before extraordinary item 7,213,000 (6,347,000) Gain on early extinguishment of debt -- 310,000 ------------- ------------- Net income (loss) $ 7,213,000 $ (6,037,000) ============= ============= 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) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1998 1997 ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ 7,213,000 $ (6,037,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary item -- (310,000) Write-off reorganization-related costs 942,000 -- Depreciation and amortization 8,585,000 10,883,000 Gain on disposal of assets (28,000) (46,000) Provision for doubtful accounts 1,251,000 2,265,000 Increase in accounts receivable (1,379,000) (1,351,000) Increase (decrease) in accounts payable and accrued expenses 5,487,000 (3,497,000) Net change in other current assets and liabilities (1,461,000) (2,912,000) Net change in other noncurrent assets and liabilities (2,300,000) (693,000) ------------ ------------ Net cash provided by (used in) operating activities 18,310,000 (1,698,000) ------------ ------------ INVESTING ACTIVITIES: Purchase of property and equipment (5,216,000) (1,917,000) Purchase of Lieber Check Cashing (net of cash acquired) (245,000) -- Proceeds from disposal of assets 28,000 46,000 Obligatory investments (1,881,000) (2,089,000) ------------ ------------ Net cash used in investing activities (7,314,000) (3,960,000) ------------ ------------ FINANCING ACTIVITIES: Repayments on credit facilities -- (2,000,000) Borrowings from affiliates -- 6,500,000 Repayments of long-term debt (42,000) (2,133,000) ------------ ------------ Net cash (used in) provided by financing activities (42,000) 2,367,000 ------------ ------------ Net increase in cash and cash equivalents 10,954,000 (3,291,000) Cash and cash equivalents at beginning of period 13,871,000 15,624,000 ------------ ------------ Cash and cash equivalents at end of period $ 24,825,000 $ 12,333,000 ============ ============ The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated statements.
16 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (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. Effective September 2, 1998, GBHC acquired the membership interests in Lieber Check Cashing LLC ("Lieber"), a New Jersey limited liability company which owns a land parcel adjacent to GBHC (the "Lieber Parcel") and acquired and caused an option agreement on other adjacent land parcels (the "Option Parcels") to be assigned to Lieber. The Lieber Parcel and the Option Parcels provide GBHC with an expansion opportunity and frontage on Pacific Avenue, the principle street running parallel and closest to the boardwalk in Atlantic City, New Jersey (see Note 8). The accompanying consolidated financial statements include the accounts and operations of Holdings, GBHC, GB Property Funding, and as of September 2, 1998, Lieber. 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 $41,879,000 at September 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 17 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). The prior Boards of Directors resigned on January 2, 1998 and new Boards of Directors were elected at that time. Each company continues to operate in the ordinary course of business, as set forth in the Bankruptcy Code, and each company's executive officers and directors as of the date of the filing remain in office, subject to the jurisdiction of the Bankruptcy Court, other than the following: as required by the Settlement Agreement, as defined below, Richard Knight resigned as a Director, President, and Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was elected President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On May 11, 1998, August 10, 1998 and on November 9, 1998, as a result of motions filed by the Debtors, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998, for another 90 days until November 9, 1998, and for another 60 days until January 11, 1999, respectively. Management is in the process of seeking sponsor(s) for a plan of reorganization which requires confirmation by the Bankruptcy Court in accordance with the Bankruptcy Code and approval by the New Jersey Casino Control Casino Commission ("the Casino Commission"). 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 as a going concern. New Jersey Management, Inc. ("NJMI"), also a wholly owned subsidiary of PCC, was responsible for the operations of the Sands under a management agreement dated August 19, 1987, as amended, with GBHC (the "Management Agreement"). On May 22, 1998, GBHC filed a motion with the Bankruptcy Court to reject the Management Agreement (the "Rejection Motion"). GBCC, NJMI, and certain of their affiliates, on one side, and the Debtors, on the other, entered into an agreement on June 27, 1998, which was approved by the Bankruptcy Court on July 7, 1998, and by the Casino Commission on July 8, 1998 (the "Settlement Agreement"). Under the Settlement Agreement, among other things, the Management Agreement was suspended and replaced with a services agreement until a decision by the Bankruptcy Court on the Rejection Motion, and GBHC ceded ownership rights to an affiliate of GBCC in, and obtained a perpetual license for, the software used in its operations from the same affiliate of GBCC. On September 28, 1998, and as a result of the Second Settlement Agreement, as defined below, the Bankruptcy Court granted the Rejection Motion and, as such, no further fees will be paid under either the Management Agreement or the Settlement Agreement (see Note 6). On July 27, 1998, GBHC filed an adversary proceeding in the Bankruptcy Court against GBCC, certain of its affiliates, and certain of the former directors of GBHC (collectively the "Defendants") seeking to recover the Lieber Parcel and the agreement for the Option Parcels and to restrain the use of its Net Operating Losses (the "NOL's"). Effective September 2, 1998, the Debtors, on one side, and the Defendants, on the other, reached an agreement resolving, among other things, the adversary proceeding (the "Second Settlement Agreement"). Under the Second Settlement Agreement, among other things, the 18 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Debtors agreed to be included in the consolidated federal income tax return of GBCC for the years ended December 31, 1997 and December 31, 1998. GBCC agreed to allow the Debtors to become deconsolidated from the GBCC group for federal income tax purposes by causing PCC to transfer 21% of the stock ownership interest of PCC in Holdings to a person other than any member of the GBCC Group by December 31, 1998. The agreement also resulted in the noncash settlement of certain outstanding intercompany transactions, (see Note 9) and the transfer of the membership interests in Lieber and the assignment of the agreement for the Option Parcels to Lieber (see Note 8 ). See also Notes 6 and 7 below. GBHC is self insured for a portion of its general liability, and 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 seeking sponsor(s) for a 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. 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, SFAS 130 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 September 30, 1998 and for the three and nine month periods ended September 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 September 30, 1998, the results of its operations for the three and nine month periods ended September 30, 1998 and 1997, and cash flows for the nine month periods ended September 30, 1998 and 1997. 19 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (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 canceled. (3) LONG-TERM DEBT AND PLEDGE OF ASSETS Subject to certain exceptions in the Security Agreement, substantially all of Holdings' and GBHC's assets are pledged in connection with their long-term indebtedness. On January 5, 1998, the Debtors filed petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The prior Boards of Directors resigned on January 2, 1998 and new Boards of Directors were elected at that time. Each company continues to operate in the ordinary course of business, as set forth in the Bankruptcy Code, and each company's executive officers and directors as of the date of the filing remain in office, subject to the jurisdiction of the Bankruptcy Court, other than the following: as required by the Settlement Agreement, Richard Knight resigned as a Director, President, and Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was elected President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. GBHC filed a motion in the Bankruptcy Court, seeking to use "Cash Collateral", as defined by 11 U.S.C. SS.363. By opinion filed April 3, 1998 (the "Opinion"), the Bankruptcy Court granted GBHC the right to use "Cash Collateral" subject to providing certain adequate protection in favor of its Indenture Trustee and concluded, among other things, that the Indenture Trustee did not have a perfected security interest in GBHC's deposit accounts or cash generated from casino revenues. An order was entered in conformity with the Opinion dated May 5, 1998. The Indenture Trustee took an appeal of the order to the United States District Court for the District of New Jersey where the matter is now pending. On May 11, 1998, August 10, 1998 and on November 9, 1998, as a result of motions filed by the Debtors, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998, for another 90 days until November 9, 1998, and for another 60 days until January 11, 1999, respectively. 20 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------- 10 7/8% first mortgage notes, due 2004 (a) $ 182,472,000 $ 182,500,000 14 5/8% affiliate loan, due 2005 (b) 10,000,000 10,000,000 Lieber Mortgage (c) 587,000 -- Other 422,000 432,000 ------------- ------------- Total indebtedness 193,481,000 192,932,000 Less - current maturities (72,000) (14,000) Less - debt subject to compromise (Note 4) (192,472,000) -- ------------- ------------- Total long-term debt $ 937,000 $ 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 "First Mortgage Notes"). Interest on the First Mortgage Notes accrues at the rate of 10 7/8% per annum, payable semiannually commencing July 15, 1994. Interest only was payable during the first three years. Commencing on July 15, 1997, semiannual principal payments of $2,500,000 are due on each interest payment date with the balance due at maturity. Such semiannual payments may be made in cash or by tendering First Mortgage Notes previously purchased or otherwise acquired by Holdings. Holdings acquired $2,500,000 face amount of First Mortgage Notes at a discount during May 1997, which it used during June 1997 to make its July 15, 1997 required principal payment. As a result of the filing under Chapter 11, the debt service payments due in January and July 1998 were not made. The accrual of interest on the First Mortgage Notes for periods subsequent to the filing has been suspended. The Indenture for the First Mortgage Notes contains various provisions which, among other things, restrict the ability of certain subsidiaries of GBCC to pay dividends to GBCC, to merge, to consolidate or to sell substantially all of their assets or to incur additional indebtedness beyond certain limitations. In addition, the indenture requires the maintenance of certain cash balances and requires minimum expenditures, as defined in the indenture, for property and fixture renewals, replacements and betterments at the Sands. Under an order of the Bankruptcy Court, permitting the disposition of furniture and equipment in the ordinary course of business, any payments received by GBHC for the sale of such assets, which are part of the security for the First Mortgage Notes, must be remitted to the Indenture Trustee 21 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) of the First Mortgage Notes as reductions to the outstanding principal of the First Mortgage Notes. During the currrent period, $28,000 has been remitted to the Indenture Trustee as the proceeds on the sale of equipment. (b) On February 17, 1994, GBHC issued a $10,000,000 promissory note to an affiliate, which is subordinated to the First Mortgage Notes (the "PRT Subordinated Note"). The PRT Subordinated Note is due on February 17, 2005 and bears interest at the rate of 14 5/8% per annum, which is payable semiannually commencing August 17, 1994, and payment is subject to certain conditions including the maintenance of average daily cash balances required by the indenture for the First Mortgage Notes. As a result of such payment restrictions, interest has been paid only through February 17, 1996. Repayment of the PRT Subordinated Note and the payment of the related interest are subject to any setoffs and defenses available under the Bankruptcy Code and applicable law and to the terms of a plan of reorganization which requires approval of the Bankruptcy Court and approval by the Casino Commission. The accrual of interest on the PRT Subordinated Note for periods subsequent to the filing under Chapter 11 has been suspended. (c) On September 2, 1998, and as part of the Second Settlement Agreement GBHC acquired Lieber (see Note 8) which owns the Lieber Parcel subject to the outstanding mortgage indebtedness of $587,000. The note is due July, 2001 and bears interest at the rate of 7% per annum. Principal and interest are paid monthly. As a result of the Chapter 11 filing, principal payments with respect to the First Mortgage Notes and the PRT Subordinated Note are subject to a plan of reorganization, which requires confirmation by the Bankruptcy Court in accordance with the Bankruptcy Code and approval by the Casino Commission. Pending such reorganization, the entire amount of the First Mortgage Notes and the PRT Subordinated Note are included in liabilities subject to compromise and in long-term debt on the accompanying consolidated balance sheets at September 30, 1998 and December 31, 1997, respectively. Scheduled payments of long-term debt as of September 30, 1998, exclusive of payments on the First Mortgage Notes and the PRT Subordinated Note, are set forth below: 1998 (three months) $ 17,000 1999 73,000 2000 80,000 2001 468,000 2002 19,000 Thereafter 352,000 ----------- Total $ 1,009,000 =========== 22 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Interest paid amounted to $35,000 and $20,121,000, respectively, during the nine month periods ended September 30, 1998 and 1997. At December 31, 1997, accrued interest on the 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 September 30, 1998: Accounts payable and accrued liabilities $ 7,887,000 First Mortgage Notes (Note 3) 182,472,000 PRT Subordinated Note (Note 3) 10,000,000 Borrowings from affiliate (Note 6) 5,000,000 Accrued interest (Note 6) 12,855,000 Due to affiliates 471,000 ------------- Total $ 218,685,000 ============= (5) INCOME TAXES As part of the Second Settlement Agreement (see Note 1), Holdings' operations are included in GBCC's consolidated federal income tax return for the years ended December 31, 1997 and 1998. GBCC agreed to allow the Debtors to become deconsolidated from the GBCC group for federal income tax purposes by causing PCC to transfer 21% of the stock ownership interest of PCC in Holdings to a person other than any member of the GBCC group by December 31, 1998. Prior to 1997, Holdings was included in the consolidated federal income tax return of Hollywood Casino Corporation ("HCC"), the parent company of GBCC until HCC distributed the GBCC stock it owned to the shareholders of HCC as a dividend on December 31, 1996 (the "Spin Off"). 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 nine month periods ended September 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. 23 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) At September 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 may be subject to the consequences of the proposed deconsolidation as of December 31, 1998 and to the tax consequences of a plan of reorganization approved by the Bankruptcy Court. Statement of Financial Accounting Standards No. 109 ("SFAS 109") requires that the tax benefit of NOL's and deferred tax assets resulting from temporary differences be recorded as an asset and, to the extent that management can not assess that the utilization of all or a portion of such NOL's and deferred tax assets is more likely than not, requires the recording of a valuation allowance. As a result of book and tax losses incurred in 1997 and the filing under Chapter 11 by Holdings in January 1998, management is unable to determine that realization of Holdings' deferred tax asset is more likely than not and, thus, has provided a valuation allowance for the entire amount at September 30, 1998. As part of the Second Settlement Agreement, GBHC settled certain intercompany obligations on a noncash basis. Loans to GBHC from GBCC, totaling $8,000,000 along with accrued interest totaling $1,508,000, and a deferred federal tax asset of GBHC's, totaling $10,902,000, representing a claim against an affiliate for the overpayment of federal income taxes under a previously existing tax sharing agreement, were mutually released. As the deferred federal tax asset had been previously fully reserved for as required by SFAS 109, this mutual release resulted in the recording of additional paid-in capital in the amount of $9,508,000 on the accompanying consolidated balance sheet at September 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. In addition, HCC has reported that it may be required to file an amended federal tax return for calender year 1996 and that it may experience a material increase in income tax liability as a result of the Spin Off. However, as part of the Second Settlement Agreement, and after use of any tax attributes available to members of the former HCC consolidated group, HCC and GBCC agreed to pay any increased taxes due, without contribution from the Debtors, that is attributable to the Spin Off. 24 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 the Rejection Motion. The Settlement Agreement, partially resolving the Rejection Motion, was entered into on June 27, 1998 and was approved by the Bankruptcy Court on July 7, 1998 and by the Casino Commission on July 8, 1998. Under the Settlement Agreement and effective as of May 1, 1998 and until decision on the Rejection Motion, NJMI agreed to provide certain services to GBHC and GBHC agreed to pay a monthly fee of $165,000, which was payable $122,000 on a monthly basis in arrears and $43,000 per month upon confirmation of GBHC's plan of reorganization by the Bankruptcy Court. On September 28, 1998, and as part of the Second Settlement Agreement, the Bankruptcy Court approved the Rejection Motion. The current fees under the Settlement Agreement have been paid and the deferred fees have been accrued. As part of the Second Settlement Agreement, a rejection damages claim of NJMI was preserved provided it was filed in the Bankruptcy Court within 30 days of the entry of the order of the Bankruptcy Court on September 11, 1998 approving the Second Settlement Agreement. The rejection damages claim was not filed and expired along with the corresponding avoiding powers causes of action under the Bankruptcy Code of GBHC, as provided in the Second Settlement Agreement. Accordingly, other than the deferred fees, no further management fees will be paid under either the Management Agreement or the Settlement Agreement except that NJMI possesses a disputed claim for prepetition management fees. 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 $479,000 and $1,630,000, respectively, during the three month periods ended September 30, 1998 and 1997 and $2,388,000 and $4,432,000, respectively, during the nine month periods ended September 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 September 30, 1998 amounted to $211,000. Fees payable under the Management Agreement of $34,000 are included in due to affiliates on the accompanying consolidated balance sheet at December 31, 1997 and are subject to defenses and offsets reserved under the Second Settlement Agreement. Fees payable under the Management Agreement of $145,000 are included in liabilities subject to compromise on the accompanying consolidated balance sheet at September 30, 1998, and an additional $22,000 is included in due to affiliates at September 30, 1998 and are subject to the defenses and offsets reserved under the Second Settlement Agreement. GBHC's rights to the trade name "Sands" (the "Trade Name") are derived from a license agreement between GBCC and an unaffiliated third party. Amounts payable by the Sands for these rights are equal to the amounts paid to the unaffiliated third party. Such charges amounted to $78,000 and $82,000, 25 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) respectively, for the three month periods ended September 30, 1998 and 1997 and $209,000 and $222,000, respectively, during the nine month periods ended September 30, 1998 and 1997. Under the Settlement Agreement, GBCC agreed not to seek to cancel the rights of GBHC to use the Trade Name prior to December 15, 1998, and GBHC preserved its legal position that GBCC lacked the right to cancel the rights of GBHC to use the Trade Name. An advance from GBHC to another GBCC subsidiary in the amount of $5,672,000 was outstanding at both September 30, 1998 and December 31, 1997, except that, under the Second Settlement Agreement, GBHC agreed not to sue the entity receiving the advance and its affiliates and reserved any rights it had to offset the advance against the PRT Subordinated Note, and the PCC Subordinated Note, as hereafter defined (collectively, the "Subordinated Notes"). Interest on the advance accrues at the rate of 16.5% per annum. The advance, together with accrued interest amounting to $4,680,000 and $3,978,000 at September 30, 1998 and December 31, 1997, respectively, are fully reserved as collection of the receivables is uncertain. 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. Interest accrued on such loan amounted to $1,496,000 at December 31, 1997 and is included in noncurrent amounts due to affiliates on the accompanying consolidated balance sheets. As part of the Second Settlement Agreement, GBHC settled certain intercompany obligations on a noncash basis. This loan to GBHC from GBCC, totaling $8,000,000 along with accrued interest totaling $1,508,000, and a deferred federal tax asset of GBHC's, totaling $10,902,000, representing a claim against an affiliate for the overpayment of federal income taxes under a previously existing tax sharing agreement, were mutually released. As the deferred federal tax asset had been previously fully reserved for as required by SFAS 109, this mutual release resulted in the recording of additional paid-in capital in the amount of $9,508,000 on the accompanying consolidated balance sheet at September 30, 1998. GBHC also borrowed $5,000,000 from another subsidiary of GBCC during January 1997 at the stated rate of 14 5/8% per annum payable semiannually commencing July 15, 1997 and, as set forth in the terms of the corresponding note, the loan is subordinated to the First Mortgage Notes and payment is subject to certain conditions (the "PCC Subordinated Note"). At September 30, 1998 and December 31, 1997, interest accrued on the PCC Subordinated Note amounted to $728,000 and $720,000, 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 the PCC Subordinated Note and the payment of the related interest are subject to approval of the Casino Commission and any setoffs and defenses available under the Bankruptcy Code and applicable law and to the terms of a plan of reorganization which requires approval by the Bankruptcy Court and approval by the Casino Commission. 26 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The accrual of interest on the PCC Subordinated Note 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ------------------------------- 1998 1997 1998 1997 --------------- ------------- ------------- ------------- Net Borrowings/(Advances) $ - $ 230,000 $ 20,000 $ 640,000 PRT Subordinated Note (Note 3) - 366,000 16,000 1,097,000
Interest accrued on the PRT Subordinated Note (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 September 30, 1998 and December 31, 1997. Effective September 2, 1998, GBHC acquired Lieber as part of the Second Settlement Agreement and caused the agreement for the Option Parcels to be assigned to Lieber. The acquisition of the agreement for the Option Parcels requires a confirmation payment of $500,000 to be paid to a designated affiliate of GBCC upon confirmation of a plan of reorganization. This amount is included in Due to Affiliates in the accompanying consolidated balance sheets at September 30, 1998. 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 GBHC's business. Such affiliate transactions are summarized below:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ------------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Billings to affiliates $ 61,000 $ 200,000 $ 199,000 $ 858,000 Charges from affiliates (172,000) (177,000) (579,000) (907,000)
(7) 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 27 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) the filing remain in office, subject to the jurisdiction of the Bankruptcy Court, other than the following: as required by the Settlement Agreement, Richard Knight resigned as a Director, President, and Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was elected President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On May 11, 1998, August 10, 1998 and on November 9, 1998, as a result of motions filed by the Debtors, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998, for another 90 days until November 9, 1998, and for another 60 days until January 11, 1999, respectively. On May 22, 1998, GBHC filed the Rejection Motion with the Bankruptcy Court. The Management Agreement was suspended as a result of the Settlement Agreement and was replaced with a services agreement until the decision on the Rejection Motion. On September 28, 1998, and as part of the Second Settlement Agreement, the Bankruptcy Court granted the Rejection Motion (see Note 1). On July 27, 1998, GBHC filed an action in the Bankruptcy Court (the "Action") against GBCC, certain affiliates of GBCC, and Jack E. Pratt, Edward T. Pratt Jr. and William D. Pratt, former directors of GBHC and current directors of GBCC (collectively, the "Defendants"), alleging, inter alia, usurpation of corporate opportunities of GBHC and breach of fiduciary duty with respect to GBHC, in connection with the acquisition of an option for certain land parcels and the acquisition of a land parcel on Pacific Avenue in Atlantic City, New Jersey adjoining the Sands (collectively, the "Parcels"), and seeking, inter alia, an order enjoining the Defendants from transferring the Parcels to third parties and requiring the Defendants to convey the Parcels to GBHC. The Action also sought to enjoin the Defendants from using the NOL's of the Debtors (see Note 5). Effective September 2, 1998, the parties entered into the Second Settlement Agreement resolving, among other things, the Action. Under the Second Settlement Agreement, among other things, GBHC agreed to be included in the consolidated income tax return of GBCC for the years ended December 31, 1997 and December 31, 1998. GBCC agreed to allow the Debtors to become deconsolidated from the GBCC group for Federal income tax purposes by causing PCC to transfer 21% of the stock ownership interest of PCC in Holdings to a person other than any member of the GBCC group by December 31, 1998. The agreement also resulted in the noncash settlement of certain outstanding intercompany transactions (see Note 9), and the transfer of the membership interests in Lieber to GBHC and the assignment of the agreement for the Option Parcels to Lieber (see Note 8). The Second Settlement Agreement also resulted in the dismissal of all applications in the Bankruptcy Court related to the Action. The Debtors and the Defendants also entered into mutual and general releases subject to certain exceptions described in the Second Settlement Agreement. GBHC is a party in various legal proceedings with respect to the conduct of casino and hotel operations. Although a possible range of losses can not be estimated, in the opinion of management, based upon the advice of counsel, settlement or resolution of these proceedings should not have a material adverse impact upon the consolidated financial position or results of operations of Holdings and GBHC. The 28 GB HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) accompanying consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainties described above. (8) ACQUISITION OF LIEBER CHECK CASHING AND THE AGREEMENT FOR THE OPTION PARCELS Effective September 2, 1998, and as part of the Second Settlement Agreement (see Note 1), GBHC acquired the membership interests in Lieber from affiliates of GBCC for $251,000. GBHC also caused Lieber to acquire the rights under the agreement for the Option Parcels from another affiliate of GBCC for a payment of $1.3 million and a payment of $500,000 at confirmation of a plan of reorganization. During September 1998, GBHC provided Lieber with $1 million which Lieber paid to the owner of the Option Parcels to extend the closing under the agreement for the Option Parcels to September 30, 1999. The Lieber Parcel is subject to a mortgage in the amount of $587,000 ( see Note 3). The assets, liabilities, and results of operations of Leiber at the date of acquisition are not material to the consolidated financial statements. Accordingly, pro forma financial information has not been provided. These transactions were accounted for by the purchase method of accounting, and, as such, the accompanying consolidated financial statements include results of operations of Lieber as of September 2, 1998. (9) SUPPLEMENTAL CASH FLOW INFORMATION As part of the Second Settlement Agreement, GBHC settled certain intercompany obligations on a noncash basis. Loans to GBHC from GBCC, totaling $8,000,000 along with accrued interest totaling $1,508,000, and a deferred federal tax asset of GBHC's, totaling $10,902,000, representing a claim against an affiliate for the overpayment of federal income taxes under a previously existing tax sharing agreement, were mutually released. As the deferred federal tax asset had been previously fully reserved for as required by SFAS 109, this mutual release resulted in the recording of additional paid-in capital in the amount of $9,508,000 on the accompayning consolidated balance sheet at September 30, 1998. The effects of this settlement have been excluded from the accompanying statement of cash flows as noncash transactions. (10) 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 September 30, 1998 financial statement presentation. 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) 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 to fund a substantial portion of annual capital expenditures. The Sands also used short-term borrowings to fund seasonal cash needs for certain capital projects. However, over time, the competitive position of the Sands was impaired, which was due, in part, to insufficient capital expenditures. As a result, and due to adverse weather in the first quarter of 1996, declines in hold percentages in 1996, and increased marketing expenses in 1996 on an industry wide basis, cash flow decreased significantly in 1996 and improved in 1997, but remained significantly below historical levels. These declines in operating cash flow at the Sands resulted in the need for periodic financial assistance from PCC and GBCC in order to meet debt service obligations. Substantial additional financial assistance would have been required to make the January 15, 1998 principal and interest payments due on the First Mortgage Notes. GBHC was unable to obtain additional borrowings from affiliates or other sources and, accordingly, on January 5, 1998, the Debtors filed petitions seeking protection under Chapter 11 of the Bankruptcy Code in Bankruptcy Court. The prior Boards of Directors resigned on January 2, 1998 and new Boards of Directors were elected at that time. Each company continues to operate in the ordinary course of business, as set forth in the Bankruptcy Code, and each company's executive officers and directors as of the date of filing remain in office, subject to the jurisdiction of the Bankruptcy Court, other than the following: as required under the Settlement Agreement, Richard Knight resigned as a Director, President, and Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was elected President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On May 11, 1998, August 10, 1998 and on November 9, 1998, as a result of motions filed by the Debtors, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998, for another 90 days until November 9, 1998, and for another 60 days until January 11, 1999, respectively. 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) As a result of the filings, GBHC has sufficient cash flow to continue normal operations while it seeks to develop a plan of reorganization which requires confirmation by the Bankruptcy Court in accordance with the Bankruptcy Code and approval by the Casino Commission. Capital expenditures, other than normal recurring capital expenditures in the ordinary course of business, will require prior approval of the Bankruptcy Court. In order to improve GBHC's competitive position, GBHC sought the approval of the Bankruptcy Court for a capital expenditure program to renovate the majority of its hotel rooms and suites and to purchase approximately 700 slot machines. The capital expenditure program in the amount of approximately $13.6 million was approved in March, 1998. The renovations of the hotel suites has commenced and GBHC expects to complete the renovation of the hotel suites in 1998 except for three supersuites which GBHC expects to complete in 1999 and expects to substantially complete the renovation of the non-suite hotel rooms in 1999. The replacement and upgrading of slot machines has commenced and is expected to be completed by or about the first quarter of 1999. There can be no assurance at this time that GBHC's plan of reorganization, when submitted, will be accepted by the Bankruptcy Court in accordance with the Bankruptcy code or accepted by the Casino Commission OPERATING ACTIVITIES At September 30, 1998, GBHC had cash and cash equivalents of $24.8 million. During the nine month period ended September 30, 1998, net cash provided by operating activities was $20.6 million compared with net cash used in operations of $1.7 million during the comparable 1997 period. The 1997 period includes the payment of $20.1 million in interest; the payment of such interest was suspended in 1998 by the Chapter 11 filing. GBHC utilized cash from operations, in part, during the first nine months of 1998 to fund capital additions totaling $5.2 million, to make obligatory investments of $1.9 million, and to purchase Lieber for $251,000 and the rights under the agreement for the Option Parcels for $1.3 million and $1 million to extend the closing on the Option Parcels (see Note 8). FINANCING ACTIVITIES Semiannual principal payments of $2.5 million which became due commencing in July 1997 with respect to the First Mortgage Notes have been suspended as a result of the Chapter 11 filing. Exclusive of the First Mortgage Notes and the PRT Subordinated Note, which are subject to reorganization, total scheduled maturities of long-term debt during the remainder of 1998 are $17,000. Under an order of the Bankruptcy Court, permitting the disposition of furniture and equipment in the ordinary course of business, any payments received by GBHC for the sale of such assets, which are part of the security for the First Mortgage Notes, must be remitted to the Indenture Trustee of the First Mortgage Notes as reductions to the outstanding principal of the First Mortgage Notes. During the current period, $28,000 has been remitted to the Indenture Trustee as the proceeds on the sale of equipment. 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) INVESTING ACTIVITIES Effective September 2, 1998, and as part of the Second Settlement Agreement (see Note 1), GBHC acquired the membership interests in Lieber from affiliates of GBCC for $251,000. GBHC also caused Lieber to acquire the rights under the agreement for the Option Parcels from another affiliate of GBCC for payment of $1.3 million and a payment of $500,000 at confirmation of a plan of reorganization. During September 1998, GBHC provided Lieber with $1 million which Lieber paid to the owner of the Option Parcels to extend the closing under the agreement for the Option Parcels to September 30, 1999. The Lieber Parcel is subject to a mortgage in the amount of $587,000 (see Note 3). Capital expenditures at the Sands during the nine month period ended September 30, 1998 amounted to $5.2 million and management anticipates capital expenditures during the remainder of 1998 will be approximately $ 5.6 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 nine months of 1998 totaled $1.9 million and are anticipated to be approximately $753,000 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 seeking sponsor(s) for a reorganization plan which requires confirmation by the Bankruptcy Court in accordance with the Bankruptcy Code and approval by the Casino Commission. On May 11, 1998, August 10, 1998 and on November 9, 1998, as a result of motions filed by the Debtors, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998, for another 90 days until November 9, 1998, and for another 60 days until January 11, 1999, respectively. 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 First Mortgage Notes and on the Subordinated Notes for periods subsequent to the filing has been suspended. 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) RESULTS OF OPERATIONS GENERAL The Sands earned income from operations of $5.0 million and $10.6 million, respectively, during the three and nine month periods ended September 30, 1998 compared to income from operations of $4.1 million and $9.8 million, respectively, reported for the three and nine month periods ended September 30, 1997. Operating results during the third quarter of 1998 were positively impacted by higher table game hold percentages; such percentages directly impact casino revenues. The declines in casino revenues were offset by operating efficiencies, by management's ongoing efforts to discontinue certain marginally effective marketing programs, and by the cessation of payment of the management fee. Although net revenues declined for the three and nine month periods ended September 30, 1998 to $65.8 million and $179.9 million, respectively, from $69.2 million and $199.9 million, respectively, during the corresponding 1997 periods, operating expenses also decreased significantly by $4.4 million (6.7%) and $20.8 million (10.9%), respectively. Such operating expense decreases are due to reductions in salaries and related benefits costs of $1 million (4.1%) and $4.8 million (6.9%) for the three and nine month periods, respectively, and marketing and advertising costs of $1.2 million (6.5%) and $6.7 million (13.2%), respectively, resulting from management's efforts to control costs while maintaining positive gross operating profit. Management fee expense decreased $1.2 million (70.6%) and $2 million (46.1%) for the three and nine month periods, respectively, as a result of the filing and granting of the Rejection Motion. 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. 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) GAMING OPERATIONS The following table sets forth certain unaudited financial and operating data relating to the Sands' operations:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------------- ----------------------------------- 1998 1997 1998 1997 --------------- --------------- ---------------- --------------- (IN THOUSANDS, EXCEPT PERCENTAGES) REVENUES: Slot machines $ 43,981 $ 42,726 $ 116,580 $ 122,096 Table games 16,223 19,764 47,750 58,920 Other (1) 791 782 2,183 2,409 --------------- --------------- ---------------- --------------- Total $ 60,995 $ 63,272 $ 166,513 $ 183,425 =============== =============== ================ =============== SLOT MACHINES: Gross Wagering (Handle) (2) $ 552,164 $ 526,470 $ 1,443,208 $ 1,486,379 =============== =============== ================ =============== Hold Percentages: (3, 4) Sands 8.0% 8.1% 8.1% 8.2% Atlantic City 8.5% 8.4% 8.4% 8.4% TABLE GAMES: Gross Wagering (Drop) (2) $ 115,511 $ 143,483 $ 318,790 $ 406,116 =============== =============== ================ =============== Hold Percentages: (3, 4) Sands 14.0% 13.8% 14.9% 14.5% Atlantic City 15.6% 14.6% 15.3% 15.0%
- ---------------- (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. 34 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 increased $25.7 million (4.9%) and decreased $43.2 million (2.9%), respectively, during the three and nine month periods ended September 30, 1998 compared with the same periods of 1997. The Sands' change in slot machine handle compare with increases of 3.4% and 4.3%, 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) increased to 5.9% from 5.8% during the three month period ended September 30, 1998 as compared to the same period in 1997, and decreased to 5.6% from 6.0%, during the nine month period ended September 30, 1998 as compared to the same period in 1997. Gaming space and the number of slot machines have decreased slightly at the Sands since the third quarter of 1997. Expansions of other Atlantic City casinos resulted in an increase of approximately 85,000 square feet of gaming space and 1,900 additional slot machines at September 30, 1998 compared to September 30, 1997. While the number of slot machines has decreased slightly at the Sands, during the third quarter of 1998 older slot machines were replaced with new and more popular machines which has contributed to the increase in handle during the third quarter of 1998. This has slightly offset the below industry wide performance in handle experienced by the Sands for the nine month period as a result of competitive pressures resulting from casino expansions and related marketing campaigns at other properties. As a result of such competitive pressures, the Sands has experienced a significant decrease (20.4%) in the number of bus passengers, a market segment which historically plays slot machines. Table game drop at the Sands declined $28 million (19.5%) and $87.3 million (21.5%), respectively, during the three and nine month periods ended September 30, 1998 compared with the same periods of 1997. The Sands' decreases compare to slight increases of less than 1% in table drop for all other Atlantic City casinos during the same periods. As a result, the Sands' table game market share decreased to 5.5% during the three and nine month periods ended September 30, 1998 from 6.8% and 7.0%, 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 13% 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. 35 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) REVENUES Casino revenues at the Sands, including poker and simulcast horse racing wagering revenues, decreased by $2.3 million (3.6%) and $16.9 million (9.2%), respectively, for the three and nine month periods ended September 30, 1998 compared with the same periods of 1997. Decreases in table game wagering and slightly lower slot machine hold percentages were partially offset by an increase in slot wagering for the three month period and by the overall improvement in the table game hold percentage to 14.9% from 14.5% for the nine month period. Rooms revenue decreased $107,000 (3.9%) and $437,000 (5.9%), respectively, during the three and nine month periods ended September 30, 1998 compared with the same periods in 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 $1.9 million (21%) and $6.5 million (25.5%), respectively, during the three and nine month periods ended September 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 decreased $283,000 (24.1%) and $347,000 (11.2%), respectively, during the three and nine month periods ended September 30, 1998 compared to the prior year periods as a result of a decrease in theater entertainment revenue. Promotional allowances represent the estimated value of goods and services provided free of charge to casino customers under various marketing programs. As a percentage of rooms, food and beverage and other revenues at the Sands, these allowances increased to 54.5% during the three month period ended September 30, 1998 from 53.8%, during the same period of 1997. Such allowances decreased to 53.3% from 54.1% during the nine month period ended September 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 $1.7 million (3.2%) and $14.1 million (9.2%), respectively, during the three and nine month periods ended September 30, 1998 compared with the same 1997 periods reflecting the respective 3.6% and 9.2% 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 due to the aforementioned reduction in promotional allowances. Rooms expense increased $149,000 (23.7%) and $544,000 (28.7%), respectively, during the three and nine month periods ended September 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 $319,000 (10.3%) and 36 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) $733,000 (8.8%), respectively, during the three and nine month periods ended September 30, 1998 compared with the same periods of 1997. The decreases result from reductions in payroll, operating costs and promotional expenses during the third 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 complementaries. Other expenses decreased $112,000 (12.3%) and $239,000 (11.6%), respectively, during the three and nine month period ended September 30, 1998 compared to the 1997 period due to cost savings with respect to theater entertainment. GENERAL AND ADMINISTRATIVE General and administrative expenses decreased $1.8 million (37.8%) and $4 million (28.5%), respectively, during the three and nine month periods ended September 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 $1.2 million (70.6%) and $2.4 million (46%), respectively, during the three and nine month periods during 1998 compared to the prior year periods as a result of a renegotiation and subsequent rejection 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 $590,000 (17.6%) and $2.3 million (21.2%), respectively, during the three and nine month periods ended September 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 $260,000 (66%) and $376,000 (30.9%), respectively, during the three and nine month periods ended September 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 $17.2 million (98.3%), respectively, during the three and nine months ended September 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 First Mortgage Notes, the Subordinated Notes 37 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) 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 nine month periods ended September 30, 1998 would have been $5.5 million and $16.6 million, respectively. INCOME TAX BENEFIT As part of the Second Settlement Agreement (see Note 1), Holdings' operations are included in GBCC's consolidated federal income tax return for the years ended December 31, 1997 and 1998. GBCC agreed to allow the Debtors to become deconsolidated from the GBCC group for federal income tax purposes by causing PCC to transfer 21% of the stock ownership interest of PCC in Holdings to a person other than any member of the GBCC group by December 31, 1998. Prior to 1997, Holdings was included in the consolidated federal income tax return of HCC, the parent company of GBCC until HCC distributed the GBCC stock it owned to the shareholders of HCC as a dividend on December 31, 1996 At September 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 may be subject to the consequences of the proposed deconsolidation as of December 31, 1998 and 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 September 30, 1998. As part of the Second Settlement Agreement, GBHC settled certain intercompany obligations on a noncash basis. Loans to GBHC from GBCC, totaling $8,000,000 along with accrued interest totaling $1,508,000, and a deferred federal tax asset of GBHC's totaling $10,902,000, representing a claim against an affiliate for the overpayment of federal income taxes under a previously existing tax sharing agreement, were mutually released. As the deferred federal tax asset had been previously fully reserved for as required by SFAS 109, this mutual release resulted in the recording of additional paid-in capital in the amount of $9,508,000 on the accompanying consolidated balance sheet at September 30, 1998. 38 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) REORGANIZATION AND OTHER RELATED COSTS Reorganization and other related costs include costs associated with Holdings' reorganization under Chapter 11, including, among other things, professional fees, costs associated with the termination of agreements and other administrative costs. Also, costs in the amount of $942,000 associated with a planned re-theming of the Sands were expensed during the second and third quarters of 1998. Due to the reorganization proceedings discussed above, this project has been abandoned. As noted previously, interest income on cash accumulated during the reorganization is reflected as a reduction to reorganization and other related costs ($190,000 and $ 434,000, respectively, for the three and nine months ended September 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 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. 39 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 the Bankruptcy Court. The prior Boards of Directors resigned on January 2, 1998 and new Boards of Directors were elected at that time. Each company continues to operate in the ordinary course of business, as set forth in the Bankruptcy Code, and each company's executive officers and directors as of the date of the filing remain in office, subject to the jurisdiction of the Bankruptcy Court, other than the following: as required under the Settlement Agreement, Richard Knight resigned as a Director, President, and Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was elected President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On May 11, 1998, August 10, 1998 and on November 9, 1998, as a result of motions filed by the Debtors, the Bankruptcy Court extended the exclusive period during which only the Debtors may file a plan of reorganization for 90 days until August 10, 1998, for another 90 days until November 9, 1998, and for another 60 days until January 11, 1999, respectively. (See Note 7). ITEM 3. DEFAULTS UPON SENIOR SECURITIES As a result of the filings discussed in Item 1. above, $182,500,000 principal amount of First Mortgage Notes issued by GB Property Funding are in default. Principal payments of $2,500,000 each due on January 15, 1998 and July 15, 1998 were not made. Under an order of the Bankruptcy Court, permitting the disposition of furniture and equipment in the ordinary course of business, any payments received by GBHC for the sale of such assets, which are part of the security for the First Mortgage Notes, must be remitted to the Indenture Trustee of the First Mortgage Notes as reductions to the outstanding principal of the First Mortgage Notes. Through November 13, 1998, $67,000 has been remitted to the Indenture Trustee as the proceeds on the sale of equipment. The accrual of interest on the First Mortgage Notes for periods subsequent to the filings has been suspended; such interest on a contractual basis amounts to $26,407,000 as of November 13, 1998. ITEM 6.(A) - EXHIBITS 10.1 Settlement Agreement dated as of September 2, 1998 by and among Greate Bay Hotel and Casino, Inc., GB Holdings, Inc., GB Property Funding Corp., on one side, and Greate Bay Casino Corporation, PHC Acquisition Corp., Lieber Check Cashing, LLC, Jack E. Pratt, William D. Pratt, Jr., and Edward T. Pratt, Jr., and Hollywood Casino Corporation, on the other. ITEM 6.(B) - REPORTS ON FORM 8-K The Registrants did not file any reports on Form 8-K during the quarter ended September 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: November 13, 1998 By:/s/ TIMOTHY A. EBLING ------------------------- -------------------------------------- Timothy A. Ebling Executive Vice President, Chief Financial Officer and Principal Accounting Officer 40 EX-10.1 2 AGREEMENT AGREEMENT This Agreement (herein so called) is entered into as of this 2nd day of September, 1998 by and among Greate Bay Hotel and Casino, Inc. ("GBHC"), GB Holdings, Inc., ("GBH"), GB Property Funding Corp. ("GBPF") (collectively with their Subsidiaries, the "Debtors"), on the one hand, and Greate Bay Casino Corp. ("GBCC"), PHC Acquisition Corp. ("PHC"), Lieber Check Cashing, LLC. ("Lieber"), Jack E. Pratt, William D. Pratt, and Edward T. Pratt, Jr. (collectively, the "Pratts" and together with GBCC, PHC, and Lieber, the "Defendants"), 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 United States Code (the "Chapter 11 Proceedings") in the United States Bankruptcy Court for the District of New Jersey, Camden Vicinage (the "Court"). B. On July 27, 1998, GBHC filed a certain adversary proceeding against the Defendants in the Court that was docketed at No. 98-1220 seeking to recover, among other things, the rights under that certain contract of sale between PHC and FGP Bala, Inc. ("FGP") dated as of January 1, 1998 for the sale of Lots 5, 6, 7, 2, 3, 16, 19, & 42 on Block 30 and Lot 73 on Block 33 on the Tax Map of the City of Atlantic City and what is commonly known in Atlantic City, New Jersey as the Midtown Bala (the "Midtown Bala Option"), and the rights to Lot 14 on Block 30 of the Tax Map of the City of Atlantic City that Lieber acquired, subject to a purchase money mortgage, from Andermatt Corp. by deed dated July 22, 1996 (the "Lieber Parcel"), and to restrain the Defendants from using the Net Operating Loss tax attributes (the "NOL's") of the Debtors (the "Adversary Proceeding"). C. On or about August 19, 1998, the Defendants filed a Motion in the Adversary Proceeding seeking to disqualify Gibbons Del Deo Griffinger & Vecchione as counsel to the Debtors in the Adversary Proceeding (the "Gibbons DQ Motion"), and on or about August 20, 1998 filed a Motion seeking a Preliminary Injunction Against Frederick H. Kraus (the "FK Motion"). D. On August 24, 1998, GBCC filed a Response and Emergency Application in the Adversary Proceeding (the "Consolidated Return Motion"). E. The Debtors, on one side, and the Defendants, on the other side, have reached a settlement in the Adversary Proceeding which resolves all of the issues raised in the Adversary Proceeding, including the Consolidated Return Motion, and which results in the dismissal with prejudice of the Gibbons DQ Motion and the FK Motion. NOW, THEREFORE, the Debtors, the Defendants, and where applicable, HCC, for themselves and all entities owned or controlled by them, including direct or indirect subsidiaries ("Subsidiaries") stipulate and agree as follows: 1. Forthwith upon the execution of this Agreement and approval of this Agreement by the Court, the Debtors will provide GBCC with executed Internal Revenue Service Form 1122's for the 1997 tax year with respect to the GBCC Group, as hereafter defined, for each of the Debtors and the Subsidiaries of GBH and the remaining tax issues are resolved in accordance with the terms as follows: a. HCC may file an amended consolidated federal corporate tax return ("Amended Return") for calendar year 1996. HCC may use any NOL's attributable to the Debtors as of December 31, 1996 for any purpose in the Amended Return. However, if any tax, interest or penalties are due on the Amended Return, HCC, GBCC or any of GBCC's Subsidiaries other than the Debtors will satisfy all such obligations from its or their own funds. b. GBCC will file a timely return by the September 15, 1998 extended date for the filing of a return previously obtained by GBCC for a new consolidated group for calendar year 1997 consisting of GBCC and all of its Subsidiaries (the "GBCC Group"). GBCC may use any NOL's attributable to the Debtors as of December 31, 1997 for any purpose in the GBCC 1997 return. However, if any tax is due on the GBCC 1997 return, GBCC or any of its Subsidiaries other than the Debtors will satisfy all such obligations from its or their own funds. c. The GBCC Group will file a return for calendar year 2 1998 and in a manner in accordance with prior practice. HCC represents and covenants that it will take no action that will require any cancellation of debt income or any gains on disposition of assets to be recognized by the GBCC Group in 1998. GBCC represents and covenants that any restructuring of the obligations of Pratt Casino Corporation ("PCC"), PRT Funding Corp. ("PRT"), and/or New Jersey Management, Inc. ("NJMI") (the "PRT Restructuring") will not result in any cancellation of debt income or other taxable gains to the GBCC Group while the Debtors are members of the GBCC Group; provided that nothing herein shall prevent the cancellation of indebtedness in a bankruptcy proceeding. In the event that GBHC seeks to take a deduction for tax purposes for post petition interest expense as part of the 1998 return, GBHC will deliver to GBCC an opinion addressed to GBCC from a law firm reasonably satisfactory to GBCC or from a nationally recognized "Big Five" certified public accounting firm that there is substantial authority for such deduction. GBCC represents and covenants that NOL's of the GBCC Group will be available to shelter any taxable income from GBH and Subsidiaries in 1998 or from the deconsolidation of the GBH Group as hereafter defined, and otherwise GBCC or its Subsidiaries will pay any resulting tax liability. However, to the extent that there is tax actually due as a result of GBHC not taking a deduction for post petition interest expense and if the remaining NOL's of the GBCC Group are insufficient to shelter the tax liability resulting from nondeducted post petition interest expense, GBHC will be obligated to pay any such tax liability. In addition, after allowing for the use of GBCC Group NOL's to shelter any income of the Debtors, regardless of whether such income results from nondeducted interest or otherwise, HCC may take action that would result in cancellation of debt income or gain on the disposition of assets to the GBCC Group, if GBCC and its Subsidiaries other than the Debtors pay any tax due. d. On or before December 31, 1998, GBCC will cause GBH and its Subsidiaries to become deconsolidated from the GBCC Group by causing PCC to transfer 21% of the stock ownership interest of PCC in GBH (the "GBH Stock 3 Interest") free and clear of liens and encumbrances to a person other than any member of the GBCC Group such that PCC and its affiliates would no longer be the owner of at least 80% of the vote and value of the GBH stock as set forth in 26 USC ss.1504 or, with the written consent of GBHC, by otherwise causing GBH and its Subsidiaries to cease to be members of the GBCC Group so that GBH and its Subsidiaries can form a new consolidated group with GBH as the common parent (the GBH Group"). Unless GBCC notifies GBHC within seven (7) days of the approval of this Agreement by the Court that GBCC will otherwise cause the deconsolidation of GBH and its Subsidiaries or notifies GBHC of the identity of a person to hold the GBH Stock Interest, GBCC authorizes GBHC to file a petition with the New Jersey Casino Control Commission, seeking approval to transfer the GBH Stock Interest to a designee of the Debtors (or to the person designated by GBCC if notice is provided within such seven (7) days) effective on or before December 31, 1998 and will cooperate with GBHC, using GBCC's good faith best efforts, to cause such approval to be obtained. GBHC will use its good faith best efforts to obtain approval of such a petition. In addition, GBCC will cause PCC to take no action that will prevent the effectiveness of the consent of GBH to be the common parent of the GBH Group. At the deconsolidation of GBH and its Subsidiaries, the Debtors will receive their allocated share of any unused NOL's available to the GBCC Group in accordance with regulations and procedures of the IRS. GBCC Group shall not make an election under Treas. Reg. 1.1502-20(g) with respect to such deconsolidation. If because of the deconsolidation, any adjustment is required by the Treasury Regulations promulgated under 26 U.S.C. Section 1502, GBCC will fully disclose to the Debtors its analysis and calculation of such adjustments on a timely basis but no later than forty-five (45) days before the GBCC Group's 1998 federal income tax return is due (taking into account any extension). The inclusion of all such adjustments that relate to the GBH Group as a result of such deconsolidation shall be subject to the written consent of the GBH Group. Any dispute concerning such adjustments shall be resolved by the Court. 4 e. HCC and GBCC represent and covenant with respect to any audits for returns covering tax periods beginning prior to January 1, 1997, and GBCC represents and covenants with respect to any audits covering tax periods beginning subsequent to December 31, 1996 and until formation of the GBH Group, that the Debtors will be protected from exposure to liabilities resulting from activities of HCC and its Subsidiaries or GBCC and its Subsidiaries, as the case may be, other than the Debtors, and, to the extent there is money due the IRS as a result of audits with respect to such activities, HCC and/or GBCC will be responsible for payment of such amounts. The Debtors represent and covenant with respect to any audit adjustments covering tax periods prior to the formation of the GBH Group that the GBCC Group (other than the Debtors) and HCC will be protected from exposure to liabilities resulting from activities of the Debtors and, to the extent there is money due the IRS as a result of audits with respect to such activities, the Debtors will be responsible for payment of such amounts. f. Except as provided in this Agreement, neither HCC nor GBCC will enter into any agreements with the IRS or take a position in any IRS audit or amend any returns that will adversely affect the tax attributes of the Debtors or any tax issues affecting the Debtors without the written consent of the Debtors nor will HCC and/or GBCC engage in any negotiations with the IRS where either HCC or GBCC will make concessions with respect to issues or tax attributes affecting the Debtors in return for favorable treatment or the absence of any action with respect to issues or tax attributes affecting HCC and/or GBCC and their Subsidiaries other than the Debtors without the Debtors written consent. HCC and GBCC will fully disclose to the Debtors all audit issues, notices and correspondence with the IRS as they arise that would affect the Debtors so the Debtors can enforce, at their expense, the rights provided to them under the provisions of this paragraph. 2. With respect to that certain promissory note by GBHC in favor of GBCC dated February 7, 1997 in the amount of $8,000,000 together with accrued interest (the "GBHC Demand Note"), and with 5 respect to that certain claim in the amount of $10,902,000 for the claimed double payment of taxes by GBHC against GBCC arising from the payment of deferred taxes to Pratt Casino Properties, Inc., PPI Corporation, or GBCC (the "Deferred Tax Claim"), GBHC releases GBCC and its Subsidiaries, their officers, directors, employees, shareholders, agents, and insurers from the Deferred Tax Claim in exchange for a release of GBHC, which GBCC hereby grants to GBHC and its Subsidiaries, their officers, directors, employees, shareholders, agents, and insurers, from the claims arising from the GBHC Demand Note. 3. With respect to the claim of GBHC against PCPI Funding Corp. ("PCPI") arising from an advance on or about September 27, 1990 in the amount of $6.6 million plus accrued interest (the "PCPI Advance"), GBHC covenants not to sue any members of the GBCC Group or any of their officers, directors, employees, shareholders, agents, and insurers for, or take any other action with respect to, any claim arising out of the PCPI Advance, except that GBHC preserves whatever rights it may have to offset the amount of the PCPI Advance against the holders of, and with respect to, the Subordinated Notes as hereafter defined. 4. PHC represents that it and FGP entered into that certain Extension of Closing Date Agreement dated as of July 28, 1998, which extended the closing date under the Midtown Bala Option until September 30, 1999 (the "Extension"). Under the Midtown Bala Option, PHC has made the required down payment of $1,000,000 to be applied against the purchase price and the down payment of $1,000,000 is being held in escrow in accordance with the terms of that certain Escrow Agreement dated as of January 1, 1998 (the "Escrow") between PHC, FGP, and the Title Company of Jersey (the "Title Company"). PHC also represents that it has paid the $300,000 required under the Extension to FGP and that the only act required to extend the Midtown Bala Option under the Extension to September 30, 1999 is the payment of another $1,000,000 to be held under the Escrow and to be applied against the purchase price under the Midtown Bala Option. PHC also represents that its rights under the Midtown Bala Option remain freely assignable as provided under the original provisions of the Midtown Bala Option. PHC agrees to assign, and, by this Agreement, does hereby assign, effective immediately after the transfer of the Membership interests in Lieber to GBHC, as described in paragraph 5 below, all of its right, title, and interest under the Midtown Bala Option and the 6 Extension and to the funds held by the Title Company under the Escrow to Lieber in return for the payment by GBHC of $1,300,000 upon approval of this Agreement by the Court and for the Confirmation Payment as hereafter defined. PHC also agrees to deliver to GBHC a separate confirmatory instrument of assignment consistent with the provisions of this paragraph and in a form reasonably satisfactory to GBHC. 5. Lieber owns the Lieber Parcel. The Lieber Parcel shall be conveyed as described below, subject to the purchase money mortgage in favor of Andermatt Corp. (the "Mortgage"), for the sum of (a) $150,000, representing the payments made to Andermatt Corp. on account of the purchase price (the "Downpayment") plus (b) principal and interest payments on the Mortgage (the "P&I Payments"), plus (c) out of pocket expenses incurred by Lieber at or after closing for the Lieber Parcel (other than attorney's fees) (the "Expenses") less (d) all income received in respect of the Lieber Parcel on or after closing (the "Income") (the "Downpayment", the "P&I Payments", and the "Expenses" less the "Income, collectively, the "Purchase Price") upon the approval of this Agreement by the Court, and upon payment of the Purchase Price. GBHC and Lieber agree that the Purchase Price equals the $251,000 advanced by GBCC under the Lieber Note as hereafter defined provided that GBHC shall be entitled to any cash on hand in the checking account of Lieber. GBHC will pay the Purchase Price to GBCC in complete satisfaction of that certain promissory note by Lieber in favor of GBCC dated July 22, 1996 (the "Lieber Note") and in return for the transfer of the ownership of the Lieber Parcel, and the rights to the lease for the Lieber Parcel to FGP (the "Lieber Lease") upon the approval of this Agreement by the Court. The transfer of the ownership of the Lieber Parcel and the rights to the Lieber Lease shall be accomplished by transfer of the Membership Interests of PHC Properties, Inc. ("PHCP") and PHC Holdings, Inc. ("PHCH") in Lieber to GBHC and, by this Agreement, the Membership Interests of PHCP and PHCH in Lieber, constituting all of the Membership Interests in Lieber, are assigned to GBHC upon approval of this Agreement by the Court and upon payment of the Purchase Price. Except for the Mortgage, Lieber represents and covenants that the transfer of the Lieber Parcel and the Lieber Lease will be free and clear of the claims of any persons other than customary restrictions and easements of record and identified in the "marked-up" title commitment of the Title Company at the closing on the Lieber Parcel on July 22, 1996, and GBCC represents 7 that Lieber has no debts or obligations to anyone other than the Lieber Note that will be satisfied as a result of the actions contemplated in this paragraph. GBCC also agrees to deliver to GBHC a confirmatory instrument of assignment of the Membership interests of PHCH and PHCP in Lieber consistent with the provisions of this paragraph and in a form reasonably satisfactory to GBHC. 6. The Confirmation Payment is $500,000, is not subject to offset, and is payable to a designee of GBCC as an allowed administrative claim under Sections 503 and 507 of the Bankruptcy Code upon the effective date of a Plan of Reorganization of GBHC. 7. This Agreement resolves all of the issues raised in the Adversary Proceeding and the Adversary Proceeding including the Consolidated Return Motion, the Gibbons DQ Motion and the FK Motion are dismissed with prejudice. Except to the extent set forth herein, HCC on its behalf and on behalf of its Subsidiaries and GBCC on its behalf and on behalf of its Subsidiaries exclusive of the Debtors, on one side, and the Debtors on their own behalf and on behalf of their Subsidiaries, on the other side, do hereby release each other and their respective officers, directors, employees, shareholders, counsel, agents, and insurers (collectively, the "Released Parties"). The Released Parties agree to deliver to each other confirmatory mutual releases consistent with the provisions of this paragraph and in a form reasonably satisfactory to each other. Nothing in this paragraph shall be deemed to amend those certain agreements dated June 28, 1998, which were approved by the Court on July 7, 1998 and by the Casino Control Commission on July 8, 1998, and those agreements remain in effect in accordance with their terms. Nothing in this Agreement shall release any claim against a party that is not a Released Party. 8. GBCC will cause the opposition to the pending Motion of GBHC to Reject the Management Agreement, which is returnable September 28, 1998 (the "Rejection Motion"), to be withdrawn and will do so in a form reasonably satisfactory to GBHC for presentation to the Court contemporaneously at the hearing on the approval of this Agreement for the entry of an Order granting the Rejection Motion effective September 28, 1998. The withdrawal of the opposition to the Rejection Motion is without prejudice to NJMI to assert a damages claim (the "Rejection Claim") and without prejudice to the Debtors to assert any defenses they have to that 8 rejection damages claim and, except as provided in paragraph 8a below, including a fraudulent conveyance claim. Notwithstanding the foregoing, and as provided in paragraph 8a below, the fraudulent conveyance claim may not be asserted against any member of the GBCC Group (other than NJMI and PRT) and HCC. Without limiting the standing of NJMI to assert the Rejection Claim, the Rejection Claim may only be brought by or on behalf, and, in either case, only for the benefit of, the bondholders of PRT (the "Bondholders") or the designees of the Bondholders provided, however, that, if the Rejection Claim is successful, whether by reason of settlement or trial, there shall be no direct or indirect distribution to or for the benefit of the Released Parties except that PCC or NJMI could use any proceeds to pay the operating expenses of PCC or NJMI incurred on or before any such recovery. Neither HCC and its Subsidiaries nor GBCC and its Subsidiaries other than NJMI or PRT will provide financial support for the prosecution of the Rejection Claim. 8a. Except with respect to NJMI and PRT, the Debtors will not assert and hereby release claims arising under Chapter 5 of the Bankruptcy Code ("Avoidance Actions/Claims") against HCC, GBCC, and their affiliates, including but not limited to, PCC. With respect to NJMI and PRT, the Debtors additionally will not assert Avoidance Actions/Claims against either of them or the PRT Bondholders unless a Rejection Claim is filed within 30 days after Court approval of this Agreement (the "Rejection Claims Bar Date"). If a Rejection Claim is not timely filed, it shall be deemed released and waived with prejudice, and, similarly, any Avoidance Actions/Claims of the Debtors against NJMI and PRT and the PRT Bondholders will be deemed released and waived with prejudice simultaneously with the expiration of the Rejection Claim at the Rejection Claim Bar Date. If a Rejection Claim is timely filed by the Rejection Claim Bar Date, then the Debtors may assert Avoidance Actions/Claims against PRT or NJMI or against any holder of the Rejection Damage Claim or the Subordinated Notes (except for PCC with respect to the PCC Sub Note other than the offset described in the next sentence), but may not seek to levy, collect upon or otherwise recover from any intercompany balance, debt, receivable, note, or other obligation owing to PRT or NJMI from PCC or any other nonDebtor affiliate of GBCC or HCC. Notwithstanding the release of the Avoidance Actions/Claims as to PCC described in this paragraph, the Debtors may, in the event a Rejection Claim is timely filed by the Rejection Bar Date, defensively assert Avoidance Actions/Claims as 9 an offset to the PCC Sub Note, but the Debtors may not assert Avoidance Actions/Claims affirmatively against any other assets of PCC. Pursuant to this Agreement, PCC and all other affiliates of GBCC and HCC, other than NJMI and PRT, are buying their peace with the Debtors and are fully released from all claims by the Debtors or their estates. 9. Except as provided in paragraphs 8 or 8a of this Agreement, nothing in this Agreement shall operate to prejudice the rights, if any, of the holders of that certain Subordinated Promissory Note of GBHC in favor of PRT dated February 17, 1994 in the amount of $10,000,000 (the "PRT Sub Note") and that certain Subordinated Promissory Note of GBHC in favor of PCC dated January 14, 1997 in the amount of $5,000,000 (the "PCC Sub Note" and together with the PRT Sub Note, the "Subordinated Notes"). All defenses, if any, the Debtors have to the Subordinated Notes are preserved. The rights, if any, in the Subordinated Notes are preserved for the benefit of the Bondholders in the PRT Restructuring and, in the event of recovery on the Subordinated Notes, whether by reason of settlement or trial, there will be no distribution to or for the benefit of the nonDebtor Released Parties, provided that the holders of the Subordinated Notes have standing to assert any claim on the Subordinated Notes for the benefit of the Bondholders. 10. GBHC and HCC have already commenced the process of splitting off the employees of GBHC from the HCC Employee 401K Retirement Savings Plan (the "401K Plan") and will jointly cause the employees to become part of a separate 401K Plan by January 1, 1999. Until that changeover, HCC will continue to administer the 401K Plan and GBHC will continue to pay its allocated share of external costs of administration in accordance with present practice. 11. This agreement is without prejudice to the proofs of claims filed by HCC or GBCC or their Subsidiaries in the GBHC Chapter 11 Proceedings for goods, services or royalty fees provided in the ordinary course of business to GBHC. The only claims held by HCC, or any of the Defendants or any of their Subsidiaries against any of the Debtors or the Debtors Subsidiaries as of the date immediately prior to giving effect to this Agreement are set forth on Exhibit A (the "Claims"). Except as provided herein, the defenses, offsets, and counterclaims, if any, of GBHC to any such 10 proofs of claims are also preserved provided, however, that the counterclaims with respect to NJMI and PRT are described in paragraphs 8 and 8a above and otherwise are limited to intercompany accounts arising from the provision of goods or services by or on behalf of the Debtors in the ordinary course of business to HCC or GBCC or their Subsidiaries. HCC, the Defendants, and their Subsidiaries shall (a) not amend or increase any of the Claims, (b) consent to the expungement of any of the Claims which are released pursuant to this Agreement, and (c) not acquire or assert any claims against any of the Debtors or their Subsidiaries which are not set forth on Exhibit A. Nothing in this paragraph 11 varies or modifies the provisions of paragraphs 2, 3, 6, 8, 8a, or 9 above with respect to the claims or defenses described therein. With respect to post petition intercompany accounts between GBH and its Subsidiaries and HCC or its Subsidiaries or GBCC or its Subsidiaries other than the Debtors, nothing in this Agreement releases any person from any obligation for goods, services or royalties provided by or on behalf of any other person in the ordinary course of business. 12. Neither HCC nor any of the Defendants will make any application to terminate the exclusivity period of the Debtors or to oppose any future extension of the exclusivity period. Neither HCC nor GBCC will seek, request, apply for or support directly or indirectly the appointment of a trustee or examiner for any of the Debtors. HCC and GBCC will cause their Subsidiaries to comply with the provisions of this paragraph. 13. Pending the hearing on the settlement on the Adversary Proceeding represented by this Agreement, the Debtors agree to adjourn the date for responsive pleadings in the Adversary Proceedings by the Defendants and, in the event this settlement of the Adversary Proceeding is not approved by the Court, agree that such responsive pleadings may be filed within five days after the date of a decision by the Court rejecting the settlement of the Adversary Proceeding. The dates by which GBHC may respond to the Gibbons DQ Motion, the FK Motion, or any discovery served in this action is extended to the later of the date otherwise required by the discovery rules or five days after the date of a decision by the Court rejecting the settlement of the Adversary Proceeding. 14. The parties to this Agreement agree to cooperate with each other, and to take all actions necessary, to confirm the 11 transactions contemplated by this Agreement. 15. Time is of the essence in the performance of this Agreement. 16. This Agreement 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. 17. This Agreement will be effective when executed by all of the parties hereto and when approved by the Court. This Agreement may be executed in counterparts by the parties and a THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK 12 telecopied signature is as effective as an original. ACCEPTED AND AGREED: Greate Bay Casino Corporation PHC Acquisition Corp. BY:/s/ JOHN HULL BY:/s/ WILLIAM D. PRATT ------------------------- --------------------------- John Hull William D. Pratt Lieber Check Cashing, LLC. Hollywood Casino Corporation BY:/s/ JACK E. PRATT BY:/s/ EDWARD T. PRATT III ------------------------- --------------------------- Jack E. Pratt Edward T. Pratt III /s/ JACK E. PRATT /s/ WILLIAM D. PRATT -------------------------- --------------------------- Jack E. Pratt William D. Pratt /s/ EDWARD T. PRATT JR. -------------------------- Edward T. Pratt Jr. Greate Bay Hotel and Casino, Inc. GB Holdings, Inc. BY:/s/ TIMOTHY A. EBLING BY: /s/ TIMOTHY A. EBLING --------------------------- --------------------------- Timothy A. Ebling Timothy A. Ebling GB Property Funding Corp. BY:/s/ TIMOTHY A. EBLING --------------------------- Timothy A. Ebling 13 EXHIBIT "A" TO AGREEMENT DATED SEPTEMBER 2, 1998 PROOFS OF CLAIM AND INTEREST FILED BY GBCC GROUP, HCC AND AFFILIATES IN THE SANDS BANKRUPTCY Claimant Amount(1) Explanation - -------- --------- ----------- PCC $5,728,000.00 Based upon GBHC $5 Million Note, a.k.a. the "PCC Sub Note" PCC 1,279.58 On account of routine corporate expenses paid prepetition on behalf of GB Holdings (claim is against GB Holdings)(2) PCC N/A Proof of interest (as opposed to a proof of claim) to reflect PCC's 100% ownership interest in GB Holdings, as evidenced by that certain stock certificate dated October 27, 1993 reflecting PCC's ownership of 1000 shares of common stock. PRT 12,754,375.00 Based upon GBHC $10 Million Note, a.k.a. the "PRT Sub Note" GBCC 9,479,871.98 Based upon GBHC $8 Million Note, a.k.a. the "GBHC Demand Note" (amount is net of certain prepetition payables owed to GBHC)(3) - ------------- (1) Amounts include the respective claimants' computation of principal, interest accrued as of the January 5, 1998 bankruptcy petition date with respect to the Sands Group, charges and offsets, where applicable, all as set forth in detail in the various proofs of claim. (2) All other proofs of claim listed herein, with the exception of this one proof of claim filed by PCC against GB Holdings, are against GBHC. The proof of interest described in the third line hereinabove is against GB Holdings. (3) This proof of claim is to be deemed withdrawn and/or released pursuant to paragraph 2 of the Agreement. 1 of 2 NJMI 128,899.60 On account of unpaid, prepetition management fees for the 12/1/97 - 1/4/98 time period (amount is net of certain prepetition payables owed to GBHC). NJMI will likely file an additional proof of claim in respect of rejection damages, after the September 28, 1998 rejection of the NJMI Management Services Agreement, pursuant to paragraph 7 of the Agreement. ACSC 49,230.74 On account of various prepetition goods and services provided (amount is net of certain prepetition payables owed to GBHC) PPI Corp. 22,467.09 On account of unpaid, prepetition royalty fees for use of the "Sands" trademark for the 12/1/97 - 1/4/98 time period HCC 3,360.30 On account of various prepetition services provided (amount is net of certain prepetition payables owed to GBHC) HMI 19,253.35 On account of various prepetition services provided (amount is net of certain prepetition payables owed to GBHC) 2 of 2 EX-27.1 3 FDS--GB PROPERTY FUNDING CORP.
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 9-MOS DEC-31-1998 DEC-31-1998 JUL-01-1998 JAN-01-1998 SEP-30-1998 SEP-30-1998 1 1 0 0 0 0 0 0 0 0 1 1 0 0 0 0 191,846 191,846 0 0 182,472 182,472 0 0 0 0 1 1 0 0 191,846 191,846 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 4 FDS--GB HOLDINGS INC.
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 9-MOS DEC-31-1998 DEC-31-1998 JUL-01-1998 JAN-01-1998 SEP-30-1998 SEP-30-1998 24,825 24,825 0 0 20,804 20,804 12,882 12,882 3,291 3,291 40,445 40,445 325,671 325,671 (179,797) (179,797) 201,820 201,820 22,843 22,843 193,409 193,409 0 0 0 0 1 1 (41,880) (41,880) 201,820 201,820 0 0 65,835 179,901 0 0 54,575 149,333 6,911 22,654 509 1,251 (120) (550) 3,960 7,213 0 0 3,960 7,213 0 0 0 0 0 0 3,960 7,213 0 0 0 0
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