-----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, ADnj7UgiyF7qnQ5pp11B9NapXdJIL/Jv7wcVEGrdo8KeO0dyDMIEOkEt67eYKKiW RcLxXwRaJ26CmRIma8DvYw== 0001005477-99-002382.txt : 19990518 0001005477-99-002382.hdr.sgml : 19990518 ACCESSION NUMBER: 0001005477-99-002382 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99624919 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: 99624920 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: 99624921 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 March 31, 1999 ------------------------ OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to _________________________ Commission file number 33-69716 ---------------------- GB PROPERTY FUNDING CORP. GB HOLDINGS, INC. GREATE BAY HOTEL AND CASINO, INC. ----------------------------------------------------------- (Exact name of each Registrant as specified in its charter) DELAWARE 75-2502290 DELAWARE 75-2502293 NEW JERSEY 22-2242014 --------------------------------- --------------------- (States or other jurisdictions of (I.R.S. Employer incorporation or organization) Identification No.'s) c/o Sands Hotel & Casino Indiana Avenue & Brighton Park Atlantic City, New Jersey 08401 - ---------------------------------------- ---------------- (Address of principal executive offices) (Zip Code) (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 May 10, 1999 - ------------------------- ----------------------------- --------------------------- 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 registered securities consist of 10 7/8% First Mortgage Notes (the "First Mortgage Notes") in the original principal amount of $185,000,000 due January 15, 2004 issued by GB Property Funding Corp. ("GB Property Funding"). GB Property Funding's obligations are unconditionally guaranteed by GB Holdings, Inc. ("Holdings"), a Delaware corporation with principal executive offices at 136 S. Kentucky Avenue, Atlantic City, New Jersey 08401, and by Greate Bay Hotel and Casino, Inc. ("GBHC"), a New Jersey corporation and a wholly owned subsidiary of Holdings with principal offices at 136 South Kentucky Avenue, Atlantic City, New Jersey 08401. GB Property Funding is wholly owned by Holdings. Holdings was a wholly owned subsidiary of Pratt Casino Corporation ("PCC") through December 31, 1998. PCC is an indirect, wholly owned subsidiary of Greate Bay Casino Corporation ("GBCC"). Effective after December 31, 1998, PCC transferred 21% of the stock ownership in Holdings to PBV, Inc., a newly formed entity, controlled by certain stockholders of GBCC ("PBV"). GBCC's common stock is listed on the OTC Bulletin Board Service under the trading symbol "GEAAQ". GB Property Funding was organized during September 1993 as a special purpose subsidiary of Holdings for the purpose of borrowing funds through the issuance of the First Mortgage Notes for the benefit of GBHC. GBHC owns the Sands Hotel and Casino located in Atlantic City, New Jersey (the "Sands") . Substantially all of Holdings' assets and operations relate to the Sands. 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 in Note 1 to Holdings financial statements, 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 January 11, 1999, the exclusivity period during which only the Debtors may file a plan of reorganization expired and, as a result, any party in interest may file a plan of reorganization. A plan of reorganization requires confirmation by the Bankruptcy Court and approval by the New Jersey Casino Control Casino Commission (the "Casino Commission"). There can be no assurance at this time that any plan of reorganization, when submitted, will be confirmed by the Bankruptcy Court and approved by the Casino Commission. In the event the plan of reorganization is confirmed, continuation of the business thereafter is dependent on GBHC's ability to achieve successful future operations. The accompanying 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. 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 on the effective date of the confirmation of a plan of reorganization. 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 month period ended March 31, 1999 are not necessarily indicative of the operating results to be reported for the full year. 2 The financial statements of GB Property Funding and the consolidated financial statements of Holdings as of March 31, 1999 and for the three month periods ended March 31, 1999 and 1998 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 March 31, 1999, their respective results of operations for the three month periods ended March 31, 1999 and 1998, and their respective cash flows for the three month periods ended March 31, 1999 and 1998. 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's, Holdings' and GBHC's 1998 Annual Report on Form 10-K. 3 GB PROPERTY FUNDING CORP. (Debtor-in-Possession, wholly owned by GB Holdings, Inc.) BALANCE SHEETS (Unaudited) ASSETS March 31, December 31, 1999 1998 ------------ ------------ Current Asset: Cash $ 1,000 $ 1,000 Interest Receivable from Affiliate 9,373,000 9,373,000 Note Receivable from Affiliate 182,202,000 182,243,000 ------------ ------------ $191,576,000 $191,617,000 ============ ============ LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Subject to Compromise: Accrued interest payable $ 9,373,000 $ 9,373,000 Long-term debt 182,202,000 182,243,000 ------------ ----------- 191,575,000 191,616,000 Commitments and Contingencies Shareholder's Equity: Common stock, $1.00 par value per share, 1,000 shares authorized and outstanding 1,000 1,000 ------------ ------------ $191,576,000 $191,617,000 ============ ============ 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 March 31, -------------------- 1999 1998 -------- -------- Revenues: Interest income $ -- $221,000 Expenses: Interest expense (contractual interest of $4,955,000 and $4,962,000, respectively, for the three months ended March 31, 1999 and 1998) -- 221,000 -------- -------- 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 CASH FLOWS (Unaudited) Three Months Ended March 31, -------------------- 1999 1998 -------- -------- OPERATING ACTIVITIES: Net income $ -- $ -- Adjustments to reconcile net income to net cash provided by operating activities: Increase in interest receivable from affiliate -- (221,000) Increase in accrued interest payable -- 221,000 --------- --------- 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. 6 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. Holdings was a wholly owned subsidiary of Pratt Casino Corporation ("PCC), also a Delaware corporation, through December 31, 1998. Effective after December 31, 1998, PCC transferred 21% of the stock ownership of Holdings to PBV, Inc. ("PBV"), a newly formed entity, controlled by certain stockholders of Greate Bay Casino Corporation ("GBCC"). PCC was incorporated during September 1993 and is wholly owned by PPI Corporation, a New Jersey corporation and a wholly owned subsidiary of GBCC. Holdings was incorporated in September 1993 and, on February 17, 1994, acquired, through capital contributions by its parent, all of the outstanding capital stock of Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"). GB Property Funding was formed for the purpose of borrowing $185,000,000 for the benefit of GBHC; such debt was issued during February 1994 at the rate of 10 7/8% per annum and the proceeds were loaned to GBHC (see Note 2). GB Property Funding has no operations and is dependent on the repayment of its note from GBHC for servicing its debt obligations (see Note 2). Administrative services for GB Property Funding are provided by GBHC at no charge. The cost of such services is not significant. The operation of an Atlantic City casino/hotel is subject to significant regulatory control. Under provisions of the New Jersey Casino Control Act, GBHC is required to maintain a nontransferable license to operate a casino in Atlantic City. The accompanying financial statements have been prepared in accordance with Statement of Position No. 90-7, "Financial Reporting By Entities in Reorganization Under the Bankruptcy Code," and include disclosure of liabilities subject to compromise. On January 5, 1998, GB Property Funding, GBHC and Holdings (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). A plan of reorganization requires confirmation by the Bankruptcy Court and approval by the New Jersey Casino Control Casino Control Commission (the "Casino Commission"). There can be no assurance at this time that any plan of reorganization, when submitted, will be confirmed by the Bankruptcy Court or approved by the Casino Commission. In the event the plan of reorganization is confirmed, continuation of the business thereafter is dependent on GBHC's ability to achieve successful future operations. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should GB Property Funding be unable to continue as a going concern. 7 GB PROPERTY FUNDING CORP. (Debtor-in-Possession, wholly owned by GB Holdings, Inc.) NOTES TO FINANCIAL STATEMENTS (Continued) As discussed above, GB Property Funding was formed for the purpose of issuing $185,000,000 of first mortgage notes for the benefit of GBHC (the "First Mortgage Notes"). GB Property Funding loaned the proceeds from the First Mortgage Notes to GBHC and, at March 31, 1999, has a note receivable and related accrued interest receivable due from GBHC totaling $191,575,000. GB Property Funding has no operations and the note receivable and the accrued interest receivable represents virtually all of GB Property Fundings' assets. As discussed above, during 1998 the Debtors filed petitions for relief under Chapter 11 of the Bankruptcy Code. As a result of the Chapter 11 filings, the First Mortgage Notes and related accrued interest payable have been classified as liabilities subject to compromise. To the extent that any proceeds are ultimately realized from GBHC as a result of the resolution of the bankruptcy proceedings, such amounts would be offered in full satisfaction of the First Mortgage Notes. No provision for any loss relating to the uncollectibility of these receivables has been reflected in the accompanying financial statements. 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 statements as of March 31, 1999 and for the three month periods ended March 31, 1999 and 1998 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 March 31, 1999, and the results of its operations for the three month periods ended March 31, 1999 and 1998 and cash flows for the three month periods ended March 31, 1999 and 1998. (2) Long-Term Debt On February 17, 1994, GB Property Funding issued the First Mortgage Notes due January 15, 2004. Interest on the First Mortgage Notes accrued at the rate of 10 7/8% per annum, payable semiannually commencing July 15, 1994. Interest only was payable during the first three years. Commencing on July 15, 1997, semiannual principal payments of $2,500,000 were due on each interest payment date with the balance due at maturity. Such semiannual payments could be made in cash or by tendering First Mortgage Notes previously purchased or otherwise acquired by GB Property Funding. GB Property Funding acquired $2,500,000 face amount of First Mortgage Notes which were used to make the July 15, 1997 required principal payment. As a result of the filing under Chapter 11, the debt service payments due subsequent to January 5, 1998 were not made. The accrual of interest on the First Mortgage Notes for periods subsequent to the filing has been suspended. The indenture for the First Mortgage Notes (the "Indenture") contains various provisions which, among other things, restrict the ability of certain subsidiaries of GBCC to pay dividends to GBCC, to merge, to consolidate, 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. The proceeds of the First Mortgage Notes were loaned to GBHC on the same terms and conditions. 8 GB PROPERTY FUNDING CORP. (Debtor-in-Possession, wholly owned by GB Holdings, Inc.) NOTES TO FINANCIAL STATEMENTS (Continued) 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 for the First Mortgage Notes (the "Indenture Trustee") as reductions to the outstanding principal of the First Mortgage Notes. Payments amounting to $41,000 and $257,000 for the period ending March 31, 1999 and December 31, 1998, respectively, have been remitted to the Indenture Trustee as the proceeds on the sale of assets. No interest was paid or received with respect to the First Mortgage Notes and the loan to GBHC during the three month period ended March 31, 1999 and 1998. Interest receivable and payable with respect to the notes of $9,373,000 are included on the accompanying balance sheet at March 31, 1999 and December 31, 1998 in noncurrent assets and liabilities subject to compromise, respectively, as such payments are subject to terms of a reorganization plan which requires confirmation by the Bankruptcy Court. (3) Income Taxes As part of an agreement settling an adversary proceeding between the Debtors, on one side, and GBCC, certain of its affiliates, and certain former directors of GBHC on the other, GB Property Funding is included in GBCC's consolidated federal income tax return for the years ended December 31, 1997 and 1998. As part of this same agreement, GBCC agreed to allow the Debtors to become deconsolidated from the GBCC group for federal income tax purposes and, in accordance therewith, effective after December 31, 1998 PCC transferred 21% of the stock ownership in Holdings to PBV effecting the deconsolidation of Holdings from the GBCC group for federal income tax purposes. Accordingly, beginning in 1999, Holdings and its subsidiaries' provision for federal income tax will be calculated and paid on a stand alone basis. 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. GB Property Funding made no federal or state income tax payments during the three month periods ended March 31, 1999 and 1998. (4) Legal Proceedings On January 5, 1998, the Debtors filed petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court (see Note 1). 9 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS March 31, December 31, 1999 1998 ------------- ------------- Current Assets: Cash and cash equivalents $ 24,704,000 $ 23,844,000 Accounts receivable, net of allowances of $11,868,000 and $11,920,000, respectively 7,412,000 7,428,000 Inventories 3,331,000 3,402,000 Due from affiliates 422,000 398,000 Deferred income taxes 5,279,000 726,000 Prepaid expenses and other current assets 2,541,000 2,776,000 ------------- ------------- Total current assets 43,689,000 38,574,000 ------------- ------------- Property and Equipment: Land 38,929,000 38,929,000 Buildings and improvements 185,508,000 185,508,000 Operating equipment 103,260,000 99,854,000 Construction in progress 2,356,000 3,939,000 ------------- ------------- 330,053,000 328,230,000 Less - accumulated depreciation and amortization (184,148,000) (182,045,000) ------------- ------------- Net property and equipment 145,905,000 146,185,000 ------------- ------------- Other Assets: Obligatory investments 8,405,000 8,098,000 Other assets 6,236,000 6,291,000 ------------- ------------- Total other assets 14,641,000 14,389,000 ------------- ------------- $ 204,235,000 $ 199,148,000 ============= ============= The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated balance sheets. 10 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) CONSOLIDATED BALANCE SHEETS (Unaudited) LIABILITIES AND SHAREHOLDER'S DEFICIT March 31, December 31, 1999 1998 ------------- ------------- Current Liabilities Not Subject to Compromise: Current maturities of long-term debt $ 75,000 $ 73,000 Accounts payable 3,566,000 4,539,000 Accrued liabilities - Salaries and wages 4,782,000 3,699,000 Reorganization costs 1,667,000 1,310,000 Insurance 1,235,000 1,037,000 Other 6,417,000 6,066,000 Due to affiliates 1,277,000 1,119,000 Other current liabilities 2,937,000 3,599,000 ------------- ------------- Total current liabilities 21,956,000 21,442,000 ------------- ------------- Liabilities Subject to Compromise (Note 3) 218,123,000 218,322,000 ------------- ------------- Long-Term Debt 899,000 918,000 ------------- ------------- Deferred Taxes and Other Noncurrent Liabilities 5,508,000 1,207,000 ------------- ------------- 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 27,946,000 Accumulated deficit (70,198,000) (70,688,000) ------------- ------------- Total shareholder's deficit (42,251,000) (42,741,000) ------------- ------------- $ 204,235,000 $ 199,148,000 ============= ============= The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated balance sheets. 11 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended March 31, ----------------------------- 1999 1998 ------------ ------------ Revenues: Casino $ 53,404,000 $ 51,433,000 Rooms 2,019,000 2,037,000 Food and beverage 6,261,000 5,649,000 Other 1,414,000 877,000 ------------ ------------ 63,098,000 59,996,000 Less - promotional allowances (5,171,000) (4,383,000) ------------ ------------ Net revenues 57,927,000 55,613,000 ------------ ------------ Expenses: Casino 47,466,000 41,780,000 Rooms 765,000 745,000 Food and beverage 2,332,000 2,365,000 Other 954,000 395,000 General and administrative 2,683,000 3,981,000 Depreciation and amortization 2,857,000 2,899,000 ------------ ------------ Total expenses 57,057,000 52,165,000 ------------ ------------ Income from operations 870,000 3,448,000 ------------ ------------ Non-operating income (expense): Interest income 141,000 528,000 Interest expense (contractual interest of $5,523,000 and $5,796,000, respectively, for the three months ended March 31, 1999 and 1998) (20,000) (268,000) Gain on disposal of assets 28,000 28,000 ------------ ------------ Total non-operating income, net 149,000 288,000 ------------ ------------ Income before income taxes and other item 1,019,000 3,736,000 Income tax provision -- -- ------------ ------------ Income before other item 1,019,000 3,736,000 Reorganization and other related costs (529,000) (1,101,000) ------------ ------------ Net income $ 490,000 $ 2,635,000 ============ ============ The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated statements. 12 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, ----------------------------- 1999 1998 ------------ ------------ OPERATING ACTIVITIES: Net income $ 490,000 $ 2,635,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,857,000 2,899,000 Gain on disposal of assets (28,000) (28,000) Provision for doubtful accounts 475,000 349,000 Increase in accounts receivable (459,000) (183,000) Increase in accounts payable and accrued expenses 1,016,000 2,508,000 Net change in other current assets and liabilities (431,000) (377,000) Net change in other noncurrent assets and liabilities (158,000) -- ------------ ------------ Net cash provided by operating activities 3,762,000 7,803,000 ------------ ------------ INVESTING ACTIVITIES: Purchase of property and equipment (2,208,000) (1,358,000) Proceeds from disposal of assets 28,000 28,000 Obligatory investments (664,000) (636,000) ------------ ------------ Net cash used in investing activities (2,844,000) (1,966,000) ------------ ------------ FINANCING ACTIVITIES: Repayments of long-term debt (58,000) (3,000) ------------ ------------ Net cash used in financing activities (58,000) (3,000) ------------ ------------ Net increase in cash and cash equivalents 860,000 5,834,000 Cash and cash equivalents at beginning of period 23,844,000 13,871,000 ------------ ------------ Cash and cash equivalents at end of period $ 24,704,000 $ 19,705,000 ============ ============ The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated statements. 13 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) Organization, Business and Basis of Presentation GB Holdings, Inc. ("Holdings") is a Delaware corporation and was a wholly owned subsidiary of Pratt Casino Corporation ("PCC") through December 31, 1998. PCC, a Delaware corporation, was incorporated 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"). Effective after December 31, 1998, PCC transferred 21% of the stock ownership in Holdings to PBV, Inc., a newly formed entity, controlled by certain stockholders of GBCC ("PBV"). 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, 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 2). 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 GBHC acquired and caused an option agreement on other adjacent land parcels (the "Option Parcels") to be assigned to Lieber (the "Option Agreement"). The Lieber Parcel and the Option Parcels provide GBHC with an expansion opportunity and frontage on Pacific Avenue, the principal street running parallel and closest to the boardwalk in Atlantic City, New Jersey (see Note 7). 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, 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 3). Holdings has experienced 14 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) significant losses and has a net capital deficiency of $42,251,000 at March 31, 1999. On January 5, 1998, Holdings, GBHC and GB Property Funding (collectively, the "Debtors") filed petitions for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). The prior Boards of Directors resigned on January 2, 1998 and new Boards of Directors were elected at that time. Each company continues to operate in the ordinary course of business, as set forth in the Bankruptcy Code, and each company's executive officers and directors as of the date of the filing remain in office, subject to the jurisdiction of the Bankruptcy Court, other than the following: 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 January 11, 1999, the exclusivity period during which only the Debtors may file a plan of reorganization expired and, as a result, any party in interest may file a plan of reorganization. A plan of reorganization requires confirmation by the Bankruptcy Court and approval by the New Jersey Casino Control Casino Commission (the "Casino Commission"). There can be no assurance at this time that any plan of reorganization, when submitted, will be confirmed by the Bankruptcy Court and approved by the Casino Commission. In the event the plan of reorganization is confirmed, continuation of the business thereafter is dependent on GBHC's ability to achieve successful future operations. The accompanying 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. 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 on the effective date of the confirmation of a plan of reorganization. Prior to July 8, 1998, New Jersey Management, Inc. ("NJMI"), also a wholly owned subsidiary of PCC, was responsible for the operations of the Sands under a management agreement dated August 19, 1987, as amended, with GBHC (the "Management Agreement"). On May 22, 1998, GBHC filed a motion with the Bankruptcy Court to reject the Management Agreement (the "Rejection Motion"). GBCC, NJMI, and certain of their affiliates, on one side, and the Debtors, on the other, entered into an agreement on June 27, 1998, which was approved by the Bankruptcy Court on July 7, 1998, and by the Casino Commission on July 8, 1998 (the "Settlement Agreement"). Under the Settlement Agreement, among other things, the Management Agreement was suspended and replaced with a services agreement until a decision by the Bankruptcy Court on the Rejection Motion, and GBHC ceded ownership rights to an affiliate of GBCC in, and obtained a perpetual license from the same affiliate for, the software used in its operations. On September 28, 1998, and as a result of the Second Settlement Agreement, as defined below, the Bankruptcy Court granted the Rejection Motion and, in conformity therewith, no further fees will be paid under either the Management Agreement or the Settlement Agreement (see Note 5). 15 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) On July 27, 1998, GBHC filed an adversary proceeding in the Bankruptcy Court against GBCC, certain of its affiliates, and certain of the former directors of GBHC (collectively the "Defendants"), seeking to recover the Lieber Parcel and the Option Agreement for the Option Parcels and to restrain the use of its Net Operating Losses (the "NOL's"). Effective September 2, 1998, the Debtors, on one side, and the Defendants, on the other, reached an agreement resolving, among other things, the adversary proceeding (the "Second Settlement Agreement"). Under the Second Settlement Agreement, among other things, the Debtors agreed to be included in the consolidated federal income tax return of GBCC for the years ended December 31, 1997 and December 31, 1998. GBCC agreed to allow the Debtors to become deconsolidated from the GBCC group for federal income tax purposes and, in accordance therewith, effective after December 31, 1998, PCC transferred 21% of the stock ownership in Holdings to PBV, effecting the deconsolidation of Holdings from the GBCC group for federal income tax purposes. The Second Settlement Agreement also resulted in the non-cash settlement of certain outstanding intercompany transactions, and the transfer of the membership interests in Lieber to GBHC, and the assignment of the Option Agreement for the Option Parcels to Lieber (see Note 7). GBHC is self insured for a portion of its general liability, and certain health care and other liability exposures. Amounts over prescribed levels are insured by a third party. 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. 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 on the effective date of the confirmation of a plan of reorganization. The consolidated financial statements as of March 31, 1999 and for the three month periods ended March 31, 1999 and 1998 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 March 31, 1999, the results of its operations for the three month periods ended March 31, 1999 and 1998, and cash flows for the three month periods ended March 31, 1999 and 1998. 16 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (2) Long-Term Debt and Pledge of Assets Long term debt is comprised of the following: March 31, December 31, 1999 1998 ------------ ------------ 10 7/8% first mortgage notes, due 2004 (a) $182,202,000 $182,243,000 14 5/8% affiliate loan, due 2005 (b) 10,000,000 10,000,000 Lieber Mortgage (c) 558,000 572,000 Other 416,000 419,000 ------------ ------------ Total indebtedness 193,176,000 193,234,000 Less - current maturities (75,000) (73,000) Less - debt subject to compromise (Note 3) (192,202,000) (192,243,000) ------------ ------------ Total long-term debt $ 899,000 $ 918,000 ============ ============ - ---------- (a) On February 17, 1994, GBHC obtained $185,000,000 from GB Property Funding, which issued $185,000,000 of first mortgage notes due January 15, 2004 (the "First Mortgage Notes"). Interest on the First Mortgage Notes accrued at the rate of 10 7/8% per annum, payable semiannually commencing July 15, 1994. Interest only was payable during the first three years. Commencing on July 15, 1997, semiannual principal payments of $2,500,000 were due on each interest payment date with the balance due at maturity. Such semiannual payments could be made in cash or by tendering First Mortgage Notes previously purchased or otherwise acquired by Holdings. Holdings acquired $2,500,000 face amount of First Mortgage Notes at a discount during May 1997, which it used during June 1997 to make its July 15, 1997 required principal payment. As a result of the filing under Chapter 11, the debt service payments due subsequent to January 5, 1998 were not made. The accrual of interest on the First Mortgage Notes for periods subsequent to the filing has been suspended. 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. 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 the Indenture Trustee for the First Mortgage Notes (the "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 17 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 5, 1998. The Indenture Trustee took an appeal of the order to the United States District Court for the District of New Jersey. On March 19, 1999, the United States District Court for the District of New Jersey affirmed the Bankruptcy Court's decision. The Indenture Trustee has now filed an appeal with the United States Court of Appeals for the Third Circuit. The Indenture for the First Mortgage Notes (the "Indenture") contains various provisions which, among other things, restrict the ability of certain subsidiaries of GBCC to pay dividends to GBCC, to merge, to consolidate, 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 as reductions to the outstanding principal of the First Mortgage Notes. Payments amounting to $41,000 and $257,000 for the periods ending March 31, 1999 and December 31, 1998, respectively, have been remitted to the Indenture Trustee as the proceeds on the sale of assets. (b) On February 17, 1994, GBHC issued to PRT Funding Corp., an affiliate, a $10,000,000 promissory note, which is subordinated to the First Mortgage Notes (the "PRT Subordinated Note"). The PRT Subordinated Note is due on February 17, 2005 and bore interest at the rate of 14 5/8% per annum, which was payable semiannually commencing August 17, 1994, and payment was subject to certain conditions including the maintenance of average daily cash balances required by the Indenture. 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 confirmation by 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 the membership interests in Lieber (see Note 7) which owns the Lieber Parcel. Principal mortgage indebtedness at the time of acquisition was $591,000 and bears interest at the rate of 7% per annum. Principal and interest are paid monthly based on a ten year payment schedule. The balance of the note is due in July, 2001. 18 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 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 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 on the accompanying consolidated balance sheets at March 31, 1999 and December 31, 1998. Scheduled payments of long-term debt as of March 31, 1999, exclusive of payments on the First Mortgage Notes and the PRT Subordinated Note, are set forth below: 1999 (nine months) $ 55,000 2000 80,000 2001 468,000 2002 19,000 2003 21,000 Thereafter 331,000 --------- Total $ 974,000 ========= Interest paid amounted to $20,000 and $11,000, respectively, for the three month periods ended March 31, 1999 and 1998. At March 31, 1999 and December 31, 1998 accrued interest on the First Mortgage Notes in the amount of $9,373,000 is presented with liabilities subject to compromise on the accompanying consolidated balance sheet. (3) Liabilities Subject to Compromise Liabilities subject to compromise under Holdings' reorganization proceedings consist of the following: March 31, December 31, 1999 1998 ------------ ------------ Accounts payable and accrued liabilities $ 7,593,000 $ 7,751,000 First Mortgage Notes (Note 2) 182,202,000 182,243,000 PRT Subordinated Note (Note 2) 10,000,000 10,000,000 Borrowings from affiliate (Note 5) 5,000,000 5,000,000 Accrued interest (Note 5) 12,855,000 12,855,000 Due to affiliates 473,000 473,000 ------------ ------------ Total $218,123,000 $218,322,000 ============ ============ (4) 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 19 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) purposes and, in accordance therewith, effective after December 31, 1998 PCC transferred 21% of the stock ownership in Holdings to PBV, effecting the deconsolidation of Holdings from the GBCC group for federal income tax purposes. Accordingly, beginning in 1999, Holdings and its subsidiaries' provisions for federal income tax is calculated and paid on a stand alone basis. 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 three month periods ended March 31, 1999 and 1998. Deferred income taxes result primarily from the use of the allowance method rather than the direct write-off method for doubtful accounts, the use of accelerated methods of depreciation for federal and state income tax purposes, and differences in the timing of deductions taken between tax and financial reporting purposes for contributions of, and adjustments to, the carrying value of certain investment obligations and for other accruals. At March 31, 1999, Holdings and its subsidiaries have deferred tax assets including net operating loss carryforwards ("NOL's"). The NOL's do not expire before the year 2009 for federal tax purposes and the year 2001 for state tax purposes. The availability of the NOL's and credit carryforwards may be subject to the tax consequences of a plan of reorganization approved by the Bankruptcy Court. In addition, the Second Settlement Agreement provides that GBCC may utilize NOL's of Holdings and its subsidiaries through December 31, 1998 to offset taxable income of GBCC and other members of the consolidated tax group. Representatives of GBCC have advised Holdings that Holdings should have approximately $13 million in NOL's available subsequent to December 31, 1998. 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 March 31, 1999. 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. 20 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 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 through 1996 in which Holdings' was included. Representatives of HCC have advised Holdings 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, during 1998 HCC 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 are attributable to the Spin Off. (5) 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 are included in general and administrative expenses on the accompanying consolidated financial statements and amounted to $1,166,000 during the three month period ended March 31, 1998. As a result of the Second Settlement Agreement and the Rejection Motion, no such fees were incurred for the three month period ended March 31, 1999. Amounts payable under the Settlement Agreement to NJMI and included in due to affiliates on the accompanying consolidated balance sheet at March 31, 1999 amounted to $199,000. Fees payable under the Management Agreement of $145,000 are included in liabilities subject to compromise on the accompanying consolidated balance sheet 21 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) at March 31, 1999, 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 $60,000 and $61,000, respectively, for the three month periods ended March 31, 1999 and 1998. Under the Settlement Agreement, GBCC agreed not to seek to cancel the rights of GBHC to use the Trade Name prior to December 15, 1998, and GBHC preserved its legal position that GBCC lacked the right to cancel the rights of GBHC to use the Trade Name. GBCC filed a motion in the Bankruptcy Court seeking relief from the automatic stay, pursuant to 11 U.S.C. ss.362(a), to send a letter to the licensor, purporting to terminate the license agreement. GBHC opposed the motion and the motion was denied by Order of the Bankruptcy Court dated March 2, 1999. On March 10, 1999, GBCC took an appeal to the United States District Court for the District of New Jersey. An advance from GBHC to another GBCC subsidiary in the amount of $5,672,000 was outstanding at March 31, 1999, 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 accrued at the rate of 16.5% per annum. The advance, together with accrued interest amounting to $5,147,000 and $4,914,000 at March 31, 1999 and December 31, 1998, 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 GBCC then loaned to GBHC to enable GBHC to make its debt service obligations and a property tax payment. According to the terms of the corresponding note, such borrowings 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. 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 a capital contribution in the amount of $9,508,000 on the accompanying consolidated balance sheet at December 31, 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 both March 31, 1999 and December 31, 22 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 1998, interest accrued on the PCC Subordinated Note amounted to $728,000, respectively, and is included in liabilities subject to compromise 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 confirmation by the Bankruptcy Court and approval by the Casino Commission. The accrual of interest on the PCC Subordinated Note for periods subsequent to the filing under Chapter 11 has been suspended. Net interest expense incurred with respect to affiliate advances and borrowings is as follows: Three Months Ended March 31, ------------------------ 1999 1998 --------- --------- Net Borrowings/(Advances) $ -- $ 20,000 PRT Subordinated Note (Note 2) -- 16,000 Interest accrued on the PRT Subordinated Note (Note 2) of $2,754,000 is included in liabilities subject to compromise on the accompanying consolidated balance sheets at March 31, 1999 and December 31, 1998. Effective September 2, 1998, GBHC acquired Lieber as part of the Second Settlement Agreement and caused the Option Agreement for the Option Parcels to be assigned to Lieber. The assignment of the Option Agreement for the Option Parcels under the Second Settlement Agreement 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 March 31, 1999, and December 31, 1998. GBHC performed certain services for other subsidiaries of GBCC and for HCC and its subsidiaries and invoiced those companies for the Sands' cost of providing those services. Similarly, GBHC was charged for certain equipment and other expenses incurred by GBCC and HCC and their respective subsidiaries that relate to GBHC's business. Such affiliate transactions are summarized below: Three Months Ended March 31, ------------------------ 1999 1998 --------- --------- Billings to affiliates $ 24,000 $ 70,000 Charges from affiliates 313,000 231,000 23 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (6) Legal Proceedings On January 5, 1998, the Debtors filed petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court (see Note 1). 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 4). Effective September 2, 1998, the parties entered into the Second Settlement Agreement resolving, among other things, the Action. 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 has filed tax appeals with the New Jersey Tax Court challenging the amount of its real property assessment for calendar years 1996, 1997, 1998, and 1999. The City of Atlantic City has also appealed the amount of the assessment of its assessor. GBHC is a party in various legal proceedings with respect to the conduct of casino and hotel operations. Although a possible range of losses can not be estimated, in the opinion of management, based upon the advice of counsel, settlement or resolution of these proceedings should not have a material adverse impact upon the consolidated financial position or results of operations of Holdings and GBHC. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainties described above. (7) 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 Option Agreement for the Option Parcels from another affiliate of 24 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 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 Option Agreement for the Option Parcels to September 30, 1999. On April 20, 1999, GBHC filed a motion with the Bankruptcy Court seeking approval to close on the Option Agreement for the Option Parcels (the "Closing Motion"). In addition, on May 6, 1999, and subject to Bankruptcy Court approval, Lieber entered into a second amendment to the Option Agreement to set the closing date as September 20, 1999, to increase the down payment by $500,000, and to provide for the right to seek certain state and local land use approvals prior to the closing date without violation of the Option Agreement (the "Amendment"). On May 10, 1999, the Bankruptcy Court granted the Closing Motion and approved the Amendment. On May 10, 1999, $500,000 was paid to the Escrow Agent under the Option Agreement as required by the Amendment. The purchase price of the Option Parcels is $10 million, $2.5 million of which has been paid and $7.5 million of which is due at closing on September 20, 1999. Upon closing under the Option Agreement, GBHC plans to demolish the existing structures and to provide for a new front entrance to the Sands' facility. This demolition and renovation is expected to cost approximately $5.1 million and is expected to be completed by the first half of 2000. The $7.5 million to be paid at closing and the $5.1 million for demolition and renovation will be funded through available cash. Principal mortgage indebtedness of Lieber outstanding at the acquisition date of the Lieber membership interests was $591,000 (see Note 2). The assets, liabilities, and results of operations of Lieber at the date of such 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. (8) Reclassifications Certain reclassifications have been made to prior year's consolidated financial statements to conform to the 1999 consolidated financial statement presentation. 25 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements about the business, financial condition and prospects of Holdings. The actual results could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, among other things, changes in competition, economic conditions, tax regulations, state regulations applicable to the gaming industry in general or Holdings in particular, and other risks indicated in Holdings' filings with the Securities and Exchange Commission. Such risks and uncertainties are beyond management's ability to control and, in many cases, can not be predicted by management. When used in this Quarterly Report on Form 10-Q, the words "believes", "estimates", "anticipates" and similar expressions as they relate to Holdings or its management are intended to identify forward-looking statements. LIQUIDITY AND CAPITAL RESOURCES Holdings owns GBHC which owns the Sands in Atlantic City. Prior to 1996, the Sands' cash flow was sufficient to meet debt service obligations and to fund a substantial portion of annual capital expenditures. The Sands also used short-term borrowings to fund seasonal cash needs for certain capital projects. However, over time, the competitive position of the Sands was impaired, which was due, in part, to insufficient capital expenditures. As a result, and due to adverse weather in the first quarter of 1996, declines in hold percentages in 1996, and increased marketing expenses in 1996 on an industry wide basis, cash flow decreased significantly in 1996 and improved in 1997, but remained significantly below historical levels. These declines in operating cash flow at the Sands resulted in the need for periodic financial assistance from PCC and GBCC in order to meet debt service obligations. Substantial additional financial assistance would have been required to make the January 15, 1998 principal and interest payments due on the First Mortgage Notes. GBHC was unable to obtain additional borrowings from affiliates or other sources and, accordingly, on January 5, 1998, the Debtors filed petitions seeking protection under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. 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 January 11, 1999, the exclusivity period during which only the Debtors may file a plan of reorganization expired and, as a result, any party in interest may file a plan of reorganization. A plan of reorganization requires confirmation by the Bankruptcy Court and approval by the Casino Commission. There can be no assurance at this time that any plan of reorganization, when submitted, will be confirmed by the Bankruptcy Court and approved by the Casino Commission. As a result of the filings, GBHC has sufficient cash flow to continue normal operations while it seeks to develop a plan of reorganization. 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 26 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) to renovate the majority of its hotel rooms and suites and to purchase approximately 700 slot machines. The capital expenditure program in the amount of approximately $13.6 million was approved in March, 1998. The renovations of the hotel suites has commenced and GBHC expects to substantially complete the renovations in early 2000. The replacement and upgrading of slot machines has commenced and is substantially completed, with approximately 50 slot machines remaining to be replaced by the end of 1999. Operating Activities At March 31, 1999, GBHC had cash and cash equivalents of $24.7 million. During the three month period ended March 31, 1999, net cash provided by operating activities was $3.8 million compared with net cash provided by operating activities of $7.8 million during the same period in 1998. GBHC utilized cash from operations, in part, during the first three months of 1999 to fund capital additions totaling $2.2 million and to make obligatory investments of $664,000. Financing Activities Semiannual principal payments of $2.5 million which became due commencing in July 1997 with respect to the First Mortgage Notes have been suspended as a result of the Chapter 11 filing. Exclusive of the First Mortgage Notes and the Subordinated Notes, which are subject to reorganization, total scheduled maturities of long-term debt during the remainder of 1999 are $55,000. Under an order of the Bankruptcy Court, permitting the disposition of furniture and equipment in the ordinary course of business, any payments received by GBHC for the sale of such assets, which are part of the security for the First Mortgage Notes, must be remitted to the Indenture Trustee as reductions to the outstanding principal of the First Mortgage Notes. During the current period, $41,000 has been remitted to the Indenture Trustee as the proceeds on the sale of equipment. Investing Activities Effective September 2, 1998, and as part of the Second Settlement Agreement, GBHC acquired the membership interests in Lieber from affiliates of GBCC for $251,000. GBHC also caused Lieber to acquire the rights under the Option Agreement for the Option Parcels from another affiliate of GBCC for payment of $1.3 million and a payment of $500,000 at confirmation of a plan of reorganization. During September 1998, GBHC provided Lieber with $1 million which Lieber paid to the Escrow Agent under the Option Agreement as required by the Amendment. On May 10, 1999, the Bankruptcy Court approved the Closing Motion filed by GBHC seeking approval to close on the Option Agreement. On May 10, 1999, $500,000 was paid to the owner of the Option Parcels to accelerate the closing on the Option Parcels to September 20, 1999. The purchase price of the Option Parcels is $10 million, $2.5 million of which has been previously paid and $7.5 million of which is due at closing on September 20, 1999. Upon closing on the Option Agreement, GBHC plans to demolish the existing structures and to provide for a new front entrance to the Sands' facility. This 27 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) demolition and renovation is expected to cost approximately $5.1 million and is expected to be completed by the first half of 2000. The $7.5 million to be paid at closing and the $5.1 million for demolition and renovation will be funded through available cash. Capital expenditures at the Sands during the three month period ended March 31, 1999 amounted to $2.2 million and management anticipates capital expenditures during the remainder of 1999 will be approximately $10.2 million. In addition to capital expenditures in the ordinary course of business totaling approximately $5.0 million, capital expenditures during 1999 will include approximately $7.4 million of a $13.6 million, two-year capital expenditure program approved by the Bankruptcy Court. Of this $7.4 million, it is anticipated that $4.4 million will be expended on the ongoing room and suite renovations and $3.0 million will be expended for slot machines and related equipment. The Sands is required by the New Jersey Casino Control Act ("Casino Act") to make certain deposits with the Casino Reinvestment Development Authority, a governmental agency which administers the deposits required by casino licensees under the Casino Act. Deposit requirements for the first three months of 1999 totaled $664,000 and are anticipated to be approximately $2.2 million during the remainder of 1999. Summary On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions for relief under Chapter 11 of the United States Bankruptcy Code. Accordingly, there is significant doubt about Holdings' ability to continue as a going concern. A plan of reorganization requires confirmation by the Bankruptcy Court and approval by the Casino Commission. As a result of the filing, the debt service payments due subsequent to January 5, 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. Management believes that cash flows generated from operations during 1999 will be sufficient to meet its operating plan. 28 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS Gaming Operations The following table sets forth certain unaudited financial and operating data relating to the Sands' operations: Three Months Ended March 31, --------------------------------- 1999 1998 ------------ ------------ (in thousands, except percentages) Revenues: Slot machines $ 34,750 $ 33,793 Table games 17,959 16,953 Other (1) 695 687 ------------ ------------ Total $ 53,404 $ 51,433 ============ ============ Slot machines: Gross Wagering (Handle) (2) $ 438,841 $ 410,120 ============ ============ Hold Percentages: (3, 4) Sands 7.9% 8.2% Atlantic City 8.2% 8.3% Table games: Gross Wagering (Drop) (2) $ 102,738 $ 95,645 ============ ============ Hold Percentages: (3, 4) Sands 17.5% 17.7% Atlantic City 15.9% 15.4% - ---------- (1) Consists of revenues from poker and simulcast horse racing wagering. (2) Gross wagering consists of the total value of coins wagered in slot machines (the "handle") and the total value of chips purchased for table games (the "drop"), excluding poker. Gross wagering for 1998 also includes drop for Keno wagering, however, Keno was discontinued in September of 1998. (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". 29 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (4) The Sands' hold percentages are reflected on an accrual basis. Comparable data for the Atlantic City gaming industry is not available; industry percentages have been calculated based on information made available from the Casino Commission. Slot machine handle increased $28.7 million (7.0%) during the three month period ended March 31, 1999 compared with the same period of 1998. The Sands' change in slot machine handle compares with increases of 1.2% in handle for all other Atlantic City casinos during the same time period. As a result, the Sands' slot machine market share (expressed as a percentage of the Atlantic City industry aggregate slot machine handle) increased to 5.5% from 5.2% during the three month period ended March 31, 1999 as compared to the same period in 1998. The number of slot machines have decreased slightly at the Sands since the first quarter of 1998. Expansions of other Atlantic City casinos resulted in an increase of approximately 29,000 square feet of gaming space and 1,100 additional slot machines compared to March 31, 1998. While the number of slot machines has decreased slightly at the Sands, beginning in 1998 and continuing into 1999 older slot machines have been replaced with new and more popular machines as part of the Sands capital expenditure plan, which was approved by the Bankruptcy Court, and which has had a positive impact on slot machine handle. The increase in slot machine handle is also attributable to increased and aggressive coin incentive marketing programs directed at bus passengers, a market segment which historically plays slot machines. Table game drop at the Sands increased $7.1 million (7.4%) during the three month period ended March 31, 1999 compared with the same period of 1998. The Sands' increases compare to a decreases of 6.7% in table drop for all other Atlantic City casinos during the same period. As a result, the Sands' table game market share increased to 6.1% during the three month period ended March 31, 1999 from 5.3%, during the same period of 1998. The Sands' table game drop increases are attributable to increases in patron volume from both the rated and the unrated market segment. This increase in the rated segment patron volume is a result of managements focus on the "mid" to "high" end patron through increased marketing programs directed at this segment, including increased headline entertainment and events. The increase in the unrated segment is a result of managements efforts to cultivate new players through review show entertainment and aggressive advertising campaigns. Revenues Casino revenues at the Sands, including poker and simulcast horse racing wagering revenues, increased by $2.0 million (3.8%) for the three month period ended March 31, 1999 compared with the same period of 1999. Increases in table game and slot machine wagering were offset slightly by the decreases in both table game and slot machine hold percentages. Rooms revenue did not change significantly during the three month period ended March 31, 1999 compared with the same period in 1998. Food and beverage revenues increased $612,000 (10.8%) during the three month period ended March 31, 1999 compared with the prior year period. This increase is a result of increased banquet activity and the reopening of a previously closed gourmet buffet outlet. Other 30 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) revenues increased $537,000 (61.2%) during the three month period ended March 31, 1999 compared to the prior year period as a result of an increase in theater entertainment revenue, and the opening of a gift shop. Promotional allowances represent the estimated value of goods and services provided free of charge to casino customers under various marketing programs. As a percentage of rooms, food and beverage and other revenues at the Sands, these allowances increased to 53.3% during the three month period ended March 31, 1999 from 51.1% during the same period of 1998. This increase is primarily attributable to an increase in marketing programs and other promotional activities directed at increasing patron volume. Departmental Expenses Casino expenses at the Sands increased $5.7 million (13.6%) during the three month period ended March 31, 1999 compared with the same period in 1998. This increase is due to an increase in marketing and advertising expenses during 1999 including coin incentive programs. This increased marketing activity also resulted in an increase in the allocation of rooms, food and beverage and other expenses to casino expense. Rooms expense and food and beverage expense did not change significantly during the three month period ended March 31, 1999 compared with the same period during 1998. Other expenses increased $559,000 (141.5%) during the three month period ended March 31, 1999 compared to the 1998 period due to increased costs with respect to theater entertainment. General and Administrative General and administrative expenses decreased $1.3 million (32.6%) during the three month period ended March 31, 1999 compared to the same period of 1998. Management fee expenses incurred by the Sands decreased by $1.2 million (100%) during the three month period during 1999 compared to the prior year period as a result of the filing of the Rejection Motion and the Settlement Agreement and Second Settlement Agreement. Depreciation and Amortization Depreciation and amortization expense did not change significantly during the three month period ended March 31, 1999 as compared with the prior year period. 31 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest Interest income decreased $387,000 (73.3%) during the three month period ended March 31, 1999 compared to the same period during 1998. Interest earned during 1998 included a one time interest payment received on obligatory investments. Interest expense decreased $248,000 (92.5%) during the three month period ended March 31, 1999 compared to the same period of the prior year. As discussed in Notes 2 and 5 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 and other affiliate advances for periods subsequent to the filing has been suspended. Income Tax 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. As required by the Second Settlement Agreement, and effective after December 31, 1998, PCC transferred 21% of the stock ownership in Holdings to PBV, effecting the deconsolidation of Holdings from the GBCC group for federal income tax purposes. Accordingly, beginning in 1999, Holdings and its subsidiaries' provision for federal income taxes will be calculated and paid on a stand alone basis. 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. At March 31, 1999, Holdings and its subsidiaries have deferred tax assets including 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 a plan of reorganization approved by the Bankruptcy Court. In addition, the Second Settlement Agreement provides that GBCC may utilize NOL's of Holdings and it's subsidiaries through December 31, 1998 to offset taxable income of GBCC and other members of the consolidated tax group. Representatives of GBCC have advised Holdings that Holdings should have approximately $13 million in NOL's available subsequent to December 31, 1998. 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 March 31, 1999. 32 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) 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. Year 2000 Compliance In the year 2000, the Sands' computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than 2000. Such an error could result in a system failure or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions or engage in similar normal business activities. Management has initiated a program to prepare the Sands' computer systems and applications for the Year 2000. The objective of this program is to determine and assess the risks of the Year 2000 issue, and to plan and institute mitigating actions to minimize those risks. The Sands has completed an assessment and an inventory of its systems. Plans are in place and work is being undertaken to test and implement changes where required. No significant remediation has been identified. The appropriate vendors and suppliers have been contacted as to their Year 2000 compliance. The costs of testing and conversion have not been and are not expected to be material. All Year 2000 costs are expected to be funded through operating cash flows. The Sands is in the process of developing a contingency plan which includes the identification of significant vendors which will be Year 2000 compliant to replace significant vendors that will not be Year 2000 compliant. It is expected that this contingency plan will be completed in a timely manner. While management expects the Sands' 2000 date conversion projects to be completed on a timely basis, the potential impact of systems outside of the Sands' control, such as those of utility companies, phone and network systems, and financial institutions, is difficult to assess. There can be no assurance that the systems of other companies on whose systems the Sands relies will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Sands' systems. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Because of the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of Year 2000 readiness of third party suppliers, the Sands is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Sands results of operations, liquidity, and financial condition. 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. 33 GB HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Seasonality Historically, the Sands' operations have been highly seasonal in nature, with the peak activity occurring from May to September. Consequently, the results of Holdings' operations for the first and fourth quarters are traditionally less profitable than the other quarters of the fiscal year. In addition, the Sands' operations may fluctuate significantly due to a number of factors, including chance. Such seasonality and fluctuations may materially affect Holdings' casino revenues and profitability. 34 PART II: OTHER INFORMATION Item 1. Legal Proceedings On January 5, 1998, Holdings, GB Property Funding, and GBHC filed petitions for relief under Chapter 11 of the Bankruptcy Code in 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 January 11, 1999, the exclusivity period during which only the Debtors may file a plan of reorganization expired and, as a result, any party in interest may file a plan of reorganization. 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. The debt service payments due subsequent to January 5, 1998 were not made. Under an order of the Bankruptcy Court, permitting the disposition of furniture and equipment in the ordinary course of business, any payments received by GBHC for the sale of such assets, which are part of the security for the First Mortgage Notes, must be remitted to the Indenture Trustee as reductions to the outstanding principal of the First Mortgage Notes. Through May 13, 1999, $375,000 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 $36,347,000 as of May 13, 1999. Item 6.(a) - Reports on Form 8-K The Registrants did not file any reports on Form 8-K during the quarter ended March 31, 1999. 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: May 14, 1999 By: /s/ Timothy A. Ebling ---------------------- ------------------------------- Timothy A. Ebling Executive Vice President, Chief Financial Officer and Principal Accounting Officer 35 EX-27 2 FINANCIAL DATA SCHDULE
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 DEC-31-1999 JAN-01-1999 MAR-31-1999 1 0 0 0 0 1 0 0 191,576 0 182,202 0 0 1 0 191,576 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EX-27 3 FINANCIAL DATA SCHDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF GB HOLDINGS, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000912926 GB HOLDINGS INC. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 24,704 0 19,280 11,868 3,331 43,689 330,053 (184,148) 204,235 21,956 182,202 0 0 1 (42,252) 204,235 0 57,927 0 51,042 5,540 475 (20) 490 0 490 0 0 0 490 0 0
-----END PRIVACY-ENHANCED MESSAGE-----