---

 

---

 

---

 

---

 

	/s/ Grant Thornton LLP

F-1

---

 

	/s/ KPMG LLP

F-2

---

 

				December 31,
				2004				2003
ASSETS
Current assets:
	Cash and cash equivalents			$	882,841			$	15,401,433
	Accounts receivable — oil and natural gas sales				18,220,105				13,214,537
	Accounts receivable — joint interest and other (net of allowance of $104,000 in 2004 & 2003)				495,272				485,083
	Notes receivable — other (net of allowance of $790,000 in 2004)				489,389				1,220,960
	Derivative broker deposit				—				1,700,000
	Drilling prepayments				858,114				1,106,871
	Other				2,200,156				286,399
		Total current assets			23,145,877				33,415,283
Oil and natural gas properties, at cost (full cost method):
	Subject to ceiling limitation				573,069,515				507,250,803
	Accumulated depreciation, depletion, and amortization				(343,485,274	)			(322,443,045	)
	Net oil and natural gas properties				229,584,241				184,807,758
Other property and equipment					5,055,490				4,838,114
Accumulated depreciation					(4,063,781	)			(3,746,317	)
	Net other property and equipment				991,709				1,091,797
Note receivable					3,090,000				1,827,000
Equity investment					2,379,108				1,698,000
Other long term assets					1,082,504				964,500
		Total assets		$	260,273,439			$	223,804,338
LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
	Accounts payable — trade			$	10,239,384			$	2,879,138
	Accounts payable — affiliate				1,595,235				411,731
	Accounts payable — revenue				4,104,029				3,964,530
	Prepayments from partners				90,186				265,871
	Other				77,593				136,707
	Derivative financial instruments				6,349,714				6,595,475
		Total current liabilities			22,456,141				14,253,452
Long term liabilities:
	Note payable				83,031				592,889
	Gas balancing				897,852				818,621
	Credit facility				51,833,624				43,833,624
	Asset retirement obligation				3,055,240				3,268,381
	Derivative financial instruments				7,766,144				—
Members’ equity					174,181,407				161,037,371
		Total liabilities and members’ equity		$	260,273,439			$	223,804,338

F-3

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				Year Ended December 31,
				2004				2003				2002
Revenues:
	Oil and natural gas sales			$	76,677,224			$	75,740,373			$	35,319,918
	Field operations				326,960				297,069				403,933
	Plant operations				1,723,305				1,568,502				177,049
		Total revenue			78,727,489				77,605,944				35,900,900
Costs and expenses:
	Lease operating				13,505,366				11,501,303				8,508,744
	Field operations				334,443				397,669				420,188
	Plant operations				680,066				577,003				68,767
	Oil and natural gas production taxes				5,732,265				5,770,865				1,874,854
	Depreciation, depletion and amortization				21,385,529				23,442,797				15,509,106
	Accretion of asset retirement obligation				261,471				242,752				—
	Amortization of loan cost				494,386				—				—
	General and administrative				4,919,525				4,833,546				5,682,804
		Total costs and expenses			47,313,051				46,765,935				32,064,463
Operating income					31,414,438				30,840,009				3,836,437
Other income (expense):
	Interest expense				(2,222,009	)			(1,538,048	)			(96,491	)
	Interest income and other, net				299,327				472,337				1,245,204
	Interest income from affiliate				149,650				114,867				546,228
	Commitment fee income				—				125,000				175,000
	Equity in loss on investment				(518,892	)			(102,000	)			—
	Dividend expense				—				—				(145,200	)
	Gain (loss) on sale of securities				—				(953,790	)			8,711,915
	Unrealized loss on financial instruments/short sale				—				—				(346,992	)
	Income before cumulative effect of change in accounting principle				29,122,514				28,958,375				13,926,101
	Cumulative effect of change in accounting principle				—				1,911,705				—
Net income				$	29,122,514			$	30,870,080			$	13,926,101

F-4

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			Year Ended December 31,
			2004				2003				2002
Operating Activities
Net income			$	29,122,514			$	30,870,080			$	13,926,101
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation, depletion and amortization			21,385,529				23,442,797				15,509,106
	Change in fair market value of derivative contracts			7,520,383				2,987,013				3,608,462
	Unrealized loss on financial instruments/short sale			—				—				346,992
	Gain (loss) on sale of assets			(6,136	)			—				7,058
	Equity in loss on investment			518,892				102,000				—
	Accretion of asset retirement obligation			261,471				242,752				—
	Provision for doubtful account			790,000				—				—
	Amortization of note costs			494,386				—				—
	Cumulative effect of change in accounting principle			—				(1,911,705	)			—
Changes in operating assets and liabilities:
	Accounts receivable			(5,078,989	)			(1,296,013	)			(2,069,815	)
	Notes receivable			(1,258,198	)			(1,831,802	)			(2,774,968	)
	Drilling prepayments			248,758				(380,288	)			(457,565	)
	Derivative broker deposit			1,700,000				100,000				(1,800,000	)
	Other current assets			(2,086,257	)			(26,215	)			912,577
	Accounts payable and accrued liabilities			8,017,822				493,730				(566,450	)
	Net cash provided by operating activities			61,630,175				52,792,349				26,641,498
Investing Activities
Oil and natural gas exploration and development expenditures				(67,487,412	)			(36,034,277	)			(18,106,385	)
Longfellow Ranch acquisition				—				—				(51,037,347	)
Purchases of other property and equipment				(245,250	)			(149,897	)			(222,039	)
Increase in restricted cash				—				—				(346,992	)
Proceeds from sales of oil and natural gas properties				1,202,263				1,436,016				1,434,212
Equity investment				(1,200,000	)			(1,800,000	)			—
Net cash used in investing activities				(67,730,399	)			(36,548,158	)			(68,278,551	)
Financing Activities
Proceeds from Arnos credit facility				—				46,756,377				—
Repayment of Arnos credit facility				—				(46,756,377	)			—
Proceeds from Mizuho credit facility				8,000,000				43,833,624				—
Loan issuance costs				(439,890	)			(951,697	)			—
Guaranteed Payment to member				(15,978,478	)			(18,228,781	)			(21,652,819	)
Priority Amount distribution to member				—				(40,506,072	)			—
Net cash used in financing activities				(8,418,368	)			(15,852,926	)			(21,652,819	)
Increase (decrease) in cash and cash equivalents				(14,518,592	)			391,265				(63,289,872	)
Cash and cash equivalents at beginning of period				15,401,433				15,010,168				78,300,040
Cash and cash equivalents at end of period			$	882,841			$	15,401,433			$	15,010,168
Supplemental Cash Flow Information
Interest paid in cash			$	1,713,136			$	1,537,127			$	96,491
Distribution of member note payable			$	—			$	10,939,750			$	—

F-5

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			Members’
			Equity
Balance at December 31, 2001			$	207,568,612
	Guaranteed Payment to member			(21,652,819	)
	Net income			13,926,101
Balance at December 31, 2002			$	199,841,894
	Guaranteed Payment to member			(18,228,781	)
	Priority Amount distribution to member			(51,445,822	)
	Net income			30,870,080
Balance at December 31, 2003			$	161,037,371
	Guaranteed Payment to member			(15,978,478	)
	Net income			29,122,514
Balance at December 31, 2004			$	174,181,407

F-6

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1.	Background

		National Energy
		Group, Inc.				Gascon				Total
Current assets		$	11,535,745			$	97,183,477			$	108,719,222
Net oil and natural gas properties			84,983,139				30,573,625				115,556,764
Hedge assets			4,807,689				—				4,807,689
Intercompany receivable			—				4,783,737				4,783,737
Total assets		$	101,326,573			$	132,540,839			$	233,867,412
Current liabilities		$	4,157,430			$	2,657,190			$	6,814,620
Long-term liabilities			940,033				1,377,782				2,317,815
Intercompany payable			4,783,737				—				4,783,737
Members’ equity			91,445,373				128,505,867				219,951,240
Total liabilities and members’ equity		$	101,326,573			$	132,540,839			$	233,867,412

F-7

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2.	Significant Accounting Policies

	Consolidation

	Accounting Estimates

	Cash and Cash Equivalents

	Oil and Natural Gas Properties

F-8

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	Other Property and Equipment

	Income Taxes

	Financial Instruments

	Accounts Receivable

F-9

---

 

	Revenue Recognition

	Natural Gas Production Imbalances

	Comprehensive Income

	Derivatives

		2004				2003				2002
Gross cash receipts		$	1,327,200			$	14,924			$	1,246,080
Gross cash payments		$	13,694,010			$	8,681,198			$	2,430
Valuation loss		$	7,520,383			$	2,987,013			$	3,608,462

F-10

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						Production
Date of Contract		Volume/Month				Month				Floor				Ceiling
August 2002			30,000 Bbls				2003			$	23.55			$	26.60
August 2002			300,000  MMBTU				2003			$	3.25			$	4.62
November 2002			300,000  MMBTU				2003			$	3.50			$	4.74
November 2002			300,000  MMBTU				2004			$	3.35			$	4.65
November 2002			300,000  MMBTU				2005			$	3.25			$	4.60
November 2003			45,000 Bbls				2004			$	26.63			$	29.85
February 2005			16,000 Bbls				2006			$	41.75			$	45.40
February 2005			120,000  MMBTU				2006			$	6.00			$	7.28

										Fixed
Type Contract		Production Month				Volume per				Price				Floor				Ceiling
Fixed price			February - March 2004				400,000  MMBTU			$	6.915			$	—			$	—
Fixed price			April - June 2004				400,000  MMBTU			$	5.48			$	—			$	—
Fixed price			July - September 2004				400,000  MMBTU			$	5.38			$	—			$	—
No Cost Collars			October - December 2004				400,000  MMBTU			$	—			$	5.25			$	5.85
No Cost Collars			2005				300,000  MMBTU			$	—			$	4.75			$	5.45
No Cost Collars			2006				500,000  MMBTU			$	—			$	4.50			$	5.00
No Cost Collars			2005				250,000  MMBTU			$	—			$	6.00			$	8.70
No Cost Collars			2005				25,000 Bbls			$	—			$	43.60			$	45.80

F-11

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	Recent Accounting Pronouncements

3.	Management Agreement

F-12

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4.	Acquisitions

F-13

---

 

				Pro Forma
				Year Ended
				December 31,
				2002
				(Unaudited)
Revenues:
	Oil and natural gas sales			$	47,659
	Plant operations				1,515
	Field operations				404
		Total revenue			49,578
Costs and expenses:
	Oil and natural gas production taxes				(2,414	)
	Lease operating				(12,250	)
	Depreciation and depletion				(20,206	)
	Plant operations expense				(529	)
	Field operations				(420	)
	General and administrative				(5,683	)
		Total expense			(41,502	)
Operating income				$	8,076
Net income				$	14,557

5.	Investments/Note Receivable

F-14

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6.	Credit Facilities

F-15

---

 

7.	Commitments and Contingencies

	(a) $20,500 in post bond premiums alleged to be owed for certain plugging and abandonment liabilities associated with the oil and gas properties sold to Osprey,
	(b) $5,422 in expenses associated with NEG’s bond claim,
	(c) $53,226 in attorneys fees,

F-16

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	(d) $24,617 in administrative expenses paid to the American Arbitration Association,
	(e) an order requiring Osprey to post and maintain an acceptable replacement bond,
	(f) a finding that Osprey’s counterclaim in the amount of $15 million was without merit, and
	(g) a ruling that Osprey is entitled to no recovery of any damages or expenses associated with NEG’s bond claim or Osprey’s counterclaim.

8.	Asset Retirement Obligation

F-17

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Balance as of January 1, 2003				$	3,034,395
Add:		Accretion			242,752
		Additions			89,548
		Revisions			9,396
Less:		Settlements			(57,008	)
		Dispositions			(50,702	)
Balance as of December 31, 2003				$	3,268,381
Add:		Accretion			261,471
		Additions			93,838
Less:		Revisions			(250,650	)
		Settlements			(24,354	)
		Dispositions			(293,446	)
Balance as of December 31, 2004				$	3,055,240

9.	Distributions under the Holding LLC Operating Agreement

	1. Guaranteed Payments are to be paid to NEG, calculated on an annual interest rate of 10.75% on the outstanding Priority Amount. The Priority Amount includes all outstanding debt owed to entities owned or controlled by Carl C. Icahn, including the amount of the Company’s 10.75% Senior Notes. As of December 31, 2004, the Priority Amount was $148.6 million. The Guaranteed Payments will be made on a semi-annual basis.
	2. The Priority Amount is to be paid to NEG. Such payment is to occur by November 6, 2006.
	3. An amount equal to the Priority Amount and all Guaranteed Payments paid to NEG, plus any additional capital contributions made by Gascon, less any distribution previously made by the Company to Gascon, is to be paid to Gascon.
	4. An amount equal to the aggregate annual interest (calculated at prime plus 1/2% on the sum of the Guaranteed Payments), plus any unpaid interest for prior years (calculated at prime plus 1/2% on the sum of the Guaranteed Payments), less any distributions previously made by the Company to Gascon, is to be paid to Gascon.
	5. After the above distributions have been made, any additional distributions will be made in accordance with the ratio of the NEG’s and Gascon’s respective capital accounts. (Capital accounts as defined in the Holding LLC Operating Agreement).

F-18

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10.	Crude Oil and Natural Gas Producing Activities

		Year Ended December 31,
		2004				2003				2002
Acquisition of properties		$	—			$	—			$	49,049,174
Exploration costs			29,006,772				6,950,706				1,072,997
Development costs			38,480,640				29,083,572				16,124,610
Depletion rate per Mcfe		$	1.28			$	1.25			$	1.29

		Year Ended December 31,
		2004				2003				2002
Plains Marketing and Transportation		$	19,786,979			$	15,666,690			$	12,512,767
Crosstex Energy Services, Inc.			5,080,974				9,225,086				4,843,756
Riata Energy, Inc.			29,884,850				30,420,624				—
Seminole Energy Services			19,572,461				7,215,735				—

11.	Supplementary Crude Oil and Natural Gas Reserve Information (Unaudited)

F-19

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			Crude Oil				Natural Gas
			(Barrels)				(Thousand
							Cubic Feet)
December 31, 2001				5,158,883				82,431,275
	Purchases of reserves in place			30,436				34,196,450
	Sales of reserves in place			(223,214	)			—
	Extensions and discoveries			28,892				14,403,643
	Revisions of previous estimates			842,776				(636,931	)
	Production			(629,100	)			(7,827,100	)
December 31, 2002				5,208,673				122,567,337
	Purchase of reserves in place			—				—
	Sales of reserves in place			(25,399	)			(744,036	)
	Extensions and discoveries			494,191				61,637,828
	Revisions of previous estimates			(7,092	)			(2,419,969	)
	Production			(628,923	)			(13,436,865	)
December 31, 2003				5,041,450				167,604,295
	Purchase of reserves in place			—				—
	Sales of reserves in place			(15,643	)			(344,271	)
	Extensions and discoveries			445,636				33,350,666
	Revisions of previous estimates			(30,249	)			15,441,298
	Production			(565,100	)			(13,106,103	)
December 31, 2004				4,876,094				202,945,885
Proved developed reserves:
	December 31, 2002			3,539,450				92,382,411
	December 31, 2003			4,096,596				104,207,660
	December 31, 2004			3,798,341				111,126,829

F-20

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		December 31,
		2004				2003
Future cash inflows		$	1,466,369,163			$	1,184,869,747
Future production and development costs			(489,331,736	)			(374,829,047	)
Future net cash flows			977,037,427				810,040,700
10% annual discount for estimated timing of cash flows			(442,213,801	)			(353,980,596	)
Standardized measure of discounted future net cash flows		$	534,823,626			$	456,060,104

		Year Ended December 31,
		2004				2003				2002
Purchases of reserves		$	—			$	—			$	102,916,472
Sales of reserves in place			(1,375,463	)			(2,475,742	)			(2,509,704	)
Sales and transfers of crude oil and natural gas produced, net of production costs			(83,004,073	)			(57,424,780	)			(31,115,247	)
Net changes in prices and production costs			31,039,998				44,711,900				112,380,701
Development costs incurred during the period and changes in estimated future development costs			(81,370,910	)			(75,286,532	)			(45,230,813	)
Extensions and discoveries, less related costs			118,570,850				211,324,414				43,640,702
Revisions of previous quantity estimates			49,194,080				(6,789,000	)			8,510,824
Accretion of discount			45,606,010				31,063,232				11,312,180
Changes in production rates (timing) and other			103,030				304,290				(2,394,593	)
Net change		$	78,763,522			$	145,427,782			$	197,510,522

F-21

---

 

				March 31, 2005
				(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	10,999,200
	Accounts receivable — oil and natural gas sales				17,388,724
	Accounts receivable — joint interest and other				216,496
	Notes receivable — other, (net allowance of $790,000)				488,415
	Drilling prepayments				793,558
	Other				1,104,408
		Total current assets			30,990,801
Oil and natural gas properties, at cost (full cost method):
	Subject to ceiling limitation				594,136,210
	Accumulated depreciation, depletion, and amortization				(349,909,614	)
	Net oil and natural gas properties				244,226,596
	Other property and equipment				5,143,947
	Accumulated depreciation				(4,154,948	)
	Net other property and equipment				988,999
	Note receivable				3,090,000
	Equity investment				2,169,566
	Other long term assets				962,696
		Total assets		$	282,428,658
Current liabilities:
	Accounts payable — trade			$	6,423,198
	Accounts payable — affiliate				369,722
	Accounts payable — revenue				4,158,627
	Prepayments from partners				87,754
	Other current liabilities				806,885
	Derivative financial instruments				23,852,452
		Total current liabilities			35,698,638
Long term liabilities:
	Gas balancing				897,853
	Credit facility				66,833,624
	Asset retirement obligation				3,116,344
	Derivative financial instruments				12,883,768
	Members’ equity				162,998,431
		Total liabilities and members’ equity		$	282,428,658

F-22

---

 

				Three Months Ended March 31,
				2005				2004
				(Unaudited)
Revenues:
	Oil and natural gas sales			$	2,346,633			$	25,017,234
	Field operations				80,630				79,161
	Plant operations				442,609				472,786
		Total revenue			2,869,872				25,569,181
Costs and expenses:
	Lease operating				3,883,238				3,126,587
	Field operations				78,371				90,494
	Plant operations				174,442				125,548
	Oil and natural gas production taxes				1,695,128				1,349,374
	Depreciation, depletion and amortization				6,515,506				5,352,006
	Accretion of asset retirement obligation				61,104				63,807
	General and administrative				556,457				824,295
		Total costs and expenses			12,964,246				10,932,111
	Operating income (loss)				(10,094,374	)			14,637,070
Other income (expense):
	Interest expense				(728,809	)			(483,166	)
	Amortization of debt issuance costs				(172,890	)			(111,809	)
	Interest income and other, net				22,639				89,249
	Interest income from affiliate				—				35,803
	Interest in loss of equity investee				(209,542	)			—
		Net income (loss)		$	(11,182,976	)		$	14,167,147

F-23

---

 

			Three Months Ended March 31,
			2005				2004
			(Unaudited)
Operating Activities
	Net income (loss)		$	(11,182,976	)		$	14,167,147
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Depreciation, depletion and amortization			6,515,506				5,352,006
	Change in fair market value of derivative contracts			22,620,363				(2,688,548	)
	Amortization of debt issuance costs			172,890				111,809
	Interest in loss of equity investee			209,543				—
	Accretion of asset retirement obligation			61,104				63,807
Changes in operating assets and liabilities:
	Accounts receivable			1,111,132				(1,064,720	)
	Notes receivable			—				(1,207,198	)
	Drilling prepayments			64,556				254,227
	Derivative broker deposit			—				1,700,000
	Other current assets			1,095,752				(20,439	)
	Accounts payable and accrued liabilities			(4,343,276	)			1,626,714
	Net cash provided by operating activities			16,324,594				18,294,805
Investing Activities
	Oil and natural gas exploration and development expenditures			(21,189,663	)			(10,869,942	)
	Purchases of other property and equipment			(88,457	)			(38,467	)
	Proceeds from sales of oil and natural gas properties			122,967				—
	Equity investment			—				(1,200,000	)
	Net cash used in investing activities			(21,155,153	)			(12,108,409	)
Financing Activities
	Proceeds from Mizuho credit facility			15,000,000				—
	Proceeds from advance from affiliate			5,000,000				—
	Repayment of advance from affiliate			(5,000,000	)			—
	Loan issuance costs			(53,082	)			(328,599	)
	Net cash (used in) provided by financing activities			14,946,918				(328,599	)
	Increase in cash and cash equivalents			10,116,359				5,857,797
	Cash and cash equivalents at beginning of period			882,841				15,401,433
	Cash and cash equivalents at end of period		$	10,999,200			$	21,259,230
Supplemental Cash Flow Information
	Interest paid in cash		$	247,022			$	148,979

F-24

---

 

		Members’
		Equity
		(Unaudited)
Balance at December 31, 2004		$	174,181,407
Net loss for the three months ended March 31, 2005			(11,182,976	)
Balance at March 31, 2005		$	162,998,431

F-25

---

 

1.	Background

2.	Basis of Presentation

3.	Recent Accounting Pronouncements

F-26

---

 

4.	Derivatives

F-27

---

 

5.	Management Fees

6.	Investment in Petrosource

7.	Credit Facilities

F-28

---

 

8.	Note Receivable

9.	Commitments and Contingencies

F-29

---

 

	(a) $20,500 in post bond premiums alleged to be owed for certain plugging and abandonment liabilities associated with the oil and gas properties sold to Osprey,
	(b) $5,422 in expenses associated with our bond claim,
	(c) $53,226 in attorneys fees,
	(d) $24,617 in administrative expenses paid to the American Arbitration Association,
	(e) an order requiring Osprey to post and maintain an acceptable replacement bond,
	(f) a finding that Osprey’s counterclaim in the amount of $15 million was without merit, and
	(g) a ruling that Osprey is entitled to no recovery of any damages or expenses associated with the Company’s bond claim or Osprey’s counterclaim.

F-30

---

 

	/s/ Pannell Kerr Forster of Texas, P.C.

F-31

---

 

				December 31,
				2004				2003
ASSETS
Current assets
	Cash			$	23,753,000			$	3,152,000
	Restricted cash				—				8,716,000
	Accounts receivable, net of allowance of $5,947,000 and $5,847,000 as of December 31, 2004 and December 31, 2003, respectively				8,641,000				8,233,000
	Accounts receivable — other				1,841,000				—
	Prepaid expenses and other current assets				4,652,000				1,001,000
	Deferred taxes, net				1,943,000				—
		Total current assets			40,830,000				21,102,000
	Property, plant and equipment
	Oil and natural gas properties, successful efforts method of accounting				326,733,000				323,001,000
	Less accumulated depreciation, depletion and amortization				(263,140,000	)			(246,803,000	)
	Oil and natural gas properties, net				63,593,000				76,198,000
	Pipelines and other property, plant and equipment				26,114,000				26,303,000
	Less accumulated depreciation				(17,789,000	)			(16,023,000	)
	Pipelines and other property, plant and equipment, net				8,325,000				10,280,000
Other assets
	Restricted deposits				23,519,000				18,234,000
	Deferred taxes, net				21,341,000				—
		Total assets		$	157,608,000			$	125,814,000
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Liabilities not subject to compromise
	Current liabilities
		Accounts payable and accrued liabilities		$	13,517,000			$	6,506,000
		Accounts payable — related party			555,000				—
		Interest payable — related party			288,000				—
		Interest payable			—				220,000
		Income tax payable			157,000				—
		Current maturities of long-term debt — related party			5,429,000				—
		Revolving credit facility			—				35,272,000
		Total current liabilities			19,946,000				41,998,000
Long-term debt — related party, net of current maturities					32,571,000				—
Deferred credits					263,000				556,000
Asset retirement obligation					49,538,000				43,933,000
		Total liabilities not subject to compromise			102,318,000				86,487,000
Liabilities subject to compromise
	Accounts payable and accrued liabilities				—				19,838,000
	Interest payable				—				3,115,000
	Natural gas imbalance payable				—				1,311,000
	Senior notes due 2004				—				100,000,000
		Total liabilities subject to compromise			—				124,264,000
Commitments and contingencies					—				—
Stockholders’ equity (deficit)
	Preferred shares, $0.01 par value, 5,000,000 shares authorized at December 31, 2003; no shares issued and outstanding at December 31, 2003 (see Note 1)				—				—
	New common shares, $0.01 par value, 1,000,000 shares authorized; 1,000 shares issued and outstanding as of December 31, 2004				—				—
	Old common shares, $0.01 par value, 100,000,000 shares authorized; 24,359,695 shares issued and outstanding as of December 31, 2003				—				247,000
	Additional paid-in capital				121,140,000				69,089,000
	Accumulated deficit				(65,850,000	)			(154,273,000	)
		Total stockholders’ equity (deficit)			55,290,000				(84,937,000	)
		Total liabilities and stockholders’ deficit		$	157,608,000			$	125,814,000

F-32

---

 

				Year Ended December 31,
				2004				2003				2002
Oil and natural gas sales				$	51,234,000			$	50,160,000			$	39,065,000
Costs and expenses:
	Lease operating expenses and ad valorem taxes				14,040,000				17,218,000				14,508,000
	Production taxes				711,000				1,021,000				720,000
	Geological and geophysical expenses				76,000				105,000				119,000
	Depletion, depreciation and amortization				19,008,000				12,812,000				36,986,000
	Impairment of oil and natural gas properties				—				—				23,291,000
	General and administrative expenses				2,284,000				2,290,000				3,550,000
	Management fees and other — related party				884,000				—				—
	Bad debt expense				100,000				1,896,000				510,000
	Accretion of asset retirement obligation				3,132,000				2,843,000				—
	Gain on expiration of production payment				—				(2,249,000	)			—
		Total cost and expenses			40,235,000				35,936,000				79,684,000
Operating income (loss)					10,999,000				14,224,000				(40,619,000	)
Other income (expense):
	Interest income				684,000				274,000				500,000
	Other income				48,000				—				—
	Interest expense				(912,000	)			(2,929,000	)			(9,298,000	)
	Interest expense — related party				(1,605,000	)			—				—
	Loss on sale of assets				(76,000	)			—				—
		Total other expense. net			(1,861,000	)			(2,655,000	)			(8,798,000	)
	Income (loss) before reorganization costs, income taxes and cumulative effect of accounting change				9,138,000				11,569,000				(49,417,000	)
	Reorganization costs:
	Deferred debt costs				—				—				(962,000	)
	Professional fees				(3,794,000	)			(2,898,000	)			(1,296,000	)
	Loss on restructuring of debt — related party				(3,561,000	)			—				—
	Gain on restructuring of senior notes due 2004				51,268,000				—				—
	Gain on restructuring of payables				12,495,000				—				—
	Income (loss) before cumulative effect of accounting change				65,546,000				8,671,000				(51,675,000	)
	Income tax benefit, net				22,877,000				—				—
	Cumulative effect of accounting change, net of tax				—				(12,149,000	)			—
	Net income (loss)			$	88,423,000			$	(3,478,000	)		$	(51,675,000	)
Basic and diluted earnings (loss) per share (see Note 2):
	Income (loss) before cumulative effect of accounting change							$	0.36			$	(2.12	)
	Cumulative effect of accounting change, net of tax								(0.50	)			—
	Net loss							$	(0.14	)		$	(2.12	)
	Basic and diluted weighted average common shares outstanding								24,359,695				24,359,695

F-33

---

 

		Number of				Number of				Common												Total
		New Common				Old Common				Share Par				Additional				Accumulated				Stockholders’
		Shares				Shares				Value				Paid-In Capital				Deficit				Equity (Deficit)
Balance, December 31, 2001			—				24,359,695			$	247,000			$	69,089,000			$	(99,120,000	)		$	(29,784,000	)
Net loss			—				—				—				—				(51,675,000	)			(51,675,000	)
Balance, December 31, 2002			—				24,359,695				247,000				69,089,000				(150,795,000	)			(81,459,000	)
Net loss			—				—				—				—				(3,478,000	)			(3,478,000	)
Balance, December 31, 2003			—				24,359,695				247,000				69,089,000				(154,273,000	)			(84,937,000	)
Cancellation Old Common Stock			—				(24,359,695	)			(247,000	)			247,000				—				—
Issuance of New Common Stock			1,000				—				—				51,804,000				—				51,804,000
Net income			—				—				—				—				88,423,000				88,423,000
Balance, December 31, 2004			1,000				—			$	—			$	121,140,000			$	(65,850,000	)		$	55,290,000

F-34

---

 

			Year Ended December 31,
			2004				2003				2002
Cash flows from operating activities
	Net income (loss)		$	88,423,000			$	(3,478,000	)		$	(51,675,000	)
Adjustments to reconcile net income (loss) to net cash provided from operating activities
	Depletion, depreciation and amortization			19,008,000				12,812,000				36,986,000
	Impairment of oil and natural gas properties			—				—				23,291,000
	Deferred income taxes			(23,284,000	)			—				—
	Loss on sale of assets			76,000				—				—
	Unrealized loss on derivative instruments			903,000				—				—
	Loss on restructuring of debt — related party			3,561,000				—				—
	Gain on restructuring of senior notes due 2004			(51,268,000	)			—				—
	Gain on restructuring of payables			(12,495,000	)			—				—
	Allowance for doubtful accounts			100,000				1,896,000				510,000
	Accretion of asset retirement obligation			3,132,000				2,843,000				—
	Deferred debt costs			—				—				962,000
	Gain on expiration of production payment			—				(2,249,000	)			—
	Cumulative effect of accounting change			—				12,149,000				—
Changes in operating assets and liabilities
	Accounts receivable			(508,000	)			(1,353,000	)			(924,000	)
	Accounts receivable — other			(1,841,000	)			—				—
	Prepaid expenses and other current assets			(3,651,000	)			20,000				(103,000	)
	Accounts payable and accrued liabilities			(3,278,000	)			(5,306,000	)			(3,560,000	)
	Accounts payable — related party			555,000				—				—
	Natural gas imbalance payable			(1,311,000	)			154,000				8,000
	Deferred credits			(293,000	)			(397,000	)			(552,000	)
	Interest payable			1,385,000				(661,000	)			1,132,000
	Income taxes payable			157,000				—				—
	Net cash provided by operating activities			19,371,000				16,430,000				6,075,000
Cash flows from investing activities
	Capital expenditures			(1,994,000	)			(3,875,000	)			(6,494,000	)
	Proceeds from property sale			150,000				—				—
	Increase in restricted deposits			(5,285,000	)			(4,907,000	)			(2,316,000	)
	Asset retirement obligation			(207,000	)			(1,028,000	)			—
	Net cash used in investing activities			(7,336,000	)			(9,810,000	)			(8,810,000	)
Cash flows from financing activities
	Proceeds from borrowings of debt			—				—				8,101,000
Repayment of debt				(150,000	)			(2,450,000	)			(3,250,000	)
Net cash provided by (used in) financing activities				(150,000	)			(2,450,000	)			4,851,000
Net increase in cash				11,885,000				4,170,000				2,116,000
	Decrease (increase) in restricted cash			8,716,000				(8,716,000	)			—
	Cash at beginning of year			3,152,000				7,698,000				5,582,000
	Cash at end of year		$	23,753,000			$	3,152,000			$	7,698,000
Supplemental Disclosure of Cash Flow Information:
	Interest paid		$	1,129,000			$	3,590,000			$	8,166,000
	Income taxes paid		$	272,000			$	—			$	—
Supplemental Non-cash Investing and Financing Activities:
	Oil and natural gas properties for asset retirement obligation		$	2,680,000			$	26,344,000			$	—
	Interest payable — related party converted to debt principal		$	1,317,000			$	—			$	—
	Senior notes due 2004 and accrued interest converted to new common stock and additional paid-in capital		$	51,804,000			$	—			$	—
	Old common stock converted to additional paid-in capital		$	247,000			$	—			$	—

F-35

---

 

Note 1 —	Voluntary Petition for Relief Under Chapter 11 Bankruptcy

	•	Revolving Credit Facility: the holder of the claim received a new note, the principal amount of which will be paid over seven years,
	•	Senior Notes: 49% of the Senior Notes were settled for a cash payment equal to 2.5% of the face value of the Senior Notes; 51% of the Senior Notes were converted into 100% of the equity of the reorganized Company,
	•	Unsecured Creditors: received a cash payment equal to 10% of their allowed claim.
	•	Equity: the pre-confirmation shares of common stock (the “Old Common Stock”) are deemed to be of no value and were cancelled. The equity of the reorganized Company became owned by the 51% Senior Note holders.

F-36

---

 

Note 2 —	Summary of Significant Accounting Policies

	Nature of business

	Significant Accounting Policies

	Basis of Presentation

	Oil and Natural Gas Properties and Depreciation, Depletion and Amortization

F-37

---

 

	Revenue Recognition

	Earnings Per Share

	Cash and Cash Equivalents

	Stock-Based Compensation

F-38

---

 

		2004				2003				2002
Net income (loss) — as reported		$	88,423,000			$	(3,478,000	)		$	(51,675,000	)
Plus: stock-based compensation expense determined using the intrinsic value of the option at the measurement date			—				—				—
Less: stock-based employee compensation determined under fair value method for all awards granted to employees			—				(34,000	)			(77,000	)
Net income (loss) — pro forma		$	88,423,000			$	(3,512,000	)		$	(51,752,000	)
Basic and diluted net income (loss) per share — as reported						$	(0.14	)		$	(2.12	)
Basic and diluted net income (loss) per share — pro forma						$	(0.14	)		$	(2.12	)

	Fair Value

	Asset Retirement Obligations

	Restricted cash

F-39

---

 

	Accounts Receivable

	Pipelines and Other Property, Plant and Equipment

	Amortization of Deferred Debt Costs

	Natural gas Imbalances

	Derivative Instruments and Hedging Activities

F-40

---

 

Date of Contract

Volume/Month

Beginning

Ending

Floor

Ceiling

November 2004

25,000 Bbls

January 2005

December  2005

$

42.50

$

46.00

November 2004

150,000 MMBTU

January 2005

December  2005

$

6.00

$

8.35

	Income Taxes

	Environmental Liabilities

F-41

---

 

	Concentration of Credit Risk

	Use of Estimates

	Recently Issued Accounting Pronouncements

Note 3 —	Asset Retirement Obligations

F-42

---

 

		2004				2003
ARO at beginning of period		$	43,933,000			$	42,118,000
Revision of estimate			2,680,000				—
Liabilities settled			(207,000	)			(1,028,000	)
Accretion expense			3,132,000				2,843,000
ARO at end of period		$	49,538,000			$	43,933,000

Note 4 —	Restricted Deposits

F-43

---

 

Year Ended December 31,
2005		$	3,200,000
2006			3,200,000
2007			3,200,000
2008			3,200,000
2009			3,200,000
Thereafter			2,000,000
		$	18,000,000

Note 5 —	Debt

			2004				2003
Subject to compromise:
	10.625% Senior Notes due 2004		$	—			$	100,000,000
Not subject to compromise:
	Revolving Credit Facility due 2003		$	—			$	35,272,000
	Term loan due 2011 — related party			38,000,000				—
	Total long-term debt			38,000,000				35,272,000
	Less current maturities			(5,429,000	)			(35,272,000	)
	Long-term debt, less current maturities		$	32,571,000			$	—

	Senior Notes

F-44

---

 

	Revolving Credit Facility

	Term Loan

	Production Payment

F-45

---

 

		Long-Term
Year Ended December 31,		Debt
2005		$	5,429,000
2006			5,429,000
2007			5,429,000
2008			5,429,000
2009			5,429,000
Thereafter			10,855,000
		$	38,000,000

Note 6 —	Major Customers

Note 7 —	Income Taxes

		2004				2003				2002
Current		$	(407,000	)		$	—			$	—
Deferred			23,284,000				—				—
		$	22,877,000			$	—			$	—

		2004				2003				2002
Statutory federal income tax rate expense (benefit)			35	%			35	%			(35	)%
Other			—	%			11	%			1	%
Change in valuation allowance			(70	)%			(46	)%			34	%
			(35	)%			—	%			—	%

F-46

---

 

				2004				2003
Deferred tax assets
	Net operating loss carryforwards			$	14,917,000			$	38,393,000
	Asset retirement obligation accretion				6,343,000				6,516,000
	Fixed asset basis differences				—				3,152,000
	Allowance for bad debts				2,081,000				2,046,000
	State taxes				795,000				2,615,000
	AMT tax credits				610,000				290,000
		Total deferred tax assets			24,746,000				53,012,000
		Less valuation allowance			—				(53,012,000	)
		Total net deferred tax assets			24,746,000				—
Deferred tax liabilities
	Fixed asset basis differences				(1,324,000	)			—
	Natural gas balancing				(138,000	)			—
		Total deferred tax liabilities			(1,462,000	)			—
		Net deferred tax assets (liabilities)		$	23,284,000			$	—

Note 8 —	Stock Options

F-47

---

 

			2004								2003								2002
							Weighted								Weighted								Weighted
							Average								Average								Average
							Exercise								Exercise								Exercise
			Shares				Price				Shares				Price				Shares				Price
Outstanding at beginning of year				100,000			$	1.92				225,000			$	1.92				425,000			$	1.92
	Granted			—				—				—				—				—				—
	Exercised			—				—				—				—				—				—
	Forfeited			—				—				—				—				(200,000	)			1.92
	Cancelled			(100,000	)			1.92				(125,000	)			1.92				—				—
Outstanding at end of year				—				—				100,000				1.92				225,000				1.92
Exercisable at end of year				—				—				60,000			$	1.92				90,000			$	1.92
Unexercisable at end of year				—				—				40,000				1.92				135,000				1.92

Note 9 —	Related Party Transactions

	•	At December 31, 2004, the balance sheet reflects a term loan payable of $38 million, and related interest payable of $0.3 million. During the year ended December 31, 2004, the Company recorded interest expense of $1.6 million and a loss on restructuring of debt of $3.6 million associated with this related party.
	•	The Company entered into a Management Agreement with an entity pursuant to the Bankruptcy Court’s Order confirming the effective date of the Plan. In exchange for management services provided by that entity, the Company pays a monthly fee equal to the actual direct and indirect administrative overhead costs that the entity incurs in operating and administering the Company’s oil and natural gas properties plus 15% of such costs. The Company recorded $0.7 million in management fee expense under this agreement and $0.2 of general and administrative expense for the year ended December 31, 2004. At December 31, 2004 the balance sheet reflects accounts payable of $0.6 million owed under the agreement.

F-48

---

 

Note 11 —	Subsequent Events

Note 12 —	Supplemental Information Related to Oil and Natural Gas Producing Activities (Unaudited)

	Capitalized Costs

		2004				2003
Developed oil and natural gas properties		$	326,733,000			$	323,001,000
Unevaluated oil and natural gas properties			—				—
Pipelines and other production equipment			26,114,000				25,554,000
Accumulated depletion, depreciation and amortization			(280,929,000	)			(262,077,000	)
Net capitalized costs(1)		$	71,918,000			$	86,478,000

(1)	Included in net capitalized costs is approximately $30 million of net ARO asset recorded in 2003 relating to the cumulative effect of adopting SFAS No. 143 on January 1, 2003 (see Note 3) and $2.7 million of net ARO asset recorded in 2004 as a result of a revision in estimate.

	Costs Incurred

			2004				2003				2002
Property acquisition costs, proved			$	—			$	—			$	—
Property acquisition costs, unproved				—				—				—
Exploration expenses				—				—				—
Development costs				1,994,000				3,875,000				6,494,000
Asset retirement cost(1)				207,000				1,028,000				—
	Total cost incurred		$	2,201,000			$	4,903,000			$	6,494,000

F-49

---

 

(1)	Excluded from asset retirement cost in 2003 is $26.3 million of asset retirement obligation asset recorded in 2003 related to the cumulative effect of adopting SFAS No. 143 on January 1, 2003 (see Note 3). Excluded from asset retirement cost in 2004 is $2.7 million of asset retirement obligation asset recorded in 2004 related to a revision in estimate.

	Results of Operations

				2004				2003				2002
Oil and natural gas revenues				$	51,234,000			$	50,160,000			$	39,065,000
Operating expenses:
	Lease operating expenses and ad valorem taxes				14,040,000				17,218,000				14,508,000
	Production taxes				711,000				1,021,000				720,000
	Geological and geophysical expenses				76,000				105,000				119,000
	Depletion expense				16,441,000				10,007,000				33,589,000
	Depreciation of pipelines and other production equipment				2,567,000				2,468,000				2,468,000
	Accretion expense				3,132,000				2,843,000				—
	Impairment of oil and natural gas properties				—				—				23,291,000
		Results of operations from oil and natural gas producing activities		$	14,267,000			$	16,498,000			$	(35,630,000	)

	Quantities of Oil and Natural gas Reserves

		Oil				Natural gas
		(BBLS)				(MCF)
Proved developed and undeveloped reserves:
Estimated reserves as of December 31, 2001			7,853,303				66,940,028
Production			(916,030	)			(5,621,901	)
Extensions and discoveries			35,901				39,000
Sale of minerals in-place			—				—
Revisions of previous estimates			(270,378	)			(14,058,034	)
Estimated reserves as of December 31, 2002			6,702,796				47,299,093

F-50

---

 

		Oil				Natural gas
		(BBLS)				(MCF)
Production			(689,318	)			(5,043,527	)
Extensions and discoveries			151,197				1,026,000
Sale of minerals in-place			(78,761	)			(1,908,300	)
Revisions of previous estimates			(106,515	)			(2,594,770	)
Estimated reserves as of December 31, 2003			5,979,399				38,778,496
Production			(643,404	)			(3,938,379	)
Extensions and discoveries			—				—
Sale of minerals in-place			(43,663	)			(3,695	)
Revisions of previous estimates			(88,733	)			(8,854,673	)
Estimated reserves as of December 31, 2004			5,203,599				25,981,749
Proved developed reserves:
December 31, 2002			2,062,680				8,057,440
December 31, 2003			1,600,376				5,115,501
December 31, 2004			2,746,047				14,145,700

	Standardized Measure of Discounted Future Net Cash Flows

F-51

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				2004				2003				2002
Future cash inflows				$	382,805,375			$	425,695,797			$	431,912,125
Future costs:
	Production				(109,972,000	)			(139,335,808	)			(125,247,373	)
	Development and ARO				(103,386,010	)			(89,551,310	)			(91,096,741	)
		Future production and development costs			(213,358,010	)			(228,887,118	)			(216,344,114	)
Net cash flows before tax					169,447,365				196,808,679				215,568,011
Future income tax expense(1)					(32,979,000	)			—				—
Future net cash flows					136,468,365				196,808,679				215,568,011
10% discount for estimated timing of future cash flows					(61,229,531	)			(60,564,618	)			(71,565,128	)
Standardized measure of discounted future net cash flows				$	75,238,834			$	136,244,061			$	144,002,883

(1)	Prior to the year ended December 31, 2004, it was determine by management that the likelihood for the Company to have taxable income in the future was uncertain thus no future income tax expense was provided (see Note 7).

	Changes Relating to the Standardized Measure of Discounted Future Net Cash Flows

				2004				2003				2002
Beginning of year balance				$	136,244,061			$	144,002,883			$	89,242,543
Changes due to current year operations:
	Sales, net of production costs				(36,483,000	)			(31,921,000	)			(23,837,000	)
	Sales of minerals in place				(5,365,497	)			(4,264,894	)			—
	Development costs incurred				1,994,000				3,875,000				6,494,000
	Extensions and discoveries, net of future production and development costs				—				1,286,545				358,972
Changes due to revisions of standardized variables:
	Sales prices, net of production costs				56,915,433				15,264,428				115,325,081
	Revisions of previous quantity estimates				(38,312,699	)			(8,306,671	)			(36,822,411	)
	Estimated future development costs				(26,166,440	)			(2,059,901	)			(16,156,317	)
	Income taxes(1)				(24,097,000	)			—				—
	Accretion of discount				13,624,406				14,400,288				8,924,254
	Production rates (timing) and other				(3,114,430	)			3,967,383				473,761
		Net increase (decrease)			(61,005,227	)			(7,758,822	)			54,760,340
		End of year balance		$	75,238,834			$	136,244,061			$	144,002,883

(1)	Prior to the year ended December 31, 2004, it was determine by management that the likelihood for the Company to have taxable income in the future was uncertain thus no future income tax expense was provided (see Note 7).

F-52

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ASSETS
					(unaudited)
Current assets
	Cash			$	9,721,125
	Accounts receivable, net of allowance of $5,947,000				7,885,023
	Hedge deposits				3,600,000
	Advances to affiliate				10,000,000
	Prepaid expenses and other current assets				4,552,886
	Deferred taxes, net				3,440,605
		Total current assets			39,199,639
Property, plant and equipment
	Oil and natural gas properties, successful efforts method of accounting				266,150,858
	Less accumulated depreciation, depletion and amortization				(212,470,520)
		Oil and natural gas properties, net			53,680,338
	Pipelines and other property, plant and equipment				22,057,363
	Less accumulated depreciation				(15,036,406)
		Pipelines and other property, plant and equipment, net			7,020,957
Other assets
	Restricted deposits				19,631,786
	Deferred taxes, net				21,340,236
		Total assets		$	140,872,956
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
	Accounts payable and accrued liabilities			$	9,803,917
	Accounts payable — related party				277,292
	Interest payable — related party				207,177
	Hedge liability				4,980,264
	Income tax payable				155,953
	Current maturities of long-term debt — related party				5,428,572
		Total current liabilities			20,853,175
Long-term debt — related party, net of current maturities					31,214,285
Deferred credits					263,250
Asset retirement obligation					33,600,348
Hedge Liability					2,257,960
Commitments and contingencies
Stockholders’ equity
	New Common shares, $0.01 par value, 1,000,000 shares authorized; 1,000 shares issued and outstanding as of March 31, 2005				10
	Additional paid-in capital				121,140,455
	Accumulated deficit				(68,456,527)
		Total stockholders’ equity			52,683,938
		Total liabilities and stockholders’ equity		$	140,872,956

F-53

---

 

				Three Months Ended
				March 31,
				2005				2004
				(Unaudited)
Oil and natural gas sales				$	6,474,008			$	12,155,652
Costs and expenses:
	Lease operating expenses				3,132,010				3,144,885
	Production taxes				209,938				191,173
	Geological and geophysical expenses				75,804				14,980
	Depletion, depreciation and amortization				3,662,254				3,729,647
	Bad debt expense				—				120,532
	General and administrative expenses				529,851				421,685
	Management fees and other — related party				1,017,402				—
	Accretion of asset retirement obligation				823,734				758,711
		Total cost and expenses			9,450,993				8,381,613
	Operating income (loss)				(2,976,985	)			3,774,039
Other income (expense):
	Interest income and other				131,721				62,286
	Bankruptcy (costs) benefit				60,000				(1,084,445	)
	Interest expense — related party				(604,444	)			(655,541	)
	Loss on sale of assets				(714,764	)			—
		Total other expense.			(1,127,487	)			(1,677,700	)
	Net Income (loss) before income taxes				(4,104,472	)			2,096,339
	Income tax benefit (expense), net				1,497,722				—
	Net income (loss)			$	(2,606,750	)		$	2,096,339
Basic and diluted earnings (loss) per share (see Note 4):
	Net income (loss) per share			$	(2,606.75	)		$	.09
	Basic and diluted weighted average New common shares outstanding				1,000
	Basic and diluted weighted average Old common shares outstanding								24,359,695

F-54

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		New Common
		Shares																Total
										Additional				Accumulated				Stockholders’
		Shares				Amount				Paid-In Capital				Deficit				Equity
		(Unaudited)
Balance, December 31, 2004			1,000			$	10			$	121,140,455			$	(65,849,777	)		$	55,290,688
Net loss for the three month period ended March 31, 2005			—				—				—				(2,606,750	)			(2,606,750	)
Balance, March 31, 2005			1,000			$	10			$	121,140,455			$	(68,456,527	)		$	52,683,938

F-55

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			Three Months Ended
			March 31,
			2005				2004
			(Unaudited)
Cash flows from operating activities
	Net income (loss)		$	(2,606,750	)		$	2,096,339
	Adjustments to reconcile net income (loss) to net cash provided from operating activities
	Depletion, depreciation and amortization			3,662,254				3,729,647
	Deferred income taxes			(1,497,722	)			—
	Loss on sale of assets			714,764				—
	Unrealized loss on derivative instruments			6,335,507				—
	Allowance for doubtful accounts			—				120,532
	Accretion of asset retirement obligation			823,734				758,711
Changes in operating assets and liabilities
	Accounts receivable			2,201,089				274,787
	Hedge deposit			(3,600,000	)			—
	Prepaid expenses and other current assets			494,831				676,251
	Accounts payable and accrued liabilities			(3,167,943	)			(1,503,185	)
	Accounts receivable — related party			(10,000,000	)			—
	Natural gas imbalance payable			—				(809,872	)
	Other			(832,578	)			(87,750	)
	Net cash provided by (used in) operating activities			(7,472,814	)			5,255,460
Cash flows from investing activities
	Capital expenditures			(4,683,666	)			(131,013	)
	Proceeds from property sale, net			(518,480	)			150,000
	Increase in restricted deposits			—				(875,437	)
	Net cash used in investing activities			(5,202,146	)			(856,450	)
Cash flows from financing activities Repayment of debt				(1,357,143	)			(150,000	)
	Net cash used in financing activities			(1,357,143	)			(150,000	)
	Net increase (decrease) in cash			(14,032,103	)			4,249,010
	Decrease (increase) in restricted cash			—				(5,272,641	)
	Cash at beginning of period			23,753,229				3,152,122
	Cash at end of period		$	9,721,126			$	2,128,491
Supplemental Disclosure of Cash Flow Information:
	Interest paid		$	682,812			$	641,530
	Income taxes paid		$	—			$	52,000

F-56

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Note 1 —	Basis of Presentation

Note 2 —	Voluntary Petition for Relief Under Chapter 11 Bankruptcy

	•	Revolving Credit Facility: the holder of the claim received a new note, the principal amount of which will be paid over seven years,

F-57

---

 

	•	Senior Notes: 49% of the Senior Notes were settled for a cash payment equal to 2.5% of the face value of the Senior Notes; 51% of the Senior Notes were converted into 100% of the equity of the reorganized Company,
	•	Unsecured Creditors: received a cash payment equal to 10% of their allowed claim.
	•	Equity: the pre-confirmation shares of common stock (the “Old Common Stock”) are deemed to be of no value and were cancelled. The equity of the reorganized Company became owned by the 51% Senior Note holders.

Note 3 —	Sale of West Delta Property

			Book Value at
			March 10, 2005
Assets transferred to purchaser:
	Net book value of West Delta properties		$	(12,238,020	)
	Escrow account — West Delta			(4,720,060	)
	Cash payment — purchase price adjustment			(518,480	)
Liabilities assumed by purchaser:
	West Delta asset retirement obligation			16,761,796
	Loss on sale of West Delta		$	(714,764	)

Note 4 —	Earnings per Share

F-58

---

 

Note 5 —	Derivative Instruments and Hedging Activities

F-59

---

 

Date of Contract		Volume/Month				Beginning				Ending				Floor				Ceiling
November 2004			25,000 Bbls				January 2005				December  2005			$	42.50			$	46.00
November 2004			150,000  MMBTU				January 2005				December  2005			$	6.00			$	8.35
February 2005			5,000 Bbls				March 2005				December  2005			$	44.50			$	48.00
February 2005			40,000 MMBTU				March 2005				December  2005			$	6.05			$	7.30
February 2005			17,000 Bbls				January 2006				December  2006			$	41.65			$	45.25
February 2005			140,000  MMBTU				January 2006				December  2006			$	6.00			$	7.25

Note 6 —	Asset Retirement Obligations

		Three Month Period Ended
		March 31,
		2005				2004
ARO at the beginning of the period		$	49,538,410			$	43,932,452
Sales (see note 3)			(16,761,796	)			—
Accretion expense			823,734				758,711
ARO at the end of the period		$	33,600,348			$	44,691,163

Note 7 —	Income Taxes

F-60

---

 

Note 8 —	Commitments and Contingencies

	Restricted Deposits

		Year Ended
		December 31,
2005 (remaining)		$	2,400,000
2006			3,200,000
2007			3,200,000
2008			3,200,000
2009			3,200,000
Thereafter			2,000,000
		$	17,200,000

F-61

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Note 9 —	Related Party Transactions

	•	At March 31, 2005, the balance sheet reflects a term loan payable of $38.6 million, and related interest payable of $0.2 million. During the three month period ended March 31, 2005, the Company recorded interest expense of $0.6 million associated with this related party.
	•	The Company entered into a Management Agreement with an entity pursuant to the Bankruptcy Court’s Order confirming the effective date of the Plan. In exchange for management services provided by that entity, the Company pays a monthly fee equal to the actual direct and indirect administrative overhead costs that the entity incurs in operating and administering the Company’s oil and natural gas properties plus 15% of such costs. The Company recorded $1.0 million in management fee expense under this agreement for the three month period ended March 31, 2005. At March 31, 2005, the balance sheet reflects accounts payable of $0.3 million owed under the agreement.
	•	As of March 31, 2005, the Company had $10 million in outstanding advances to TransTexas, Inc., an entity owned or controlled by Mr. Icahn. The advances are non-interest bearing.

F-62

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	/s/ KPMG LLP

F-63

---

 

				As of December 31,
				2004				2003
ASSETS
Current Assets:
	Cash and cash equivalents			$	12,756,000			$	33,454,000
	Accounts receivable, net of allowances of $3,862,000 and $5,918,000, respectively				5,223,000				5,247,000
	Inventories				2,499,000				2,222,000
	Deferred financing costs				2,260,000				762,000
	Insurance deposits				3,017,000				—
	Prepaid expenses and other current assets				1,689,000				3,946,000
		Total current assets			27,444,000				45,631,000
Property and Equipment:
	Land				54,344,000				54,344,000
	Buildings and improvements				88,147,000				88,249,000
	Equipment				73,675,000				64,722,000
	Construction in progress				2,040,000				2,111,000
					218,206,000				209,426,000
	Less — accumulated depreciation and amortization				(46,566,000	)			(40,013,000	)
	Property and equipment, net				171,640,000				169,413,000
Other Assets:
	Obligatory investments, net of allowances of $12,500,000 and $11,340,000, respectively				11,647,000				10,705,000
	Other assets				6,227,000				1,814,000
		Total other assets			17,874,000				12,519,000
				$	216,958,000			$	227,563,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
	Current portion debt			$	43,741,000			$	—
	Current portion capital leases				248,000				—
	Accounts payable				7,082,000				6,815,000
	Accrued liabilities —
		Payroll and related expenses			4,379,000				4,241,000
		Interest			1,216,000				3,092,000
		Gaming obligations			3,363,000				2,725,000
		Insurance			4,330,000				2,505,000
		Other			2,175,000				2,821,000
		Total current liabilities			66,534,000				22,199,000
	Long-Term Debt, net of current maturities				66,259,000				110,000,000
	Non-current capital leases				432,000				—
	Other Noncurrent Liabilities				4,920,000				3,729,000
	Commitments and Contingencies				—				—
	Warrants in Atlantic Coast Entertainment Holdings, Inc.				43,587,000				—
Shareholders’ Equity:
	Preferred stock, $.01 par value per share; 5,000,000 shares authorized; 0 shares outstanding				—				—
	Common Stock, $.01 par value per share; 20,000,000 shares authorized; 10,000,000 shares issued and outstanding				100,000				100,000
	Additional paid-in capital				81,313,000				124,900,000
	Accumulated deficit				(46,187,000	)			(33,365,000	)
		Total shareholders’ equity			35,226,000				91,635,000
				$	216,958,000			$	227,563,000

F-64

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			Year Ended December 31,
			2004				2003				2002
Revenues:
Casino			$	157,643,000			$	154,813,000			$	175,065,000
Rooms				10,908,000				10,994,000				11,143,000
Food and beverage				21,898,000				21,962,000				23,330,000
Other				3,940,000				3,914,000				3,735,000
				194,389,000				191,683,000				213,273,000
Less — promotional allowances				(23,146,000	)			(23,934,000	)			(23,356,000	)
	Net revenues			171,243,000				167,749,000				189,917,000
Expenses:
Casino				50,467,000				52,657,000				59,971,000
Rooms				3,397,000				2,677,000				3,639,000
Food and beverage				7,930,000				8,481,000				10,343,000
Other				870,000				1,297,000				1,222,000
Selling, general and administrative				90,423,000				90,010,000				93,871,000
Depreciation and amortization				14,898,000				14,123,000				13,292,000
Provision for obligatory investments				1,165,000				1,434,000				1,521,000
Loss on impairment of fixed assets				—				—				1,282,000
Loss on disposal of assets				152,000				28,000				185,000
	Total expenses			169,302,000				170,707,000				185,326,000
Income (loss) from operations				1,941,000				(2,958,000	)			4,591,000
Non-operating income (expense):
Interest income				422,000				627,000				1,067,000
Interest expense				(11,115,000	)			(12,581,000	)			(12,195,000
Debt restructuring costs				(3,084,000	)			(1,843,000	)			—
Total non-operating expense, net				(13,777,000	)			(13,797,000	)			(11,128,000	)
Loss before income taxes				(11,836,000	)			(16,755,000	)			(6,537,000	)
Income tax provision				(986,000	)			(958,000	)			(784,000	)
Net loss			$	(12,822,000	)		$	(17,713,000	)		$	(7,321,000	)
Basic/diluted loss per common share			$	(1.28	)		$	(1.77	)		$	(0.73	)
Basic/diluted weighted average common shares outstanding				10,000,000				10,000,000				10,000,000

F-65

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		Common Stock
										Additional				Accumulated
		Shares				Amount				Paid-In Capital				Deficit				Total
BALANCE, December 31, 2001			10,000,000			$	100,000			$	124,900,000			$	(8,331,000	)		$	116,669,000
Net Loss			—				—				—				(7,321,000	)			(7,321,000	)
BALANCE, December 31, 2002			10,000,000			$	100,000			$	124,900,000			$	(15,652,000	)		$	109,348,000
Net Loss			—				—				—				(17,713,000	)			(17,713,000	)
BALANCE, December 31, 2003			10,000,000			$	100,000			$	124,900,000			$	(33,365,000	)		$	91,635,000
Net Loss			—				—				—				(12,822,000	)			(12,822,000	)
Dividend to common shareholders in the form of warrants, exercisable for 2,750,000 common shares of Atlantic Coast Entertainment Holdings, Inc.			—				—				(43,587,000	)			—				(43,587,000	)
BALANCE, December 31, 2004			10,000,000			$	100,000			$	81,313,000			$	(46,187,000	)		$	35,226,000

F-66

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			Year Ended December 31,
			2004				2003				2002
OPERATING ACTIVITIES:
Net loss			$	(12,822,000	)		$	(17,713,000	)		$	(7,321,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Depreciation and amortization			14,898,000				14,123,000				13,292,000
	Provision for obligatory investments			1,165,000				1,434,000				1,521,000
	Loss on impairment of fixed assets			—				—				1,282,000
	Loss on disposal of assets			152,000				28,000				185,000
	Provision for doubtful accounts			416,000				1,040,000				1,586,000
	Decrease in deferred financing costs			1,229,000				—				—
	Increase in insurance deposits			(3,017,000	)			—				—
	(Increase) decrease in accounts receivable			(392,000	)			(1,312,000	)			2,349,000
	Increase (decrease) in accounts payable and accrued liabilities			360,000				(130,000	)			(3,080,000	)
	Decrease (increase) in prepaid expenses and other current assets			2,187,000				(98,000	)			(426,000	)
	Increase in other noncurrent assets			(929,000	)			(11,000	)			—
	Increase in other noncurrent liabilities			1,178,000				369,000				285,000
	Net cash provided by (used in) operating activities			4,425,000				(2,270,000	)			9,673,000
INVESTING ACTIVITIES:
Purchase of property and equipment				(17,378,000	)			(12,825,000	)			(14,058,000	)
Proceeds from disposition of assets				308,000				110,000				320,000
Proceeds from sale of obligatory investments				202,000				130,000				208,000
Purchase of obligatory investments				(2,308,000	)			(2,336,000	)			(2,496,000	)
	Net cash used in investing activities			(19,176,000	)			(14,921,000	)			(16,026,000	)
FINANCING ACTIVITIES:
Proceeds from long-term debt				758,000				—				—
Repayments of long-term debt				(79,000	)			—				(371,000	)
Cost of issuing long-term debt				(6,626,000	)			—				—
	Net cash used in financing activities			(5,947,000	)			—				(371,000	)
	Net decrease in cash and cash equivalents			(20,698,000	)			(17,191,000	)			(6,724,000	)
	Cash and cash equivalents at beginning of period			33,454,000				50,645,000				57,369,000
	Cash and cash equivalents at end of period		$	12,756,000			$	33,454,000			$	50,645,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid			$	10,744,000			$	12,100,000			$	12,128,000
Interest Capitalized			$	86,000			$	300,000			$	766,000
Income Taxes paid			$	1,051,000			$	899,000			$	1,764,000
Dividends to Common Shareholders in the form of Warrants in Atlantic Coast Entertainment Holdings, Inc.			$	43,587,000			$	—			$	—
Issuance of 3% Notes in exchange for 11% Notes			$	66,259,000			$	—			$	—

F-67

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(1)	Organization, Business and Basis of Presentation

F-68

---

 

F-69

---

 

(2)	Liquidity Matters

(3)	Summary of Significant Accounting Policies

	Casino revenues, promotional allowances and departmental expenses

F-70

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		Year Ended December 31,
		2004				2003				2002
Allocation From:
Rooms		$	6,511,000			$	7,360,000			$	8,274,000
Food and Beverage			16,116,000				16,482,000				17,399,000
Other Operating			2,294,000				2,070,000				1,324,000
		$	24,921,000			$	25,912,000			$	26,997,000
Allocation To:
Casino		$	3,846,000			$	3,815,000			$	4,186,000
Selling, General and Administrative			21,075,000				22,097,000				22,811,000
		$	24,921,000			$	25,912,000			$	26,997,000

	Cash and cash equivalents

	Allowance for doubtful accounts

	Inventories

	Property and equipment

Buildings and improvements		25 - 40 years
Operating equipment		3 - 7 years

F-71

---

 

	Deferred financing costs

	Long-lived assets

	Accrued insurance

F-72

---

 

	Income taxes

	Loss per share

	Reclassifications

(4)	Long-Term Debt

		As of December 31,
		2004				2003
11% notes, due September 29, 2005(a)		$	43,741,000			$	110,000,000
3% Notes due July 22, 2008(b)			66,259,000				—
Total indebtedness			110,000,000				110,000,000
Less — current maturities			(43,741,000	)			—
Total long-term debt		$	66,259,000			$	110,000,000

(a)		In accordance with its approved plan of reorganization, GB Holdings through its then wholly-owned subsidiaries issued $110 million at 11% interest payable September 29, 2005 (“11% Notes”). Interest on the 11% Notes is payable on March 29 and September 29, beginning March 29, 2001. The outstanding principal is due on September 29, 2005.
		The original indenture for the 11% Notes contained various provisions, which, among other things, restricted the ability of GB Holdings, and GBHC to incur certain senior secured indebtedness beyond certain limitations, and contained certain other limitations on the ability to merge, consolidate, or sell

F-73

---

 

		substantially all of their assets, to make certain restricted payments, to incur certain additional senior liens, and to enter into certain sale-leaseback transactions.
		In a Consent Solicitation Statement and Consent Form dated September 14, 2001, Property sought the consent of holders of the 11% Notes to make certain changes to the original indenture (the “Modifications”). The Modifications included, but were not limited to, a deletion of, or changes to, certain provisions the result of which would be (i) to permit GB Holdings and its subsidiaries to incur any additional indebtedness without restriction, to issue preferred stock without restriction, to make distributions in respect of preferred stock and to prepay indebtedness without restriction, to incur liens without restriction and to enter into sale-leaseback transactions without restriction, (ii) to add additional exclusions to the definition of “asset sales” to exclude from the restrictions on “asset sales” sale-leaseback transactions, conveyances or contributions to any entity in which GB Holdings or its subsidiaries has or obtains equity or debt interests, and transactions (including the granting of liens) made in accordance with another provision of the Modifications relating to collateral release and subordination or any documents entered into in connection with an “approved project” (a new definition included as part of the Modifications which includes, if approved by the Board of Directors of GB Holdings, incurrence of indebtedness or the transfer of assets to any person if GB Holdings or any of its subsidiaries has or obtain debt or equity interests in the transferee or any similar, related or associated event, transaction or activity) in which a release or subordination of collateral has occurred including, without limitation, any sale or other disposition resulting from any default or foreclosure, (iii) to exclude from the operation of covenants related to certain losses to collateral, any assets and any proceeds thereof, which have been subject to the release or subordination provisions of the Modifications, (iv) to permit the sale or other conveyances of Casino Reinvestment Development Authority (the “CRDA”) investments in accordance with the terms of a permitted security interest whether or not such sale was made at fair value, (v) to exclude from the operation of covenants related to the deposit into a collateral account of certain proceeds of “asset sales” or losses to collateral any assets and any proceeds thereof, which have been subject to the release or subordination provisions of the Modifications, (vi) to add new provisions authorizing the release or subordination of the collateral securing the 11% Notes in connection with, in anticipation of, as a result of, or in relation to, an “approved project”, and (vii) various provisions conforming the text of the original indenture to the intent of the preceding summary of the Modifications.
(b)		On July 22, 2004, Atlantic Holdings consummated the Consent Solicitation and Offer to Exchange which it commenced and in which Atlantic Holdings offered to exchange its 3% Notes due July 22, 2008 for 11% Notes due September 29, 2005, issued by Property. Pursuant to the Consent Solicitation and Offer to Exchange, an aggregate principal amount of $66,258,970 of 11% Notes, representing 60.2% of the outstanding 11% Notes, were tendered to Atlantic Holdings, on a dollar for dollar basis, in exchange for an aggregate principal amount of $66,258,970 of 3% Notes. At the election of the holders of a majority in principal amount of the outstanding 3% Notes, each $1,000 principal amount of 3% Notes is payable in or convertible into 65.909 shares of Atlantic Holdings Common Stock, subject to adjustments for stock dividends, stock splits, recapitalizations and the like. As a result of the Transaction, the $43.7 million in 11% Notes are no longer secured by any property or equipment of the Company. Holders of the 11% Notes that tendered in the Consent Solicitation and Offer to Exchange also received their pro rata share of the aggregate consent fees ($6.6 million) at the rate of $100 per $1000 principal amount of the 11% Notes tendered, plus accrued interest ($2.3 million) on the 11% Notes tendered, which amounts were paid at the consummation of the Transaction. The exchange is being accounted for as a modification of debt. The consent fees paid are being amortized over the term of the 3% Notes using the effective yield method. All external costs associated with the issuance of the 3% Notes have been expensed. As indicated in the Consent Solicitation and Offer to Exchange, an aggregate of 10,000,000 warrants, issued by Atlantic Holdings, were distributed on a pro rata basis to the shareholders of GB Holdings upon the consummation of the Transaction. Such Warrants allow the holders to purchase, from Atlantic Holdings, at an exercise price of $.01 per share, an aggregate of 2,750,000 shares of Atlantic Holdings Common

F-74

---

 

		Stock and are only exercisable following the earlier of (a) either the 3% Notes being paid in cash or upon conversion, in whole or in part, into Atlantic Holdings Common Stock, (b) payment in full of the outstanding principal of the 11% Notes which have not been exchanged, or (c) a determination by a majority of the board of directors of Atlantic Holdings (including at least one independent director of Atlantic Holdings) that the Warrants may be exercised. The fair value of the warrants as of July 22, 2004 (date of issuance) was $43,587,000 (as determined by a third party valuation). An additional $4.9 million in legal, accounting, professionals and state transfer fees were expended related to the Transaction, of which $3.1 million and $1.8 million were charged to debt restructuring costs during 2004 and 2003, respectively.

F-75

---

 

(5)	Income Taxes

			Year Ended December 31,
			2004				2003				2002
Federal income tax provision			$				$				$
Current				—				—				—
Deferred				—				—				—
	State income tax provision
Current				(986,000	)			(958,000	)			(784,000	)
Deferred				—				—				—
			$	(986,000	)		$	(958,000	)		$	(784,000	)

F-76

---

 

					2004				2003
Deferred tax assets:
	Bad debt reserve				$	1,578,000			$	2,418,000
	Deferred financing costs					—				234,000
	Group insurance					904,000				747,000
	Accrued vacation					603,000				613,000
	Action cash awards accrual					191,000				123,000
	Jackpot accrual					407,000				298,000
	Medical reserve					534,000				408,000
	Debt restructuring costs					—				754,000
	CRDA					6,293,000				5,724,000
	Federal and state net operating loss carryforward					21,962,000				17,004,000
	Workers Compensation					462,000				—
	Grantors trust income					3,713,000				3,616,000
	Credit carryforwards					3,345,000				3,385,000
	Other					770,000				297,000
		Total deferred tax assets				40,762,000				35,621,000
		Less valuation allowance				(24,209,000	)			(17,685,000	)
			Total deferred tax assets after valuation allowance			16,553,000				17,936,000
Deferred tax liabilities:
Noncurrent:
	Depreciation of plant and equipment					(16,336,000	)			(17,812,000	)
	Deferred financing costs					(81,000	)			—
	Other					(11,000	)			—
	Chips and tokens					(125,000	)			(124,000	)
		Total deferred tax liabilities				(16,553,000	)			(17,936,000	)
		Net deferred tax assets (liabilities)			$	—			$	—

F-77

---

 

		Years Ended December 31,
		2004				2003				2002
Expected federal benefit			(35.0	)%			(35.0	)%			(35.0	)%
State taxes net of federal benefit			(0.4	)%			(2.2	)%			(1.6	)%
State tax rate correction			0.0	%			3.9	%			0.0	%
Expired tax credit			2.7	%			0.7	%			0.0	%
Permanent differences			0.4	%			0.2	%			0.9	%
Tax credits			(6.2	)%			(5.2	)%			(13.2	)%
Deferred tax valuation allowance			55.2	%			43.3	%			57.8	%
Other			(8.4	)%			0.0	%			3.1	%
			8.3	%			5.7	%			12.0	%

(6)	Transactions with Related Parties

F-78

---

 

(7)	New Jersey Regulations and Obligatory Investments

F-79

---

 

(8)	Commitments and Contingencies

	Legal Proceedings

	Labor Relations

F-80

---

 

(9)	Employee Retirement Savings Plan

(10)	Disclosures about Fair Value of Financial Instruments

			December 31, 2004								December 31, 2003
			Carrying								Carrying
			Amount				Fair Value				Amount				Fair Value
Financial Assets:
	Cash and cash equivalents		$	12,756,000			$	12,756,000			$	33,454,000			$	33,454,000
	Obligatory investments, net			11,647,000				11,647,000				10,705,000				10,705,000
Financial Liabilities:
	Interest payable			2,099,000				2,099,000				3,092,000				3,092,000
	11% Notes			43,741,000				35,430,000				110,000,000				91,300,000
	3% Notes			66,259,000				64,452,000				—				—

F-81

---

 

(11)	Leases

				Operating Leases				Capital Leases
2005				$	1,967,000			$	286,000
2006					1,998,000				286,000
2007					1,998,000				188,000
2008					1,998,000				—
2009					1,998,000				—
Thereafter					6,434,000				—
		Total Minimum Lease Payments		$	16,393,000				760,000
Less imputed interest costs									(80,000	)
	Present value of Net Minimum Capital Lease Payments							$	680,000

(12)	Subsequent Events

(13)	Selected Quarterly Financial Data (Unaudited)

		Quarter
		First				Second				Third				Fourth
Year Ended December 31, 2004
Net revenues		$	40,990,000			$	44,570,000			$	44,160,000			$	41,523,000
Income (loss) from operations		$	915,000			$	1,911,000			$	719,000			$	(1,604,000	)
Net loss		$	(3,140,000	)		$	(2,493,000	)		$	(3,124,000	)		$	(4,065,000	)
Net loss per share		$	(0.31	)		$	(0.25	)		$	(0.31	)		$	(0.41	)
Year Ended December 31, 2003
Net revenues		$	39,303,000			$	45,464,000			$	45,211,000			$	37,771,000
Income (loss) from operations		$	(1,298,000	)		$	2,607,000			$	(144,000	)		$	(4,123,000	)
Net loss		$	(4,401,000	)		$	(507,000	)		$	(3,456,000	)		$	(9,349,000	)
Net loss per share		$	(0.44	)		$	(0.05	)		$	(0.35	)		$	(0.93	)

F-82

---

 

						Additions
						Amounts
		Balance of				Charged to
		Beginning of				Costs and								Balance at
		Period				Expenses				Deductions				End of Period
Year Ended December 31, 2004:
Allowance for doubtful accounts receivable		$	5,918,000			$	416,000			$	(2,472,000	)(1)		$	3,862,000
Allowance for obligatory investments			11,340,000				1,165,000				(5,000	)(2)			12,500,000
		$	17,258,000			$	1,581,000			$	(2,477,000	)		$	16,362,000
Year Ended December 31, 2003:
Allowance for doubtful accounts receivable		$	11,301,000			$	1,040,000			$	(6,423,000	)(1)		$	5,918,000
Allowance for obligatory investments			10,028,000				1,434,000				(122,000	)(2)			11,340,000
		$	21,329,000			$	2,474,000			$	(6,545,000	)		$	17,258,000
Year Ended December 31, 2002:
Allowance for doubtful accounts receivable		$	14,406,000			$	1,586,000			$	(4,691,000	)(1)		$	11,301,000
Allowance for obligatory investments			9,290,000				1,521,000				(783,000	)(2)			10,028,000
		$	23,696,000			$	3,107,000			$	(5,474,000	)		$	21,329,000

(1)	Represents net write offs of uncollectible accounts.
(2)	Represents write offs of obligatory investments in connection with the contribution of certain obligatory investments to CRDA approved projects.

F-83

---

 

				As of
				March 31,				December 31,
				2005				2004
				(Unaudited)
				(In thousands)
ASSETS
Current Assets:
	Cash and cash equivalents			$	14,929			$	12,756
	Accounts receivable, net				4,371				5,100
	Deferred financing costs				2,237				2,260
	Other current assets				9,813				7,328
		Total Current Assets			31,350				27,444
Property and equipment, net					168,237				171,640
Obligatory investments, net					11,830				11,647
Deferred financing costs					3,970				4,509
Other assets					1,667				1,718
		Total Other Assets			17,467				17,874
	TOTAL ASSETS			$	217,054			$	216,958
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
	Line of credit			$	4,000			$	—
	Current portion of long-term debt				43,741				43,741
	Accounts payable — trade				3,912				3,995
	Accrued expenses				10,261				11,360
	Accrued payroll and related expenses				7,503				6,819
	Related party payables				588				371
	Current portion of capital lease obligation				236				248
		Total Current Liabilities			70,241				66,534
Long-Term Liabilities:
	Long-term debt, less current portion				66,259				66,259
	Capital lease obligations, less current portion				385				432
	Other				5,496				4,920
		Total Long-Term Liabilities			72,140				71,611
Commitments and Contingencies
Warrants in Atlantic Coast Entertainment Holdings, Inc.					43,587				43,587
Shareholders’ Equity:
	Preferred stock, $.01 par value per share; 5,000,000 shares authorized; 0 shares outstanding				—				—
	Common stock, $.01 par value share; 20,000,000 shares authorized; 10,000,000 shares issued and outstanding				100				100
	Additional paid-in capital				81,313				81,313
	Accumulated deficit				(50,327	)			(46,187	)
		Total Shareholders’ Equity			31,086				35,226
		TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	217,054			$	216,958

F-84

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			Three Months				Three Months
			Ended				Ended
			March 31, 2005				March 31, 2004
			(In thousands, except per share data)
			(Unaudited)
REVENUES:
Casino			$	37,341			$	38,119
Hotel				2,294				2,288
Food and beverage				4,866				4,990
Other				807				927
	Gross Revenues			45,308				46,324
Less promotional allowances				(5,343	)			(5,334	)
	Net Revenues			39,965				40,990
COSTS AND EXPENSES:
Casino				11,827				12,214
Hotel				703				655
Food and beverage				1,566				2,027
Other operating expenses				209				203
Selling, general and administrative				22,925				21,041
Depreciation and amortization				4,026				3,567
Provision for obligatory investments				238				368
Gain on sale of assets				(4	)			—
	Total Costs And Expenses			41,490				40,075
(LOSS) INCOME FROM OPERATIONS				(1,525	)			915
OTHER INCOME (EXPENSE):
Interest income				107				111
Interest expense				(2,451	)			(3,189	)
Debt restructuring costs				(24	)			(710	)
	Total other expense, net			(2,368	)			(3,788	)
LOSS BEFORE INCOME TAXES				(3,893	)			(2,873	)
Provision for income taxes				247				267
NET LOSS			$	(4,140	)		$	(3,140	)
Basic/diluted loss per common share			$	(0.41	)		$	(0.31	)
Weighted average common shares outstanding				10,000,000				10,000,000

F-85

---

 

			Three Months				Three Months
			Ended				Ended
			March 31, 2005				March 31, 2004
			(In thousands)
			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss			$	(4,140	)		$	(3,140	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization				4,026				3,567
Provision for obligatory investments				238				368
Gain on sale of assets				(4	)			—
Changes in operating assets and liabilities:
	Accounts receivable, net			729				94
	Deferred financing costs			595				—
	Other current assets			(2,486	)			900
	Accounts payable and accrued expenses			(281	)			(4,612	)
	Long-term liabilities			576				56
Net Cash Used in Operating Activities				(747	)			(2,767	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment				(571	)			(2,118	)
Purchase of obligatory investments				(553	)			(517	)
Cash proceeds from sale of property and equipment				4				9
Cash proceeds from sale of obligatory investments				132				—
	Net Cash Used in Investing Activities			(988	)			(2,626	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowing on line of credit				4,000				—
Deferred financing fees				(33	)			—
Payments on capital lease obligation				(59	)			—
	Net Cash Provided by Financing Activities			3,908				—
Net increase (decrease) in cash and cash equivalents				2,173				(5,393	)
Cash and cash equivalents — beginning of period				12,756				33,454
Cash and Cash Equivalents — End of Period			$	14,929			$	28,061
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest			$	2,494			$	6,050
Cash paid for income taxes			$	88			$	88
Interest capitalized			$	2			$	28

F-86

---

 

(1)	Organization, Business and Basis of Presentation

	Reclassifications

F-87

---

 

(2)	Liquidity Matters

(3)	Related Party Transactions

(4)	Line of Credit

F-88

---

 

(5)	Commitments and Contingencies

F-89

---

 

	/s/ KPMG LLP

F-90

---

 

			As of December 31,
			2004				2003
			(Restated)				(Restated)
			(Dollars in thousands, except
			share related data)
ASSETS
Current Assets:
Cash and cash equivalents			$	12,756			$	16,904
Accounts receivable, net				5,100				5,247
Inventories				2,499				2,222
Insurance deposits				3,017				—
Prepaid expenses and other current assets				2,017				4,150
	Total current assets			25,389				28,523
Property and Equipment:
	Land			54,344				54,344
	Buildings and Improvements			88,147				88,249
	Equipment			73,675				64,722
	Construction in progress			2,040				2,111
				218,206				209,426
Less — accumulated depreciation and amortization				(46,566	)			(40,013	)
	Property and equipment, net			171,640				169,413
Other assets:
Obligatory investments, net				11,647				10,705
Deferred financing costs and other assets				8,113				2,369
	Total other assets			19,760				13,074
			$	216,789			$	211,010
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
	Current portion capital leases		$	248			$	—
	Accounts payable			6,710				6,815
	Accounts payable-related party			371				48
Accrued liabilities:
	Accrued payroll and related expenses			6,818				4,241
	Gaming obligations			3,173				2,725
	Insurance			1,891				2,505
	Interest payable			—				3,092
	Other			2,364				2,597
	Total current liabilities			21,575				22,023
Long-term debt				66,259				110,000
Notes payable — related party				—				21,900
Non-current capital leases				432				—
Other Non-current Liabilities				4,920				3,728
Commitments and Contingencies
Shareholder’s Equity:
	Common stock, $0.1 par value per share; 20,000,000 shares authorized; 2,882,938 and 101 shares outstanding			29				—
	Additional paid-in capital			126,550				89,660
	Warrants outstanding			43,587				—
	Accumulated deficit			(46,563	)			(36,301	)
	Total shareholder’s equity			123,603				53,359
			$	216,789			$	211,010

F-91

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'

				Year Ended				Year Ended				Year Ended
				December 31,				December 31,				December 31,
				2004				2003				2002
				(Restated)				(Restated)				(Restated)
				(Dollars in thousands, except share related data)
Revenues:
	Casino			$	157,643			$	154,813			$	175,065
	Rooms				10,908				10,994				11,143
	Food and beverage				21,898				21,962				23,330
	Other				3,940				3,914				3,735
					194,389				191,683				213,273
Less — promotional allowances					(23,146	)			(23,934	)			(23,356	)
	Net revenues				171,243				167,749				189,917
Expenses:
	Casino				50,467				52,657				59,971
	Rooms				3,397				2,677				3,639
	Food and beverage				7,930				8,481				10,343
	Other				870				1,297				1,222
	Selling, general and administrative				90,285				89,864				93,697
	Depreciation and amortization				14,898				14,123				13,292
	Provision for obligatory investments				1,165				1,434				1,521
	Loss on impairment of fixed assets				—				—				1,282
	Loss on disposal of assets				152				28				185
		Total expenses			169,164				170,561				185,152
Income (loss) from operations					2,079				(2,812	)			4,765
Non-operating income (expense):
	Interest income				345				341				445
	Interest expense				(8,883	)			(12,581	)			(12,195	)
	Debt restructuring costs				(2,759	)			(1,843	)			—
		Total non-operating expense, net			(11,297	)			(14,083	)			(11,750	)
Loss before income taxes					(9,218	)			(16,895	)			(6,985	)
	Income tax provision				(1,044	)			(862	)			(784	)
Net loss				$	(10,262	)		$	(17,757	)		$	(7,769	)
Basic/diluted loss per common share				$	(3.56	)		$	(6.16	)		$	(2.69	)
Weighted average common shares outstanding					2,882,938				2,882,938				2,882,938

F-92

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										Additional
		Common Stock								Paid-In								Accumulated
		Shares				Amount				Capital				Warrants				Deficit				Total
		(Dollars in thousands, except share related data)
BALANCE, December 31, 2001 (Restated)			100			$	—			$	89,659			$	—			$	(10,775	)		$	78,884
Net Loss																			(7,769	)			(7,769	)
BALANCE, December 31, 2002 (Restated)			100				—				89,659				—				(18,544	)			71,115
Issuance of common shares			1								1												1
Net Loss																			(17,757	)			(17,757	)
BALANCE, December 31, 2003 (Restated)			101				—				89,660				—				(36,301	)			53,359
Assumption of net liabilities by GB Holdings and issuance of common stock and warrants in connection with the Transaction			2,882,837				29				41,663				43,587				—				85,279
Return of capital											(4,773	)											(4,773	)
Net Loss																			(10,262	)			(10,262	)
BALANCE, December 31, 2004 (Restated)			2,882,938			$	29			$	126,550			$	43,587			$	(46,563	)		$	123,603

F-93

---

 

					Year Ended				Year Ended				Year Ended
					December 31, 2004				December 31, 2003				December 31, 2002
					(Restated)				(Restated)				(Restated)
					(In thousands)
OPERATING ACTIVITIES:
Net Loss					$	(10,262	)		$	(17,757	)		$	(7,769	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization						14,898				14,123				13,292
Provision for obligatory investments						1,165				1,434				1,521
Provision for doubtful accounts						416				1,040				1,586
Loss on impairment of fixed assets						—				—				1,282
Loss on disposal of assets						152				28				185
Changes in operating assets and liabilities:
	Accounts receivable					(269	)			(1,311	)			2,332
	Other current assets					(1,161	)			464				(272	)
	Noncurrent assets					589				124				—
	Accounts payable and accrued liabilities					3,668				(861	)			(2,570	)
	Noncurrent liabilities					(368	)			283				(394	)
		Net cash provided by (used in) operating activities				8,828				(2,433	)			9,193
INVESTING ACTIVITIES:
Proceeds from sale of obligatory investments						201				130				208
Related party receivables						—				24				29
Purchase of obligatory investments						(2,308	)			(2,336	)			(2,496	)
Purchase of property and equipment						(16,620	)			(12,825	)			(14,058	)
Proceeds from disposition of assets						308				110				320
		Net cash used in investing activities				(18,419	)			(14,897	)			(15,997	)
FINANCING ACTIVITIES:
Related party payable						—				15,399				6,501
Cash transferred from GB Holdings						16,920				—				—
Repayments of long-term debt						—				—				(371	)
Repayment of capital leases						(78	)			—				—
Return of capital GB Holdings, Inc.						(4,773	)			—				—
Cost of issuing long-term debt						(6,626	)			—				—
Issuance of common stock						—				1				—
		Net cash provided by financing activities				5,443				15,400				6,130
		Net decrease in cash and cash equivalents				(4,148	)			(1,930	)			(674	)
			Cash and cash equivalents at beginning of period			16,904				18,834				19,508
			Cash and cash equivalents at end of period		$	12,756			$	16,904				18,834
SUPPLEMENTAL CASH FLOW INFORMATION:
	Cash paid for income taxes				$	1,051			$	899			$	1,764
	Cash paid for interest				$	8,339			$	12,100			$	12,128
	Interest capitalized				$	86			$	300			$	766
	Assumption of net liabilities by GB Holdings in connection with the Transaction				$	68,359			$	—			$	—
	Purchase of equipment with capital lease				$	758			$	—			$	—
	Issuance of 3% Notes in exchange for 11% Notes				$	66,259			$	—			$	—

F-94

---

 

(1)	Organization, Business and Basis of Presentation

F-95

---

 

	Basis of Presentation

Current assets, primarily prepayments		$	266
Long-term debt, current		$	43,741
Note payable, related party		$	21,900
Accrued interest		$	2,984

(2)	Summary of Significant Accounting Policies

F-96

---

 

	Casino revenues, promotional allowances and departmental expenses —

		Year Ended				Year Ended				Year Ended
		December 31,				December 31,				December 31,
		2004				2003				2002
Allocation From:
Rooms		$	6,511			$	7,360			$	8,274
Food and Beverage			16,116				16,482				17,399
Other Operating			2,294				2,070				1,324
		$	24,921			$	25,912			$	26,997
Allocation To:
Casino		$	3,846			$	3,815			$	4,186
Selling, General and Administrative			21,075				22,097				22,811
		$	24,921			$	25,912			$	26,997

	Cash and cash equivalents —

	Allowance for doubtful accounts —

F-97

---

 

	Inventories —

	Property and equipment —

Buildings and improvements			25-40  years
Operating Equipment			3-7 years

	Deferred financing costs —

	Long-lived assets —

F-98

---

 

	Accrued insurance —

	Income taxes —

	Loss per share —

	(3) Restatement

F-99

---

 

			December 31, 2004
			As Previously
			Reported				As Restated
ASSETS
Current Assets:
Cash and cash equivalents			$	12,756			$	12,756
Accounts receivable, net				5,223				5,100
Inventories				2,499				2,499
Deferred financing costs				2,094	(1)			—
Insurance deposits				3,017				3,017
Prepaid expenses and other current assets				1,686	(1)			2,017
	Total current assets			27,275				25,389
Property and Equipment:
Land				54,344				54,344
Buildings and Improvements				88,147				88,147
Equipment				73,675				73,675
Construction in progress				2,040				2,040
				218,206				218,206
Less-accumulated depreciation and amortization				(46,566	)			(46,566	)
Property and equipment, net				171,640				171,640
Other assets:
Obligatory investments, net				11,647				11,647
Deferred financing costs and other assets				6,227	(1)			8,113
	Total other assets			17,784				19,760
			$	216,789			$	216,789
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Current portion capital leases			$	248	(3)		$	248
Accounts payable				7,082	(2)			6,710
Accounts payable-related party				—	(2)			371
Accrued liabilities:
Accrued payroll and related expenses				4,379	(3)			6,818
Gaming obligations				3,363	(3)			3,173
Insurance				4,330	(3)			1,891
Other				2,173	(3)			2,364
	Total current liabilities			21,575				21,575
Long-term debt				66,259				66,259
Non-current capital leases				432				432
Other Non-current Liabilities				4,920				4,920
Commitments and Contingencies
Shareholder’s Equity:
Common stock, $0.1 par value per share; 20,00,000 shares authorized; 2,882,938 shares outstanding				29				29
Additional paid-in capital				86,401	(4)			126,550
Warrants outstanding				43,587				43,587
Accumulated deficit				(6,414	)(4)			(46,563	)
	Total shareholder’s equity			123,603				123,603
			$	216,789			$	216,789

				As Previously
				Reported				As Restated
Year ended December 31, 2004:
Revenues:
	Casino			$	66,208			$	157,643
	Rooms				5,054				10,908
	Food and Beverage				9,830				21,898
	Other				1,804				3,940
					82,896				194,389
Less — promotional allowances					(10,323	)			(23,146	)
	Net revenues				72,573				171,243
Expenses:
	Casino				22,250				50,467
	Rooms				1,724				3,397
	Food and Beverage				3,316				7,930
	Other				402				870
	Selling, general and administrative				41,142				90,285
	Depreciation and amortization				6,844				14,898
	Provision for obligatory investments				508				1,165
	Loss on disposal of assets				187				152
		Total expenses			76,373				169,164
Income (loss) from operations					(3,800	)			2,079
Non-operating income (expense):
	Interest income				172				345
	Interest expense				(1,837	)			(8,883	)
	Debt restructuring costs				(475	)			(2,759	)
		Total non-operating expense, net			(2,140	)			(11,297	)
Loss before income taxes					(5,940	)			(9,218	)
	Income tax provision				(474	)			(1,044	)
Net loss				$	(6,414	)		$	(10,262	)
Basic/diluted loss per share				$	(5.00	)		$	(3.56	)
Weighted average common shares outstanding					1,283,929				2,882,938

F-100

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				Year Ended December 31, 2004
				As Previously
				Reported				As Restated
OPERATING ACTIVITIES:
Net Loss				$	(6,414	)		$	(10,262	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization					6,844				14,898
Provision for obligatory investments					508				1,165
Loss on disposal of assets					187				152
Provision for doubtful accounts					62				416
Changes in operating assets and liabilities:
	Decrease accounts receivable				(393	)			(269	)
	Deferred financing costs				821				—
	Other current assets				(518	)			(1,161	)
	Noncurrent assets				(538	)			589
	Accounts payable and accrued liabilities				(1,529	)			3,668
	Increase (decrease) noncurrent liabilities				1,014				(368	)
	Net cash provided by operating activities				44				8,828
INVESTING ACTIVITIES:
Proceeds from sale of obligatory investments									201
Purchase of obligatory investments					(932	)			(2,308	)
Purchase of property and equipment					(10,269	)			(16,620	)
Proceeds from disposition of assets					163				308
	Net cash used in investing activities				(11,038	)			(18,419	)
FINANCING ACTIVITIES:
Cash transferred from GB Holdings					—				16,920
Proceeds from capital leases					758				—
Repayment of capital leases					(78	)			(78	)
Proceeds from capital contributions from GB Holdings, Inc.					34,468				—
Return of capital GB Holdings, Inc.					(4,773	)			(4,773	)
Cost of issuing long-term debt					(6,626	)			(6,626	)
	Net cash provided by financing activities				23,749				5,443
	Net increase (decrease) in cash and cash equivalents				12,755				(4,148	)
		Cash and cash equivalents at beginning of period			1				16,904
		Cash and cash equivalents at end of period		$	12,756			$	12,756
SUPPLEMENTAL CASH FLOW INFORMATION:
	Cash paid for income taxes			$	355			$	1,051
	Transfer of net assets from GB Holdings, Inc.			$	98,033			$	—
	Cash paid for interest			$	—			$	8,339
	Interest capitalized			$	15			$	86
	Dividends to common shareholders in the form of Warrants in Atlantic Coast Entertainment Holdings, Inc.			$	43,587			$	—
	Assumption of net liabilities by GB Holdings in connection with the Transaction			$	—			$	68,359
	Purchase of equipment with capital lease			$	—			$	758
	Issuance of 3% notes in exchange for 11% notes			$	—			$	66,259

F-101

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(4)	Long-Term Debt

			As of December 31,
			2004				2003
11% Notes, due September 29, 2005(a)			$	—			$	110,000
3% Notes due July 22, 2008(b)				66,259				—
	Total long-term debt		$	66,259			$	110,000

(a)	In accordance with its approved plan of reorganization, GB Holdings through its then wholly-owned subsidiaries issued $110 million at 11% interest payable September 29, 2005 (“11% Notes”). Interest on the 11% Notes is payable on March 29 and September 29, beginning March 29, 2001. The outstanding principal is due on September 29, 2005.

	The original indenture for the 11% Notes contained various provisions, which, among other things, restricted the ability of GB Holdings, and GBHC to incur certain senior secured indebtedness beyond certain limitations, and contained certain other limitations on the ability to merge, consolidate, or sell substantially all of their assets, to make certain restricted payments, to incur certain additional senior liens, and to enter into certain sale-leaseback transactions.
	In a Consent Solicitation Statement and Consent Form dated September 14, 2001, Property sought the consent of holders of the 11% Notes to make certain changes to the original indenture (the “Modifications”). The Modifications included, but were not limited to, a deletion of, or changes to, certain provisions the result of which would be (i) to permit GB Holdings and its subsidiaries to incur any additional indebtedness without restriction, to issue preferred stock without restriction, to make distributions in respect of preferred stock and to prepay indebtedness without restriction, to incur liens without restriction and to enter into sale-leaseback transactions without restriction, (ii) to add additional exclusions to the definition of “asset sales” to exclude from the restrictions on “asset sales” sale-leaseback transactions, conveyances or contributions to any entity in which GB Holdings or its subsidiaries has or obtains equity or debt interests, and transactions (including the granting of liens) made in accordance with another provision of the Modifications relating to collateral release and subordination or any documents entered into in connection with an “approved project” (a new definition included as part of the Modifications which includes, if approved by the Board of Directors of GB Holdings, incurrence of indebtedness or the transfer of assets to any person if GB Holdings or any of its subsidiaries has or obtain debt or equity interests in the transferee or any similar, related or associated event, transaction or activity) in which a release or subordination of collateral has occurred including, without limitation, any sale or other disposition resulting from any default or foreclosure, (iii) to exclude from the operation of covenants related to certain losses to collateral, any assets and any proceeds thereof, which have been subject to the release or subordination provisions of the Modifications, (iv) to permit the sale or other conveyances of Casino Reinvestment Development Authority investments in accordance with the terms of a permitted security interest whether or not such sale was made at fair value, (v) to exclude from the operation of covenants related to the deposit into a collateral account of certain proceeds of “asset sales” or losses to collateral any assets and any proceeds thereof, which have been subject to the release or subordination provisions of the Modifications, (vi) to add new provisions authorizing the release or subordination of the collateral securing the 11% Notes in connection with, in

F-102

---

 

(b)

On July 22, 2004, Atlantic Holdings consummated the Consent Solicitation and Offer to Exchange which it commenced and in which Atlantic Holdings offered to exchange its 3% Notes due on July 22, 2008 for GB Holdings 11% Notes due on September 29, 2005, issued by Property. Pursuant to the Consent Solicitation and Offer to Exchange, an aggregate principal amount of $66,258,970 of GB Holdings 11% Notes were tendered to Atlantic Holdings, on a dollar for dollar basis, in exchange for an aggregate principal amount of $66,258,970 of 3% Notes. The $43,741,030 of 11% Notes that were not tendered to Atlantic Holdings remain an obligation of GB Holdings and are not an obligation of Atlantic Holdings as of December 31, 2004. At the election of the holders of a majority in principal amount of the outstanding 3% Notes, each $1,000 principal amount of 3% Notes is payable in or convertible into 65.909 shares of common stock, par value $.01 per share (“Atlantic Holdings Common Stock”) of Atlantic Holdings, subject to adjustments for stock dividends, stock splits, recapitalizations and the like. Holders of the GB Holdings 11% Notes that tendered in the Consent Solicitation and Offer to Exchange also received their pro rata share of the aggregate consent fees ($6.6 million) at the rate of $100 per $1,000 principal amount of the GB Holdings 11% Notes tendered, plus accrued interest ($2.3 million) on the GB Holdings 11% Notes tendered, which amounts were paid at the consummation of the Transaction. The exchange is being accounted for as a modification of debt. The consent fees paid are being amortized over the term of the 3% Notes using the effective yield method. All external costs associated with the issuance of the 3% Notes have been expensed. As indicated in the Consent Solicitation and Offer to Exchange, an aggregate of 10,000,000 warrants, issued by Atlantic Holdings, were distributed on a pro rata basis to the shareholders of GB Holdings upon the consummation of the Transaction. Such Warrants allow the holders to purchase from Atlantic Holdings, at an exercise price of $.01 per share, an aggregate of 2,750,000 shares of Atlantic Holdings Common Stock and are only exercisable following the earlier of (a) either the 3% Notes being paid in cash or upon conversion, in whole or in part, into Atlantic Holdings Common Stock, (b) payment in full of the outstanding principal of the GB Holdings 11% Notes which have not been exchanged, or (c) a determination by a majority of the board of directors of Atlantic Holdings (including at least one independent director of Atlantic Holdings) that the Warrants may be exercised. The fair value of the warrants as of July 22, 2004 (date of issuance) was $43,587,000.

F-103

---

 

(5)	Income Taxes

			Years Ended December 31,
			2004				2003				2002
Federal income tax provision:
	Current		$	—			$	—			$	—
	Deferred			—				—				—
State income tax provision:
	Current			(1,044	)			(862	)			(784	)
	Deferred			—				—				—
			$	(1,044	)		$	(862	)		$	(784	)

F-104

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				December 31,
				2004				2003
Deferred tax assets:
	Bad debt reserve			$	1,578			$	2,418
	Deferred financing costs				—				234
	Group insurance				904				747
	Accrued vacation				603				613
	Action cash awards accrual				191				123
	Jackpot accrual				407				298
	Medical reserve				534				408
	Debt restructuring costs				—				754
	Casino Reinvestment Development Authority				6,293				5,724
	Federal and state net operating loss carryforward				21,252				17,210
	Workers Compensation				462				—
	Grantors trust income				3,713				3,616
	Credit carryforwards				3,345				3,385
	Other				770				297
		Total deferred tax assets			40,052				35,827
		Less valuation allowance			(23,499	)			(17,891	)
		Total deferred tax assets after valuation allowances			16,553				17,936
Deferred tax liabilities:
Non-current:
	Depreciation of plant and equipment				(16,336	)			(17,812	)
	Deferred financing costs				(81	)			—
	Other				(11	)			—
	Chips and tokens				(125	)			(124	)
	Total deferred tax liabilities				(16,553	)			(17,936	)
		Net deferred tax assets (liabilities)		$	—			$	—

F-105

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		Year Ended December 31,
		2004				2003				2002
Expected federal benefit			(35.0	)%			(35.0	)%			(35.0	)%
State taxes net of federal benefit			(0.5	)%			(2.0	)%			(1.5	)%
State tax rate correction			0.0	%			3.8	%			0.0	%
Expired tax credit			3.5	%			0.7	%			0.0	%
Permanent differences			0.6	%			0.2	%			0.8	%
Tax credits			(7.9	)%			(5.1	)%			(12.4	)%
Deferred tax valuation allowance			60.8	%			43.1	%			59.3	%
Other			(10.8	)%			0.0	%			0.0	%
			10.7	%			5.7	%			11.2	%

(6)	Transactions with Related Parties

F-106

---

 

(7)	New Jersey Regulations and Obligatory Investments

F-107

---

 

(8)	Commitments and Contingencies

	Legal Proceedings

F-108

---

 

	Labor Relations

(9)	Employee Retirement Savings Plan

(10)	Disclosures about Fair Value of Financial Instruments

F-109

---

 

			As of December 31, 2004								As of December 31, 2003
			Carrying								Carrying
			Amount				Fair Value				Amount				Fair Value
Financial Assets:
	Cash and Cash equivalents		$	12,756			$	12,756			$	16,904			$	16,904
	Obligatory investments, net			11,647				11,647				10,705				10,705
Financial Liabilities:
	Interest payable			883				883				3,092				3,092
	11% Notes			—				—				110,000				91,300
	3% Notes			66,259				64,452				—				—

(11)	Leases

				Operating				Capital
				Leases				Leases
2005				$	1,967			$	286
2006					1,998				286
2007					1,998				188
2008					1,998				—
2009					1,998				—
	Thereafter				6,434				—
		Total Minimum Lease Payments		$	16,393				760
	Less imputed interest costs								(80	)
		Present value of Net Minimum Capital Lease Payments						$	680

(12)	Subsequent Events

F-110

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					As of				As of
					March 31, 2005				December 31, 2004
					(Restated)
					(Dollars in thousands, except share related data)
					(Unaudited)
ASSETS
Current Assets:
	Cash and cash equivalents				$	14,929			$	12,756
	Accounts receivable, net					4,371				5,100
	Other current assets					10,016				7,533
			Total Current Assets			29,316				25,389
	Property and equipment, net					168,237				171,640
	Obligatory investments, net					11,830				11,647
		Deferred financing costs and other assets				7,557				8,113
			Total Other Assets			19,387				19,760
TOTAL ASSETS					$	216,940			$	216,789
LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities:
	Line of credit				$	4,000			$	—
	Accounts payable-trade					5,271				6,710
	Accrued expenses					8,886				7,428
	Accrued payroll and related expenses					7,503				6,818
	Accounts payable-related party					588				371
	Current portion of capital lease obligation					236				248
			Total Current Liabilities			26,484				21,575
Long-Term Liabilities:
	Long-term debt, less current portion					66,259				66,259
	Capital lease obligations, less current portion					385				432
	Other					5,496				4,920
			Total Long-Term Liabilities			72,140				71,611
Commitments and Contingencies
Shareholder’s Equity:
	Common Stock, $.01 par value share; 20,000,000 shares authorized; 2,882,938 shares outstanding					29				29
	Additional paid-in capital					124,083				126,550
	Warrants outstanding					43,587				43,587
	Accumulated deficit					(49,383	)			(46,563	)
			Total Shareholder’s Equity			118,316				123,603
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY					$	216,940			$	216,789

F-111

---

 

				Three Months				Three Months
				Ended				Ended
				March 31, 2005				March 31, 2004
								(Restated)
				(Dollars in thousands, except share related data)
				(Unaudited)
REVENUES:
	Casino			$	37,341			$	38,119
	Hotel				2,294				2,288
	Food and beverage				4,866				4,990
	Other				807				927
		Gross revenues			45,308				46,324
	Less promotional allowances				(5,343	)			(5,334	)
		Net revenues			39,965				40,990
COSTS AND EXPENSES:
	Casino				11,827				12,214
	Hotel				703				655
	Food and beverage				1,566				2,027
	Other				209				203
	Selling, general and administrative				22,864				21,016
	Depreciation and amortization				4,026				3,567
	Provision for obligatory investments				238				368
	Gain on sale of assets				(4	)			—
		Total costs and expenses			41,429				40,050
INCOME (LOSS) FROM OPERATIONS					(1,464	)			940
OTHER INCOME (EXPENSE):
	Interest income				107				71
	Interest expense				(1,193	)			(3,190	)
	Debt restructuring costs				(23	)			(710	)
		Total other expense, net			(1,109	)			(3,829	)
LOSS BEFORE INCOME TAXES					(2,573	)			(2,889	)
Provision for income taxes					247				267
NET LOSS				$	(2,820	)		$	(3,156	)
Basic/diluted loss per common share				$	(0.98	)		$	(1.09	)
Weighted average common shares outstanding					2,882,938				2,882,938

F-112

---

 

				Three Months				Three Months
				Ended				Ended
				March 31, 2005				March 31, 2004
								(Restated)
				(In thousands)
				(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net Loss			$	(2,820	)		$	(3,156	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Depreciation and amortization				4,026				3,567
	Provision for obligatory investments				238				368
	Gain on sale of assets				(4	)			—
	Changes in operating assets and liabilities:
		Accounts receivable, net			729				76
		Other assets			(1,946	)			865
		Accounts payable and accrued expenses			704				(4,584	)
		Other liabilities			576				71
Net cash provided by (used in) operating activities					1,503				(2,793	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Acquisition of property and equipment				(571	)			(2,118	)
	Purchase of obligatory investments				(553	)			(517	)
	Cash proceeds from sale of property and equipment				4				—
	Cash proceeds from sale of obligatory investments				132				9
Net cash used in investing activities					(988	)			(2,626	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from borrowing on line of credit				4,000				—
	Debt Issuance Cost				(33)				—
	Related party payables				217				4,100
	Payments on capital lease obligation				(59	)			—
	Return of capital of GB Holdings, Inc.				(2,467	)			—
Net cash provided by financing activities					1,658				4,100
	Net increase (decrease) in cash and cash equivalents				2,173				(1,319	)
	Cash and cash equivalents — beginning of period				12,756				16,904
Cash and cash equivalents — end of period				$	14,929			$	15,585
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest				$	89			$	6,050
Cash paid for income taxes				$	88			$	88
Interest capitalized				$	2			$	28

F-113

---

 

Note 1.	Organization, Business and Basis of Presentation

	Basis of Presentation

F-114

---

 

Note 2.	Restatement

Note 3.	Transactions with Related Parties

Note 4.	Line of Credit

F-115

---

 

Note 5.	Commitments and Contingencies

F-116

---

 

	(i) The Acquisitions; and
	(ii) The issuance of $480.0 million of Senior Notes due 2013 at an interest rate of 71/8% per annum in February 2005.

A-1

---

 

				Historical(1)
																												Pro Forma				Pro Forma
				AREP				NEG								GB				Intercompany				Historical				Adjustments				Intercompany
				(Supplemental)(2)				Holding				Panaco				Holdings				Adjustments				Combined				Acquisitions(1)(2)				Adjustments(3)				Pro Forma
				(In thousands)
ASSETS
Current Assets
	Cash and cash equivalents			$	1,250,074			$	10,999			$	9,721			$	14,929			$				$	1,285,723			$	(180,000	)		$				$	1,105,723
	Investment in U.S. Government and Agency obligations				68,894																				68,894												68,894
	Marketable equity and debt securities				68,497																				68,497												68,497
	Due from brokers				147,223																				147,223												147,223
	Restricted cash				28,537																				28,537												28,537
	Receivables and other assets				52,567				19,992				25,642				16,421				(11,549	)			103,073												103,073
	Real estate leased to others under the financing method				3,740																				3,740												3,740
	Properties held for sale				33,995																				33,995												33,995
	Current portion of investment in debt securities of affiliates				5,429																(5,429	)			—												—
	Current portion of deferred tax asset				2,685								3,567												6,252												6,252
		Total current assets			1,661,641				30,991				38,930				31,350				(16,978	)			1,745,934				(180,000	)			—				1,565,934
	Investment in U.S. Government and Agency obligations				5,533																				5,533												5,533
	Other investments				244,602																				244,602				466,000				(466,000	)			244,602
	Land and construction-in- progress				106,000																				106,000												106,000
	Real estate leased to others:
	Accounted for under the financing method				75,949																				75,949												75,949
	Accounted for under the operating method, net				51,127																				51,127												51,127
	Oil and gas properties, net				180,241				245,216				96,319												521,776												521,776
Hotel, casino and resort operating properties, net:
	Hotel and Casino				288,890												168,237								457,127												457,127
	Hotel and resorts				46,041																				46,041												46,041
	Deferred finance costs and other assets				24,831				4,052				19,632				17,467								65,982												65,982
	Long-term portion of investment in debt securities of affiliates				91,864																(91,864	)			—												—
	Investment in NEG Holding LLC				97,693																(97,693	)			—												—
	Equity interest in GB Holdings, Inc.				9,138																(9,138	)			—												—
	Equity investment				—				2,170																2,170												2,170
	Deferred tax asset				52,147								21,340												73,487												73,487
		Total		$	2,935,697			$	282,429			$	176,221			$	217,054			$	(215,673	)		$	3,395,728			$	286,000			$	(466,000	)		$	3,215,728

A-2

---

 

				Historical(1)
																												Pro Forma				Pro Forma
				AREP				NEG								GB				Intercompany				Historical				Adjustments				Intercompany
				(Supplemental)(2)				Holding				Panaco				Holdings				Adjustments				Combined				Acquisitions(1)(2)				Adjustments(3)				Pro Forma
				(In thousands)
LIABILITIES AND PARTNERS’/ SHAREHOLDERS’ EQUITY
Current Liabilities
	Current portion of mortgages payable			$	4,205			$				$				$				$				$	4,205			$				$				$	4,205
	Mortgages on properties held for sale				20,372																				20,372												20,372
	Due to affiliate				10,000																(10,000	)			—												—
	Line of credit				—												4,000								4,000												4,000
	Current portion note payable				—												43,741								43,741												43,741
	Current portion of long-term debt				—								5,429								(5,429	)			—												—
	Accounts payable and other liabilities				96,814				35,699				15,029				22,500				(207	)			169,835												169,835
	Securities sold not yet purchased				83,750																				83,750												83,750
		Total current liabilities			215,141				35,699				20,458				70,241				(15,636	)			325,903				—				—				325,903
	Other liabilities				28,133				13,782				2,258				5,881				(1,342	)			48,712												48,712
	Mortgages payable:
	Real estate leased to others				55,614																				55,614												55,614
	Senior secured notes payable and credit facility				215,000																				215,000												215,000
	Senior unsecured notes payable, net				350,679																				350,679												350,679
	Senior unsecured notes payable				480,000																				480,000												480,000
	Long-term debt, net of current portion				—				66,834				31,214				66,259				(95,138	)			69,169												69,169
	Asset retirement obligation				3,999				3,116				33,600												40,715												40,715
	Preferred limited partnership units				108,006																				108,006												108,006
		Total long-term liabilities			1,241,431				83,732				67,072				72,140				(96,480	)			1,367,895				—				—				1,367,895
	Warrants in Atlantic Coast Entertainment Holdings, Inc.				—												43,587				(43,587	)			—												—
Commitments and contingencies
Minority interests					—																16,808				16,808												16,808
Partners’/Shareholders Equity					’
	Limited partners equity				1,383,913																				1,383,913				466,000				(6,773	)			1,843,140
	General partner equity				107,133																				107,133								(433,230	)			(326,097	)
	Treasury units at cost				(11,921	)																			(11,921	)											(11,921	)
	Shareholders’ equity				—				162,998				88,691				31,086				(76,778	)			205,997				(180,000	)			(25,997	)			—
	Partners’/ Shareholders’ equity				1,479,125				162,998				88,691				31,086				(76,778	)			1,685,122				286,000				(466,000	)			1,505,122
		Total		$	2,935,697			$	282,429			$	176,221			$	217,054			$	(215,673	)		$	3,395,728			$	286,000			$	(466,000	)		$	3,215,728

A-3

---

 

			Historical(1)
			AREP				NEG								GB				Intercompany				Historical				Debt
			(Supplemental)(2)				Holding				Panaco				Holdings				Adjustments				Combined				Offering(5)				Pro Forma
			(In thousands, except unit and per unit data)
Revenues:
	Hotel and casino operating income		$	82,838			$				$				$	39,965			$	(136	)		$	122,667			$				$	122,667
	Land, house and condominium sales			8,279																				8,279								8,279
	Interest income on financing leases			1,966																				1,966								1,966
	Interest income on U.S. Government and Agency obligations and other investments			12,902								132				107				(602	)			12,539								12,539
	Rental income			2,035																				2,035								2,035
	Hotel and resort operating income			5,563																				5,563								5,563
	Oil and gas operating income			15,422				25,490				12,707												53,619								53,619
	Accretion of investment in NEG Holding LLC			9,893																(9,893	)			—								—
	NEG management fee			2,108																(2,108	)			—								—
	Dividend and other income			4,206																				4,206								4,206
	Equity in losses of equity method investees			(986	)															986				—								—
				144,226				25,490				12,839				40,072				(11,753	)			210,874				—				210,874
Expenses:
	Hotel and casino operating expenses			57,624												37,468				(304	)			94,788								94,788
	Cost of land, house and condominium sales			7,047																				7,047								7,047
	Hotel and resort operating expenses			5,405																				5,405								5,405
	Oil and gas operating expenses			2,866				6,449				5,551								(2,108	)			12,758								12,758
	Interest expense			19,265				916				604				2,451				(1,074	)			22,162				3,575				25,737
	Depreciation, depletion and amortization			16,167				6,688				4,842				4,026								31,723								31,723
	General and administrative expenses			7,610																				7,610								7,610
	Property expenses			952																				952								952
				116,936				14,053				10,997				43,945				(3,486	)			182,445				3,575				186,020
	Operating income (loss)			27,290				11,437				1,842				(3,873	)			(8,267	)			28,429				(3,575	)			24,854
Other gains and (losses):
	Other losses			(180	)																			(180	)							(180	)
	Unrealized gains on securities sold short			21,704																				21,704								21,704
	Gain on sales and disposition of real estate and other assets			186												4								190								190
	Debt restructuring/ reorganization costs			—												(24	)							(24	)							(24	)
	Change in fair value of derivative contracts			(9,813	)			(22,620	)			(6,336	)											(38,769	)							(38,769	)
	Minority interest			—																932				932								932
	Income (loss) from continuing operations before income taxes			39,187				(11,183	)			(4,494	)			(3,893	)			(7,335	)			12,282				(3,575	)			8,707
	Income tax (expense) benefit			(4,782	)							1,624				(247	)							(3,405	)							(3,405	)
	Income (loss) from continuing operations		$	34,405			$	(11,183	)		$	(2,870	)		$	(4,140	)		$	(7,335	)		$	8,877			$	(3,575	)		$	5,302
Income from continuing operations attributable to:
	Limited partners		$	38,940																											$	10,416
	General partner			(4,535	)																											(5,114	)
			$	34,405																											$	5,302
Income from continuing operations per LP unit:
Basic earnings:
	Income from continuing operations per LP unit		$	0.84																											$	0.17
	Weighted average units outstanding			46,098,284																												62,167,250
Diluted earnings:
	Income from continuing operations per LP unit		$	0.81																											$	0.17
	Weighted average units and equivalent partnership units outstanding			49,857,622																												62,167,250

A-4

---

 

																							Other Pro Forma Adjustments
																											Panaco
			Historical(1)																								Intercompany
																											and
			AREP				NEG				GB				Intercompany				Historical								Bankruptcy				Debt				Prior Debt
			(Supplemental)(2)				Holding				Holdings				Adjustments				Combined				Panaco(1)				Adjustment(4)				Offering(5)				Offering(6)				Pro Forma
			(In thousands, except unit and per unit data)
	Income (loss) from continuing operations before income taxes			98,697				29,122				(11,836	)			(25,280	)			90,703				61,721				(54,046	)			(35,263	)			(12,285	)			50,830
	Income tax (expense) benefit			(17,326	)							(986	)							(18,312	)			22,877																4,565
	Income (loss) from continuing operations		$	81,371			$	29,122			$	(12,822	)		$	(25,280	)		$	72,391			$	84,598			$	(54,046	)		$	(35,263	)		$	(12,285	)		$	55,395
Income from continuing operations attributable to:
	Limited partners		$	71,456																																			$	45,997
	General partner			9,915																																				9,398
			$	81,371																																			$	55,395
Income from continuing operations per LP unit:
Basic earnings:
	Income from continuing operations per LP unit		$	1.55																																			$	0.74
	Weighted average units outstanding			46,098,284																																				62,167,250
Diluted earnings:
	Income from continuing operations per LP unit		$	1.48																																			$	0.74
	Weighted average units and equivalent partnership units outstanding			51,542,312																																				62,167,250

A-5

---

 

																							Other Pro Forma Adjustments
																											Panaco
			Historical(1)																								Intercompany
																											and
			AREP				NEG				GB				Intercompany				Historical								Bankruptcy				Debt				Prior Debt
			(Supplemental)(2)				Holding				Holdings				Adjustments				Combined				Panaco(1)				Adjustment(4)				Offering(5)				Offering(6)				Pro Forma
			(In thousands, except unit and per unit data)
Revenues:
	Hotel and casino operating income		$	299,981			$				$	171,243			$	(359	)		$	470,865			$				$				$				$				$	470,865
	Land, house and condominium sales			26,591																26,591																				26,591
	Interest income on financing leases			9,880																9,880																				9,880
	Interest income on U.S. Government and Agency obligations and other investments			44,376				449				422				(156	)			45,091				684				(684	)											45,091
	Rental income			7,916																7,916																				7,916
	Hotel and resort operating income			16,211																16,211																				16,211
	Accretion of investment in NEG Holding LLC			34,432												(34,432	)			—																				—
	NEG management fee			6,887												(6,887	)			—																				—
	Dividend and other income			3,616																3,616				48																3,664
	Equity in losses of equity method investees			(2,113	)			(519	)							2,113				(519	)																			(519	)
	Oil and gas operating income			58,419				78,727												137,146				51,234																188,380
				506,196				78,657				171,665				(39,721	)			716,797				51,966				(684	)			—				—				768,079
Expenses:
	Hotel and casino operating expenses			227,603								154,252				(639	)			381,216																				381,216
	Cost of land, house and condominium sales			18,486																18,486																				18,486
	Hotel and resort operating expenses			12,730																12,730																				12,730
	Interest expense			49,669				2,716				11,115				(4,754	)			58,746				2,517				(2,321	)			35,263				12,285				106,490
	Depreciation, depletion and amortization			68,291				21,647				14,898								104,836				25,965																130,801
	General and administrative expenses			20,952																20,952																				20,952
	Property expenses			4,340																4,340																				4,340
	Oil and gas operating expenses			13,816				25,172								(6,162	)			32,826				18,095				(725	)											50,196
	Provision for loss on real estate			3,150																3,150																				3,150
				419,037				49,535				180,265				(11,555	)			637,282				46,577				(3,046	)			35,263				12,285				728,361
	Operating income (loss)			87,159				29,122				(8,600	)			(28,166	)			79,515				5,389				2,362				(35,263	)			(12,285	)			39,718
Other gains and (losses):
	Gain on sale of other assets			1,680																1,680																				1,680
	Gain on sale of marketable equity and debt securities and other investments			40,159																40,159																				40,159
	Unrealized losses on securities sold short			(23,619	)															(23,619	)																			(23,619	)
	Impairment loss on equity interest in GB Holdings, Inc.			(15,600	)															(15,600	)																			(15,600	)
	Gain on retirement/ restructuring of debt			—																—				51,268				(51,268	)											—
	Gain on restructuring of payables			—																—				12,495				(12,495	)											—
	Gain (loss) on sale and disposition of real estate and other assets			5,262								(152	)							5,110				(76	)															5,034
	Severance tax refund			4,468																4,468																				4,468
	Debt restructuring/ reorganization costs			—								(3,084	)							(3,084	)			(7,355	)			7,355												(3,084	)
	Minority interest			(812	)											2,886				2,074																				2,074

A-6

---

 

			Historical(1)
			AREP				NEG								Intercompany				Historical
			(Supplemental)(2)				Holding				GB Holdings				Adjustments				Combined
			(In $000’s)
Revenues:
	Hotel and casino operating income		$	262,811			$				$	167,749			$	(191	)		$	430,369
	Land, house and condominium sales			13,265																13,265
	Interest income on financing leases			13,115																13,115
	Interest income on U.S. Government and Agency																			—
	obligations and other investments			22,592				587				627				(115	)			23,691
	Rental income			7,092																7,092
	Hotel and resort operating income			12,376																12,376
	Accretion of investment in NEG Holding LLC			30,142												(30,142	)			—
	NEG management fee			6,629												(6,629	)			—
	Dividend and other income			3,211				125												3,336
	Equity in losses of equity method investees			(3,466	)			(102	)							3,466				(102	)
	Oil and gas operating income			20,899				77,606												98,505
				388,666				78,216				168,376				(33,611	)			601,647
Expenses:
	Hotel and casino operating expenses			216,857								156,556				(191	)			373,222
	Cost of land, house and condominium sales			9,129																9,129
	Hotel and resort operating expenses			8,773																8,773
	Interest expense			27,057				1,538				12,581				(7,147	)			34,029
	Depreciation, depletion and amortization			40,571				23,686				14,123								78,380
	General and administrative expenses			14,081																14,081
	Property expenses			4,472																4,472
	Oil and gas operating expenses			5,028				23,080								(6,629	)			21,479
	Provision for loss on real estate			750																750
				326,718				48,304				183,260				(13,967	)			544,315
	Operating income (loss)			61,948				29,912				(14,884	)			(19,644	)			57,332
Other gains and (losses):
	Gain (loss) on sale of marketable equity and debt securities and other investments			2,607				(954	)											1,653
	Loss on sale of other assets			(1,503	)							(28	)							(1,531	)
	Write-down of equity securities available for sale			(19,759	)															(19,759	)
	Gain on sale and disposition of real estate			7,121																7,121
	Debt restructuring/reorganization costs			—								(1,843	)							(1,843	)
	Minority interest			(1,266	)											3,987				2,721
	Income (loss) from continuing operations before income taxes			49,148				28,958				(16,755	)			(15,657	)			45,694
	Income tax benefit (expense)			16,750								(958	)							15,792
	Income (loss) from continuing operations		$	65,898			$	28,958			$	(17,713	)		$	(15,657	)		$	61,486
Income from continuing operations attributable to:
	Limited partners		$	48,573															$	44,249
	General partner			17,325																17,237
			$	65,898															$	61,486
Income from continuing operations per LP unit:
Basic earnings:
	Income from continuing operations per LP unit		$	1.00															$	0.72
	Weighted average units outstanding			46,098,284																57,856,905
Diluted earnings:
	Income from continuing operations per LP unit		$	0.94															$	0.70
	Weighted average units and equivalent partnership units outstanding			54,489,943																66,248,564

A-7

---

 

				Historical(1)
																Intercompany				Historical
				AREP				NEG Holding				GB Holdings				Adjustments				Combined
				(In thousands)
Revenues:
	Hotel and casino operating income			$	250,023			$				$	$189,917			$	(28	)			439,912
	Land, house and condominium sales				76,024																76,024
	Interest income on financing leases				14,722																14,722
	Interest income on U.S. Government and Agency obligations and other investments				30,569				1,791				1,067				(546	)			32,881
	Rental income				6,852																6,852
	Hotel and resort operating income				12,921																12,921
	Accretion of investment in NEG Holding LLC				32,879												(32,879	)			—
	NEG management fee				7,637												(7,637	)			—
	Dividend and other income				2,720				175												2,895
	Equity in earnings of equity method investees				305												(305	)			—
	Oil and gas operating income				—				35,901												35,901
					434,652				37,867				190,984				(41,395	)			622,108
Expenses:
	Hotel and casino operating expenses				217,938								170,567				(28	)			388,477
	Cost of land, house and condominium sales				54,640																54,640
	Hotel and resort operating expenses				10,536																10,536
	Interest expense				27,297				96				12,195				(7,578	)			32,010
	Depreciation, depletion and amortization				23,646				15,509				13,292								52,447
	General and administrative expenses				14,134																14,134
	Property expenses				3,862																3,862
	Oil and gas operating expenses				—				16,556								(7,637	)			8,919
	Provision for loss on real estate				3,212																3,212
	Loss on impairment of fixed assets				—								1,282								1,282
					355,265				32,161				197,336				(15,243	)			569,519
	Operating income(loss)				79,387				5,706				(6,352	)			(26,152	)			52,589
Other gains and (losses):
	Gain on sale of marketable equity and debt securities and other investments				—				8,712												8,712
	Loss on sale of other assets				(353	)							(185	)							(538	)
	Write-down of equity securities available for sale				(8,476	)															(8,476	)
	Gain on sale and disposition of real estate				8,990																8,990
	Unrealized loss on financial instruments/short sale				—				(347	)											(347	)
	Loss on limited partnership interests				(3,750	)															(3,750	)
	Dividend expense				—				(145	)											(145	)
	Minority interest				(1,943	)											1,648				(295	)
	Income(loss) from continuing operations before income taxes				73,855				13,926				(6,537	)			(24,504	)			56,740
	Income tax expense				(10,096	)							(784	)							(10,880	)
	Income(loss) from continuing operations			$	63,759			$	13,926			$	(7,321	)		$	(24,504	)		$	45,860
Income(loss) from continuing operations attributable to:
	Limited partners			$	56,369															$	38,826
	General partner				7,390																7,034
				$	63,759															$	45,860
Income(loss) from continuing operations per LP unit:
Basic earnings:
	Income from continuing operations			$	1.12															$	0.59
	Weighted average units outstanding				46,098,284																57,856,905
Diluted earnings:
		Income(loss) from continuing operations per LP unit		$	1.00															$	0.57
	Weighted average units and equivalent partnership units outstanding				56,466,698																68,225,319

A-8

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	•	The membership interest in NEG Holding for 11,344,828 Depositary Units valued at $329.0 million.
	•	100% of the equity of Panaco for 4,310,345 Depositary Units valued at $125.0 million.
	•	Approximately 41.2% of the outstanding common stock of GB Holdings and approximately 11.3% of the fully diluted common stock of Atlantic Holdings for 413,793 Depositary Units valued at $12.0 million, plus 206,897 units valued at $6.0 million if certain earnings targets are met during 2005 and 2006.

(a)	Pro Forma Condensed Consolidated Balance Sheet at March 31, 2005

	•	The elimination of AREP’s $97.7 million investment in NEG Holding, since NEG Holding is now consolidated.
	•	The elimination of AREP’s $9.1 million equity interest in GB Holdings, since GB Holdings is now consolidated.
	•	The elimination of AREP’s $63.9 million investment in the Atlantic Holdings 3% Notes due 2008 or the Atlantic Holdings Notes, and the elimination of the corresponding debt of Atlantic Holdings.
	•	The elimination of $2.2 million of deferred consent fees for both AREP and GB Holdings related to AREP’s consent, in July 2004, to an exchange of GB Holdings 11% notes due 2005 for the Atlantic Holdings Notes.
	•	The elimination of AREP’s share of warrants in Atlantic Holdings, valued at $33.8 million. The warrants owned by AREP after the Acquisitions represent approximately 77.5% of the outstanding warrants. The remaining approximate 22.5% of the warrants in Atlantic Holdings, valued at $9.8 million, have been reclassified to minority interests.
	•	The recording of the minority interest in GB Holdings of $7.0 million.
	•	The elimination of AREP’s $36.6 million investment in the outstanding term loans of Panaco, Inc., or the Panaco Debt, plus accrued interest and the elimination of the corresponding debt of Panaco.
	•	The elimination of a $10.0 million receivable/payable between AREP and Panaco.

(b)	Pro Forma Condensed Consolidated Statement of Earnings for the Three Months Ended March 31, 2005

	•	The elimination of AREP’s $9.9 million accretion of investment in NEG Holding, since NEG Holding is now consolidated.

A-9

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	•	The elimination of AREP’s $1.0 million equity in losses of GB Holdings, since GB Holdings is now consolidated.
	•	The elimination of AREP’s $2.1 million management fee from NEG Holding, since NEG Holding is now consolidated.
	•	The elimination of a $0.1 million administrative charge between ACEP and GB Holdings.
	•	The elimination of $0.2 million of amortization of deferred consent fees between AREP and GB Holdings.
	•	The elimination of $0.5 million of related party interest expense paid by GB Holdings to Mr. Icahn and affiliates.
	•	The recording of a credit to minority interest expense on GB Holdings of $0.9 million.
	•	The elimination of $0.6 million of interest expense/income recorded by Panaco/ AREP on the term loans of Panaco.

(c)	Pro Forma Condensed Consolidated Statement of Earnings for the Year Ended December 31, 2004

	•	The elimination of AREP’s $34.4 million accretion of investment in NEG Holding, since NEG Holding is now consolidated.
	•	The elimination of AREP’s $2.1 million equity in losses of GB Holdings, since GB Holdings is now consolidated.
	•	The elimination of AREP’s $6.2 million management fee from NEG Holding, since NEG Holding is now consolidated.
	•	The elimination of a $0.3 million administrative charge between ACEP and GB Holdings.
	•	The elimination of $0.3 million of amortization of deferred consent fees between AREP and GB Holdings.
	•	The elimination of $4.8 million of related party interest expense paid by GB Holdings to Mr. Icahn and affiliates.
	•	The recording of a credit to minority interest expense on GB Holdings of $2.9 million.

(d)	Pro Forma Condensed Consolidated Statement of Earnings for the Year Ended December 31, 2003

	•	The elimination of AREP’s $30.1 million accretion of investment in NEG Holding, since NEG Holding is now consolidated.
	•	The elimination of AREP’s $3.5 million equity in losses of GB Holdings, since GB Holdings is now consolidated.
	•	The elimination of AREP’s $6.6 million management fee from NEG Holding, since NEG Holding is now consolidated.
	•	The elimination of a $0.2 million administrative charge between ACEP, a consolidated subsidiary of AREP and GB Holdings.
	•	The elimination of $0.1 million of interest income and expense between NEG Holding and NEG, Inc., a consolidated subsidiary of AREP.
	•	The elimination of $7.0 million of related party interest expense paid by GB Holdings to Mr. Icahn and affiliates.
	•	The recording of a credit to minority interest expense on GB Holdings of $4.0 million, representing 22.5% of the loss of GB Holdings.

A-10

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	•	The elimination of AREP’s $32.9 million accretion of investment in NEG Holding, since NEG Holding is now consolidated.
	•	The elimination of AREP’s $0.3 million equity in earnings of GB Holdings, since GB Holdings is now consolidated.
	•	The elimination of AREP’s $7.6 million management fee from NEG Holding, since NEG Holding is now consolidated.
	•	The elimination of $0.5 million of interest income and expense between NEG Holding and NEG.
	•	The elimination of $7.0 million of related party interest expense paid by GB Holdings to Mr. Icahn and affiliates.
	•	The recording of a debit to minority interest on GB Holdings of $2.9 million, representing 22.5% of the loss of GB Holdings.

	Pro Forma Condensed Consolidated Balance Sheet at March 31, 2005

	•	The elimination of AREP’s $466 million pro forma investment in the Acquisitions.
	•	The allocation of the change in equity as a result of the transaction between the general partner and the limited partners.

	•	The reduction of interest expense and interest income that results from the effect of its bankruptcy.
	•	The elimination of related party interest expense following emergence from bankruptcy in November 2004.
	•	The elimination of $0.7 million management fee paid to AREP, following emergence from bankruptcy.
	•	The elimination of $51.3 million of gain on retirement/restructuring of debt, $12.5 million gain on restructuring of payables and $7.4 million debt restructuring/reorganization costs related to the emergence from bankruptcy.

A-11

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