SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
-----------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 33-69716
--------------
GB PROPERTY FUNDING CORP.
GB HOLDINGS, INC.
GREATE BAY HOTEL AND CASINO, INC.
- --------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2502290
DELAWARE 75-2502293
NEW JERSEY 22-2242014
- ------------------------------------- --------------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
c/o Sands Hotel & Casino
Indiana Avenue & Brighton Park
Atlantic City, New Jersey 08401
- ---------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
(Registrants" telephone number, including area code): (609) 441-4517
---------------------------
(Not Applicable)
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether each of the Registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer"s classes
of common stock, as of the last practicable date.
Registrant Class Outstanding at August 10, 2001
- --------------------------------- ----------------------------- ------------------------------
GB Property Funding Corp. Common stock, $1.00 par value 100 shares
GB Holdings, Inc. Common stock, $.01 par value 10,000,000 shares
Greate Bay Hotel and Casino, Inc. Common stock, no par value 100 shares
1
GB HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2001 2000
------------- -------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 66,207,000 $ 77,903,000
Accounts receivable, net of allowances
of $11,812,000 and $11,408,000, respectively 10,742,000 10,972,000
Inventories 2,604,000 2,851,000
Deferred income taxes and income taxes receivable 1,722,000 1,159,000
Prepaid expenses and other current assets 3,319,000 2,707,000
------------- -------------
Total current assets 84,594,000 95,592,000
------------- -------------
Property and Equipment:
Land 54,814,000 54,814,000
Buildings and improvements 82,050,000 81,203,000
Equipment 21,267,000 18,252,000
Construction in progress 12,895,000 6,763,000
------------- -------------
171,026,000 161,032,000
Less - accumulated depreciation and
amortization (7,828,000) (2,706,000)
------------- -------------
Property and equipment, net 163,198,000 158,326,000
------------- -------------
Other Assets:
Obligatory investments, net of allowances of
$8,709,000 and $8,418,000, respectively 8,642,000 7,918,000
Other assets 2,224,000 2,411,000
------------- -------------
Total other assets 10,866,000 10,329,000
------------- -------------
$ 258,658,000 $ 264,247,000
============= =============
The accompanying notes to consolidated financial
statements are an integral part of these consolidated financial statements.
2
GB HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
June 30, December 31,
2001 2000
------------- -------------
(Unaudited)
Current Liabilities
Current maturities of long-term debt $ 434,000 $ 467,000
Accounts payable 7,339,000 9,822,000
Accrued liabilities -
Salaries and wages 4,212,000 4,424,000
Interest 3,092,000 3,092,000
Reorganization costs 189,000 1,280,000
Insurance 2,679,000 2,411,000
Other 5,834,000 5,336,000
Other current liabilities 4,182,000 4,283,000
------------- -------------
Total current liabilities 27,961,000 31,115,000
------------- -------------
Long-Term Debt 110,362,000 110,371,000
------------- -------------
Other Noncurrent Liabilities 4,051,000 4,258,000
------------- -------------
Commitments and Contingencies
Shareholder's 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 outstanding 100,000 100,000
Additional paid-in capital 124,900,000 124,900,000
Accumulated deficit (8,716,000) (6,497,000)
------------- -------------
Total shareholder's equity 116,284,000 118,503,000
------------- -------------
$ 258,658,000 $ 264,247,000
============= =============
The accompanying notes to consolidated financial
statements are an integral part of these consolidated financial statements.
3
GB HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
June 30,
--------------------------------------------
Post-reorganization | Pre-reorganization
2001 | 2000
------------------- | ------------------
(Unaudited) | (Unaudited)
|
Revenues: |
Casino $ 61,499,000 | $ 59,076,000
Rooms 3,046,000 | 2,422,000
Food and beverage 7,824,000 | 6,740,000
Other 1,401,000 | 1,084,000
------------ | ------------
73,770,000 | 69,322,000
Less - promotional allowances (11,105,000) | (9,840,000)
------------ | ------------
Net revenues 62,665,000 | 59,482,000
------------ | ------------
Expenses |
Casino 48,122,000 | 44,727,000
Rooms 1,291,000 | 781,000
Food and beverage 2,651,000 | 2,200,000
Other 1,118,000 | 817,000
General and administrative 2,718,000 | 2,658,000
Depreciation and amortization 2,852,000 | 2,969,000
------------ | ------------
Total expenses 58,752,000 | 54,152,000
------------ | ------------
Income from operations 3,913,000 | 5,330,000
------------ | ------------
Non-operating income (expense): |
Interest income 560,000 | 160,000
Interest expense (contractual interest of $5,556,000 |
for the three months ended June 30, 2000) (3,108,000) | (114,000)
Reorganization and other related costs -- | (1,081,000)
------------ | ------------
Total non-operating expense, net (2,548,000) | (1,035,000)
------------ | ------------
Income before income taxes 1,365,000 | 4,295,000
Income tax (provision) (528,000) | (1,596,000)
------------ | ------------
Net income $ 837,000 | 2,699,000
============ | ============
Basic/diluted income per common share $ 0.08 |
============ |
Weighted average common shares outstanding $ 10,000,000 |
============ |
The accompanying notes to consolidated financial
statements are an integral part of these consolidated financial statements.
4
GB HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
June 30,
------------------------------------------
Post-reorganization | Pre-reorganization
2001 | 2000
------------------- | ------------------
(Unaudited) | (Unaudited)
|
Revenues: |
Casino $ 115,165,000 | $ 113,921,000
Rooms 5,601,000 | 4,591,000
Food and beverage 14,564,000 | 13,267,000
Other 2,306,000 | 2,164,000
------------- | -------------
|
137,636,000 | 133,943,000
Less - promotional allowances (21,336,000) | (19,330,000)
------------- | -------------
|
Net revenues 116,300,000 | 114,613,000
------------- | -------------
|
Expenses: |
Casino 93,582,000 | 88,004,000
Rooms 2,462,000 | 1,458,000
Food and beverage 4,659,000 | 4,152,000
Other 1,759,000 | 1,626,000
General and administrative 6,623,000 | 5,070,000
Depreciation and amortization 5,816,000 | 6,058,000
------------- | -------------
|
Total expenses 114,901,000 | 106,368,000
------------- | -------------
|
Income from operations 1,399,000 | 8,245,000
------------- | -------------
|
Non-operating income (expense): |
Interest income 1,550,000 | 348,000
Interest expense (contractual interest of $11,071,000 |
for the six months ended June 30, 2000) (6,237,000) | (187,000)
Reorganization and other related costs -- | (2,326,000)
Gain/(loss) on disposal of assets 6,000 | (10,000)
------------- | -------------
|
Total non-operating expense, net (4,681,000) | (2,175,000)
------------- | -------------
|
Income (loss) before income taxes (3,282,000) | 6,070,000
Income tax benefit (provision) 1,063,000 | (2,235,000)
------------- | -------------
|
Net income (loss) $ (2,219,000) | $ 3,835,000
============= | =============
Basic/diluted loss per common share $ (0.22) |
============= |
Weighted average common shares outstanding 10,000,000 |
============= |
The accompanying notes to consolidated financial
statements are an integral part of these consolidated financial statements.
5
GB HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
------------------------------------------
Post-reorganization | Pre-reorganization
2001 | 2000
------------------- | ------------------
(Unaudited) | (Unaudited)
|
OPERATING ACTIVITIES: |
Net income (loss) $ (2,219,000) | $ 3,835,000
Adjustments to reconcile net income (loss) to net cash |
provided by operating activities: |
Depreciation and amortization 5,816,000 | 6,058,000
(Gain) loss on disposal of assets (6,000) | 10,000
Provision for doubtful accounts 1,579,000 | 901,000
(Increase) decrease in accounts receivable (1,349,000) | 212,000
(Decrease) increase in accounts payable |
and accrued liabilities (3,020,000) | 2,035,000
Net change in other current assets and liabilities (1,387,000) | 1,168,000
Net change in other noncurrent assets and liabilities 170,000 | 14,000
------------ | ------------
Net cash (used in) provided by operating activities (416,000) | 14,233,000
------------ | ------------
|
INVESTING ACTIVITIES: |
Purchase of property and equipment (9,993,000) | (9,745,000)
Proceeds from disposal of assets 6,000 | 13,000
Obligatory investments (1,251,000) | (960,000)
------------ | ------------
|
Net cash used in investing activities (11,238,000) | (10,692,000)
------------ | ------------
|
FINANCING ACTIVITIES: |
|
Repayments of long-term debt (42,000) | (43,000)
------------ | ------------
|
Net cash used in financing activities (42,000) | (43,000)
------------ | ------------
|
Net (decrease) increase in cash and cash equivalents (11,696,000) | 3,498,000
Cash and cash equivalents at beginning of period 77,903,000 | 20,897,000
------------ | ------------
|
Cash and cash equivalents at end of period $ 66,207,000 | $ 24,395,000
============ | ============
The accompanying notes to consolidated financial
statements are an integral part of these consolidated financial statements.
6
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization, Business and Basis of Presentation
GB Holdings, Inc. ("Holdings") is a Delaware corporation and was a wholly
owned subsidiary of Pratt Casino Corporation ("PCC") through December 31, 1998.
PCC, a Delaware corporation, was incorporated in September 1993 and was wholly
owned by PPI Corporation ("PPI"), a New Jersey corporation and a wholly owned
subsidiary of Greate Bay Casino Corporation ("GBCC"). Effective after December
31, 1998, PCC transferred 21% of the stock ownership in Holdings to PBV, Inc.
("PBV"), a newly formed entity controlled by certain stockholders of GBCC. As a
result of a certain confirmed plan of reorganization of PCC and others in
October 1999, the remaining 79% stock interest of PCC in Holdings was
transferred to Greate Bay Holdings, LLC ("GBLLC"), whose sole member as a result
of the same reorganization was PPI. In February 1994, Holdings acquired Greate
Bay Hotel and Casino, Inc. ("GBHC"), a New Jersey corporation, through a capital
contribution by its then parent. GBHC's principal business activity is its
ownership of the Sands Hotel and Casino located in Atlantic City, New Jersey
(the "Sands"). GB Property Funding Corp. ("GB Property Funding"), a Delaware
corporation and a wholly owned subsidiary of Holdings, was incorporated in
September 1993 as a special purpose subsidiary of Holdings for the purpose of
borrowing funds for the benefit of GBHC. Holdings has no operating activities
and its only significant assets are its investment in GBHC and cash and cash
equivalents of $49.3 million and $60.1 million as of June 30, 2001 and December
31, 2000, respectively. Effective September 2, 1998, GBHC acquired the
membership interests in Lieber Check Cashing LLC ("Lieber"), a New Jersey
limited liability company that owned a land parcel adjacent to GBHC.
The accompanying consolidated financial statements include the accounts
and operations of Holdings and its subsidiaries (Holdings, GBHC and GB Property
Funding, collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated.
On January 5, 1998, the Company filed petitions for relief under Chapter
11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United
States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court").
On August 14, 2000, the Bankruptcy Court entered an order (the "Confirmation
Order") confirming the Modified Fifth Amended Joint Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code Proposed by the Official Committee of
Unsecured Creditors and High River Limited Partnership and its Affiliates (the
"Plan") for the Debtors. High River Limited Partnership ("High River") is an
entity controlled by Carl C. Icahn. On September 13, 2000, the New Jersey Casino
Control Commission (the "Commission") approved the Plan. On September 29, 2000,
the Plan became effective (the "Effective Date"). All material conditions
precedent to the Plan becoming effective were satisfied on or before September
29, 2000. Accordingly, the accompanying consolidated financial statements have
been prepared in accordance with Statement of Position No. 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7").
In addition, as a result of the Confirmation Order and the occurrence of the
Effective Date, and in accordance with SOP 90-7, the Company has adopted "fresh
start reporting" in the preparation of the accompanying consolidated financial
statements. The emergence of the Company from Chapter 11 resulted in a new
reporting entity with no retained earnings or accumulated deficit as of
September 30, 2000. As a result, the consolidated financial statements for the
periods subsequent to September 30, 2000 reflect the new basis of accounting. A
black line has been drawn on the accompanying consolidated financial statements
to distinguish between the pre-reorganization and post-reorganization entities.
7
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
A significant amount of the Company's revenues are derived from patrons
living in northern New Jersey, southeastern Pennsylvania and metropolitan New
York City. Competition in the Atlantic City gaming market is intense and
management believes that this competition will continue or intensify in the
future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The consolidated financial statements have been prepared in accordance
with the accounting policies described in the Company's 2000 Annual Report on
Form 10-K. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, the Company suggests these
financial statements be read in conjunction with the notes to the consolidated
financial statements, which appear in that report. In the opinion of management,
the accompanying consolidated financial statements include all adjustments
(consisting only of a normal recurring nature), which are necessary for a fair
presentation of the results for the interim periods presented. Certain
information and footnote disclosures normally included in financial statements
have been condensed or omitted pursuant to rules and regulations of the
Securities and Exchange Commission. Interim results are not necessarily
indicative of results to be expected for any future interim period or for the
entire fiscal year. Certain reclassifications have been made to prior year's
consolidated financial statements to conform to the 2001 consolidated financial
statement presentation.
(2) Long-Term Debt
Long-term debt is comprised of the following:
June 30, December 31,
2001 2000
------------- -------------
11% first mortgage notes, due 2005 (a) $ 110,000,000 $ 110,000,000
Lieber mortgage (b) 416,000 450,000
Other 380,000 388,000
------------- -------------
Total 110,796,000 110,838,000
Less - current maturities (434,000) (467,000)
------------- -------------
Total long-term debt $ 110,362,000 $ 110,371,000
============= =============
8
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(a) As a result of the Confirmation Order and the occurrence of the Effective
Date and under the terms of the Plan, GB Property Funding issued
$110,000,000 of 11% first mortgage notes due 2005 (the "Notes"). Interest
on the Notes is payable on March 29 and September 29, beginning March 29,
2001. The outstanding principal is due on September 29, 2005. The Notes
are unconditionally guaranteed, on a joint and several basis, by both
Holdings and GBHC, and are secured by substantially all of the assets, as
of the Effective Date, other than cash and gaming receivables of Holdings
and GBHC.
The indenture for the Notes contains various provisions, which, among
other things, restrict the ability of Holdings and GBHC to incur certain
senior secured indebtedness beyond certain limitations and contain 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.
(b) On September 2, 1998, GBHC acquired the membership interests in Lieber,
which owned a certain parcel of land on Pacific Avenue in Atlantic City
until transferring it to GBHC in September 2000. Principal mortgage
indebtedness at the time of acquisition was $591,000 and bears interest at
the rate of 7% per annum. Principal and interest were paid monthly based
on a ten-year amortization schedule. The balance of the note was paid in
July 2001, in accordance with the mortgage agreement.
Scheduled payments of long-term debt as of June 30, 2001, are set forth below:
2001 (six months) $ 425,000
2002 19,000
2003 21,000
2004 23,000
2005 110,026,000
Thereafter 282,000
------------
Total $110,796,000
============
Interest paid amounted to $6,084,000 and $38,000, respectively, for the six
months ended June 30, 2001 and 2000.
9
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(3) Income Taxes
The components of the benefit (provision) for income taxes are as follows:
Post-reorganization | Pre-reorganization
------------------- | ------------------
January 1, 2001 | January 1, 2000
through | through
June 30, 2001 | June 30, 2000
------------------- | ------------------
Federal income tax benefit (provision): |
Current $ 1,063,000 | $(417,000)
Deferred -- | (222,000)
|
State income tax benefit (provision): |
Current -- | --
Deferred -- | --
----------- | ---------
$ 1,063,000 | $(639,000)
=========== | =========
Prior to 1997, the Company was included in the consolidated federal income
tax return of Hollywood Casino Corporation ("HCC"). The Company's operations
were included in GBCC's consolidated federal income tax returns for the years
ended December 31, 1998 and 1997 but GBCC agreed to allow the Company to become
deconsolidated from the GBCC group effective after December 31, 1998. In
accordance therewith, PCC transferred 21% of the stock ownership in Holdings to
PBV, effecting the deconsolidation of the Company from the GBCC group for
federal income tax purposes (the "Deconsolidation"). Beginning in 1999, the
provision for federal income taxes is calculated and paid on a consolidated
basis including GB Holdings, Inc. and Subsidiaries only.
The Internal Revenue Service is examining the consolidated federal income
tax returns of HCC for the years 1995 and 1996 and the consolidated federal
income tax returns for GBCC for the years 1997 and 1998 in which the Company was
included (the "Audit"). As a result of such Audit, GBCC management has disclosed
in its quarterly SEC Form 10-Q, filed for the quarterly period ended June 30,
2001, that it is presently unable to estimate the impact of the Audit on the
consolidated financial position or results of operations of GBCC. The Company is
dependent upon receipt of information from HCC and GBCC as to the operations of
their affiliates and the impact of those operations on the former HCC and GBCC
consolidated groups' Federal net operating losses ("Federal NOL's"). Any such
use of Federal NOL's, by either HCC or GBCC, are subject to the terms of a
certain settlement agreement.
Federal and State income tax benefits or provisions are based upon the
results of operations for the current period and the estimated adjustments, for
income tax purposes, of certain nondeductible expenses. The Federal income tax
benefit of approximately $1.1 million for the six months ended June 30, 2001 is
a result of applying the statutory Federal income tax rate of 35% to the pretax
loss after adjustments for income tax purposes. Management believes that over
the remainder of 2001, pretax income after similar adjustments for
10
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
income tax purposes will exceed the first half 2001 pretax loss. As such, the
Federal income tax benefit of approximately $1.1 million is offset to current
deferred tax assets without any associated provision for a valuation allowance.
At June 30, 2001, the Company has deferred tax assets including State net
operating losses and potential Federal credit carryforwards. The State net
operating losses ("State NOL's") begin to expire in the year 2003 for state tax
purposes. A portion of the Federal credit carryforwards, if not utilized, and/or
not otherwise reduced as part of the required tax attribute reduction, will
expire each year through 2019. In addition, as part of a certain settlement
agreement, GBCC may utilize Federal NOL's of the Company through December 31,
1998 to offset Federal taxable income of GBCC and other members of its
consolidated tax group. Subsequent to the Deconsolidation, the Company had
approximately $5.7 million in Federal NOL's, which were revised from $2.8
million due to recent developments in the on-going Audit. The Company expects to
utilize approximately $5.0 million in Federal NOL's in its amended 1999
consolidated Federal tax return resulting in approximately $700,000 in Federal
NOL's available for the year 2000. Statement of Financial Accounting Standards
No. 109 ("SFAS 109") requires that the tax benefit of NOL's and deferred tax
assets resulting from temporary differences be recorded as an asset and, to the
extent that management can not assess that the utilization of all or a portion
of such NOL's and deferred tax assets is more likely than not, requires the
recording of a valuation allowance. Due to various uncertainties impacting
estimates of the tax basis in future years, management is unable to determine
that realization of the Company's deferred tax asset is more likely than not
and, thus, has provided a valuation allowance for all but the portion resulting
from the year to date loss at June 30, 2001. Management believes the tax benefit
resulting from the year to date loss at June 30, 2001 is realizable in its
entirety.
As a result of the Confirmation Order and the occurrence of the Effective
Date and under the terms of the Plan, the Company's outstanding debt as of the
Effective Date was discharged. Pursuant to the Internal Revenue Code, debt that
is cancelled or discharged under the Bankruptcy Code does not generate taxable
income in the current period to the debtor. Instead, certain tax attributes
otherwise available to the debtor are reduced. This attribute reduction is
effective for tax purposes beginning January 1, 2001 and reduces the Company's
tax attributes by approximately $14.9 million. The Company had a change of
ownership as defined under Internal Revenue Code Section 382 upon the Effective
Date. Management currently estimates there will be no significant limitations on
the ability of the Company to use its tax attributes, if any, on a post
confirmation basis as a result of this change of ownership.
(4) Transactions with Related Parties
GBHC's rights to the trade name "Sands" (the "Trade Name") were derived
from a license agreement between GBCC and an unaffiliated third party. Amounts
payable by the Sands for these rights were equal to the amounts paid to the
unaffiliated third party. As a result of the Confirmation Order and the
occurrence of the Effective Date and under the terms of the Plan, GBHC was
assigned by High River the rights under a certain agreement with the owner of
the Trade Name to use the Trade Name as of the Effective Date. High River
received no payments for its assignment of these rights. Payment is made
directly to the owner of the Trade Name. The calculation of the license fee is
the same as under the previous agreement. Such charges amounted to $128,000 and
$137,000, respectively, for the six months ended June 30, 2001 and 2000.
11
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(5) Legal Proceedings
The Company has filed tax appeals with the New Jersey Tax Court
challenging the amount of its real property assessment for calendar years 1996
through 2001, inclusive. The City of Atlantic City has also appealed the amount
of the assessments for the same years.
The Company has recently discovered certain failures relating to currency
transaction reporting and self-reported the situation to the applicable
regulatory agencies. The Company is conducting an internal examination of the
matter and the New Jersey Division of Gaming Enforcement is conducting a
separate review. The Company has implemented internal control changes to address
the situation. The Company may be subjected to regulatory remedies, which may
include cash penalties. However, the potential cash penalties cannot be
estimated at this time.
The Company is a party in various legal proceedings with respect to the
conduct of casino and hotel operations including two claims of discriminatory
harassment. Although a possible range of losses cannot be estimated, in the
opinion of management, based upon the advice of counsel, the Company does not
expect settlement or resolution of these proceedings to have a material adverse
impact upon the consolidated financial position or results of operations of the
Company, but the outcome of litigation is subject to uncertainties. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
(6) Income (Loss) Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128), requires, among other things, the disclosure of basic earnings per
share for public companies. Since the capital structure of the Company is
simple, in that no potentially dilutive securities were outstanding during the
periods presented, basic and dilutive income (loss) per share are equivalent.
Basic income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding.
On a pro forma basis, for the three and six months ended June 30,
2000, respectively, income per share would have been as follows:
Three Months Six Months
Ended June 30, Ended June 30,
2000 2000
-------------- --------------
Basic income per common share $ 0.27 $ 0.38
========== ==========
Weighted average common shares outstanding 10,000,000 10,000,000
========== ==========
12
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(7) Supplemental Cash Flow Information
Cash paid for interest and income taxes during the six months ended June
30, 2001 and 2000 are set forth below:
Six Months Ended
June 30,
----------------------
2001 2000
---------- -------
Interest paid $6,084,000 $38,000
========== =======
Income taxes paid $ 50,000 $ --
========== =======
(8) New Accounting Pronouncements
In January 2001, the Emerging Issues Task Force (EITF) reached a consensus
on certain issues within Issue No. 00-22, "Accounting for `Points' and Certain
Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free
Products or Services to Be Delivered in the Future," (EITF 00-22). Application
of EITF 00-22 is required for interim and annual periods ending after February
15, 2001. EITF 00-22 requires volume-based cash rebates to be classified as a
reduction of revenue. Accordingly, such rebates have been classified as
promotional allowances. The Company previously classified these expenditures as
a gaming expense. Prior period amounts have been reclassified to conform with
the current presentation.
In July 2001, the Financial Accounting Standards Board (FASB) issued FASB
Statements Nos. 141 and 142 (FAS 141 and FAS 142): "Business Combinations" and
"Goodwill and Other Intangible Assets." FAS 141 replaces APB 16 and eliminates
pooling-of-interests accounting prospectively. It also provides guidance on
purchase accounting related to the recognition of intangible assets and
accounting for negative goodwill. FAS 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Under FAS 142,
goodwill will be tested annually and whenever events or circumstances occur
indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective
for all business combinations completed after June 30, 2001. Upon adoption of
FAS 142, amortization of goodwill recorded for business combinations consummated
prior to July 1, 2001 will cease, and intangible assets acquired prior to July
1, 2001 that do not meet the criteria for recognition under FAS 141 will be
reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal
years beginning after December 15, 2001, but early adoption is permitted.
Management does not believe these standards will have any impact on its results
of operations or financial position and, as such, does not anticipate the need
for early adoption.
13
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
about the business, financial condition and prospects of the Company. The actual
results could differ materially from those indicated by the forward-looking
statements because of various risks and uncertainties. Such risks and
uncertainties are beyond management's ability to control and, in many cases,
cannot be predicted by management. When used in this Quarterly Report on Form
10-Q, the words "believes", "estimates", "anticipates", "expects", "intends" and
similar expressions as they relate to the Company or its management are intended
to identify forward-looking statements (see "Private Securities Litigation
Reform Act" below).
LIQUIDITY AND CAPITAL RESOURCES
Holdings owns GBHC, which owns the Sands Hotel and Casino in Atlantic City
(the "Sands"). Prior to 1996, the Sands' cash flow from operations was
sufficient to meet debt service obligations and to fund a substantial portion of
annual maintenance capital expenditures. In addition, the Sands used short-term
borrowings as necessary to fund seasonal cash needs and for certain capital
projects. After 1995, however, the competitive position of the Sands became
impaired, which was due, in part, to insufficient capital expenditures
particularly compared to certain competing Atlantic City casinos. In 1996, due
to adverse weather in the first quarter, a decline in both table games and slot
hold percentages and increased industry competition resulting in higher
marketing expenditures, the Sands cash flow decreased significantly compared to
prior years. While cash flow improved in 1997, it remained significantly below
historical levels. These declines in operating cash flow at the Sands resulted
in the need for periodic financial assistance from PCC and GBCC in order for
GBHC to meet its debt service obligations. Substantial additional financial
assistance from affiliates or other sources would have been required to meet
GBHC's debt service payments due in January 1998.
GBHC was unable to obtain additional borrowings from affiliates or other
sources and, accordingly, on January 5, 1998, the Company filed petitions for
relief under the Bankruptcy Code in the Bankruptcy Court. On August 14, 2000,
the Bankruptcy Court entered the Confirmation Order confirming the Plan for the
Company. On September 13, 2000, the Commission approved the Plan. On September
29, 2000, the Plan became effective. All material conditions precedent to the
Plan becoming effective were satisfied on or before September 29, 2000.
Accordingly, the accompanying consolidated financial statements have been
prepared in accordance with SOP 90-7. In addition, as a result of the
Confirmation order and the occurrence of the Effective Date, and in accordance
with SOP 90-7, the Company has adopted "fresh start reporting" as of September
30, 2000. The emergence of the Company from Chapter 11 resulted in a new
reporting entity with no retained earnings or accumulated deficit as of
September 30, 2000. As a result, the consolidated financial statements for the
periods subsequent to September 30, 2000 reflect the new basis of accounting. A
black line has been drawn on the accompanying consolidated financial statements
to distinguish between the pre-reorganization and post-reorganization entities.
On the Effective Date, GB Property Funding's existing debt securities,
consisting of its 10 7/8% First Mortgage Notes due January 15, 2004 (the "Old
Notes") and all of Holdings' issued and outstanding shares of common stock owned
by PBV and GBLLC (the "Old Common Stock") were cancelled. As of the Effective
Date, an aggregate of 10,000,000 shares of new common stock of Holdings (the
"Common Stock") were issued and outstanding, and $110,000,000 of 11% First
Mortgage Notes due 2005 were issued (the "Notes"). Holders of the Old Notes
received a distribution of their pro rata shares of (i) the Notes and (ii)
5,375,000 shares of the Common Stock (the "Stock Distribution").
14
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Activities
At June 30, 2001, the Company had cash and cash equivalents of $66.2
million. The Company used $673,000 for operating activities during the six
months ended June 30, 2001 compared to generating net cash of $14.2 million for
the six months ended June 30, 2000. The most significant causes of such
variations are (1) the unfavorable operating results and (2) the reduction of
payables and other liabilities in 2001 as compared to 2000.
The Sands entered into a long-term lease of the Madison House Hotel (the
"Madison House"). The initial lease period is from December 2000 to December
2012 with lease payments ranging from $1.8 million per year to $2.2 million per
year. The Madison House is already physically connected at two floors to the
existing Sands casino-hotel complex and is currently being renovated to combine
its rooms into approximately 105-125 business suites. It is the intention of the
Sands to maintain and operate the Madison House at the same level of quality as
the Sands, making those rooms available to Sands casino customers and the
general public.
Investing Activities
Capital expenditures at the Sands for the six months ended June 30, 2001
amounted to approximately $10.0 million. In order to enhance its competitive
position in the market place, the Sands may determine to incur additional
substantial costs and expenses to maintain, improve and expand its facilities
and operations. The Company may require additional financing in connection with
those activities. In connection with, among other things, obtaining any such
financing, the Company may seek to amend or supplement the terms of existing
financing arrangements.
In 1998, and as part of a certain settlement agreement, GBHC acquired the
membership interests in Lieber from affiliates of GBCC for $251,000. GBHC also
caused Lieber to acquire the rights to purchase a certain hotel/motel on Pacific
Avenue in Atlantic City, New Jersey (the "Pacific Avenue Hotel") from another
affiliate of GBCC for payment of $1.3 million and a payment of $500,000 on the
Effective Date. The purchase price of the Pacific Avenue Hotel was $10 million.
With Bankruptcy Court approval, Lieber closed on that purchase with funds
advanced by GBHC in 1999. Demolition of the Pacific Avenue Hotel was completed
in 1999 and construction of a new front entrance to the Sands' facility was
completed in June 2000.
GBHC also entered into an agreement with the entities controlling the
Claridge, subject to Bankruptcy Court approval, to acquire the Claridge
Administration Building ("CAB"), which was situated between GBHC's existing main
entrance and the new Pacific Avenue entrance. The purchase price was $3.5
million, consisting of $1.5 million in cash at closing with the remaining $2.0
million consideration tendered through the elimination for 40 months of a
$50,000 monthly license fee paid by the Claridge to GBHC under an agreement
between the Claridge and GBHC governing the development and operation of the
"People Mover" leading from the Boardwalk to the Sands and Claridge (the "PM
Agreement"). GBHC and the Claridge also obtained Bankruptcy Court approval of
the assumption of the PM Agreement, as modified above, and by the reduction of
the monthly license fee to $20,000 a month after the 40 months elimination of
the license fee. In April 2000, closing took place on the CAB and the existing
structure was subsequently demolished.
15
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The Sands is required by the Casino Act to make certain quarterly deposits
based on gross revenue with the Casino Reinvestment Development Authority
("CRDA") in lieu of a certain investment alternative tax. Deposits for the six
months ended June 30, 2001 totaled $1.1 million. The Sands has agreed to
contribute certain of its future investment obligations to the CRDA in
connection with the renovation related to the Atlantic City Boardwalk Convention
Center. The projected total contribution will amount to $7.0 million, which will
be paid through 2011 based on an estimate of certain of the Sands' future CRDA
deposit obligations.
Financing Activities
On the Effective Date, GB Property Funding's existing debt securities,
consisting of the Old Notes, and all of Holdings' Old Common Stock owned by PBV
and GBLLC were cancelled. Also, on the Effective Date, 10,000,000 shares of
Common Stock were issued and outstanding. Of the 10,000,000 shares, 5,375,000
shares were distributed to the holders of the Old Notes in a pro rata
distribution, and 4,625,000 shares were purchased by High River for $65 million.
The Notes in the amount of $110,000,000 were issued and distributed to the
holders of the Old Notes in a pro rata distribution. Total scheduled maturities
of long term debt during the remainder of 2001 is $425,000.
Under an order of the Bankruptcy Court, permitting the disposition of
furniture and equipment in the ordinary course of business, any payments
received by GBHC for the sale of such assets prior to the Effective Date, which
were part of the security for the Old Notes, were remitted to the Indenture
Trustee as reductions to the outstanding principal of the Old Notes. Proceeds
from the sale of such assets, amounting to $4,000 for the six months ended June
30, 2000, were remitted to the Indenture Trustee. Although the payments were
remitted to the Indenture Trustee as reductions on principal in accordance with
the Order of the Bankruptcy Court, the Indenture Trustee advised the Company (i)
that such payments were retained by the Indenture Trustee pursuant to the terms
of the Indenture as security for the payment of the fees and expenses incurred
by the Indentured Trustee in the Chapter 11 proceeding and (ii) that the
Indenture Trustee included the amount of such payments in its fee application
before the Bankruptcy Court for the benefit of the holders of the Old Notes.
Subject to a certain reduction as respects the Company, the Bankruptcy Court
granted the fee application of the Indenture Trustee.
Summary
In accordance with the Confirmation Order and the occurrence of the
Effective Date, the Company emerged as a new reporting entity with a new equity
structure. Continuation of the business thereafter is dependent on GBHC's
ability to achieve successful future operations. Management believes that cash
flows generated from operations during 2001, as well as available cash reserves,
will be sufficient to meet its operating plan and provide for scheduled capital
expenditures.
RESULTS OF OPERATIONS
Gaming Operations
Information contained herein, regarding Atlantic City casinos other than
the Sands, was obtained from reports filed with the Commission.
16
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table sets forth certain unaudited financial and operating
data relating to the Sands' and all other Atlantic City casinos' capacities,
volume of play, hold percentages and revenues:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ---------------------------
2001 2000 2001 2000
---------- ---------- ----------- -----------
($000's, except for Units)
Units: (at end of quarter)
Table Games - Sands 73 82 73 82
- Atlantic City (ex. Sands) 1,201 1,231 1,201 1,231
Slot Machines - Sands 2,049 1,912 2,049 1,912
- Atlantic City (ex. Sands) 35,046 33,754 35,046 33,754
Gross Wagering (1)
Table Games - Sands $ 118,285 $ 111,810 $ 229,007 $ 221,450
- Atlantic City (ex. Sands) 1,692,074 1,780,550 3,306,811 3,473,531
Slot Machines - Sands 611,746 535,716 1,154,990 1,020,421
- Atlantic City (ex. Sands) 9,335,622 9,018,824 17,872,540 17,352,844
Hold Percentages (2)
Table Games - Sands 15.60% 14.90% 14.70% 15.10%
- Atlantic City (ex. Sands) 15.40% 16.40% 15.40% 16.00%
Slot Machines - Sands 6.90% 7.80% 6.90% 7.80%
- Atlantic City (ex. Sands) 8.10% 8.30% 8.10% 8.20%
Revenues (2)
Table Games - Sands $ 18,427 $ 16,666 $ 33,684 $ 33,325
- Atlantic City (ex. Sands) 260,956 292,695 509,346 554,256
Slot Machines - Sands 42,391 41,640 80,110 79,030
- Atlantic City (ex. Sands) 752,896 746,066 1,444,901 1,425,465
Other (3) - Sands 681 770 1,371 1,566
- Atlantic City (ex. Sands) N/A N/A N/A N/A
- ----------
(1) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (the "Drop") and coins wagered
in slot machines ("Handle").
(2) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the
"hold percentage." The Sands' hold percentages and revenues are reflected
on an accrual basis. Comparable accrual basis data for the remainder of
the Atlantic City gaming industry as a whole is not available;
consequently, industry hold percentages and revenues are based on
information available from the Commission and are possibly higher than if
computed on the accrual basis.
(3) Consists of revenues from poker and simulcast horse racing wagering.
Comparable information for the remainder of the Atlantic City gaming
industry is not available.
17
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Patron Gaming Volume
Information contained herein, regarding Atlantic City casinos other than
the Sands, was obtained from reports filed with the Commission.
Table game drop increased by $6.5 million (5.8%) during the three months
ended June 30, 2001 compared with the same period of 2000. For the six months
ended June 30, 2001, the Sands table game drop increased by $7.6 million (3.4%)
compared with the same prior year period. The increase in table game drop
occurred despite operating with fewer table games (11% decrease) than the same
prior year periods. The number of table games decreased by 30 units (2.4%) at
all other Atlantic City Casinos between June 2000 and June 2001. By comparison,
according to Casino Commission reports, table game drop at all other Atlantic
City casinos during the same period reflected a decrease of 5.0%. As a result,
the Sands table game market share (expressed as a percentage of the Atlantic
City gaming industry (the "industry") aggregate table game drop) increased to
6.5% for the three and six months ended June 30, 2001 from 5.9% and 6.0%,
respectively, for the same prior year periods. The Sands table game drop
increase in 2001 is attributable to an increased volume of play from patrons
whose wagering is tracked and whose level of play generally entitles them to a
varying level of rewards, including cash, complimentary rooms, food, beverage,
entertainment and gifts ("rated players"). Table game hold percentage increased
0.7 percentage points to 15.6% for the three months ended June 30, 2001 compared
to the same period last year. For the six months ended June 30, 2001 compared to
the same prior year period, table game hold percentage decreased 0.4 percentage
points to 14.7%. Aggregate gaming space at all other Atlantic City casinos
increased by approximately 39,000 square feet at June 30, 2001 compared to 2000.
The amount of gaming space at the Sands increased approximately 4,000 square
feet between periods.
Slot machine handle increased $76.0 million (14.2%) and $134.6 million
(13.2%) during the three and six month periods ended June 30, 2001 compared with
the same periods of 2000. By comparison, the percentage increase in slot machine
handle for all other Atlantic City casinos in the three and six month periods
ended June 30, 2001 vs. the same period in 2000 was 3.5% and 3.0%, respectively.
As a result, the Sands' market share of slot machine handle as a percentage of
total industry slot handle increased to 6.1% for the three and six months ended
June 30, 2001 from 5.6% for the same prior year periods. The increased Sands
slot handle during 2001 is primarily attributable to an increased volume of play
from both rated and unrated players brought on by the lowering of the hold
percentage, which is a result of the Sands' "value gaming" philosophy. The
number of slot machines increased 7.2% at the Sands. On an industry-wide basis,
the number of slot machines increased by 3.8% in 2001 compared to 2000. As part
of the Sands capital expenditure program new and more popular slot machines
continue to be purchased.
18
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table sets forth the changes in operating revenues and
expenses (unaudited) for the three and six month periods ended June 30, 2001 and
2000:
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------------- -----------------------------------------------
Increase (Decrease) Increase (Decrease)
2001 2000 $ % 2001 2000 $ %
-------- -------- ------- --------- --------- --------- -------- ----------
(Dollars In Thousands)
Revenues:
Casino $ 61,499 $ 59,076 $ 2,423 4.1 $ 115,165 $ 113,921 $ 1,244 1.1
Rooms 3,046 2,422 624 25.8 5,601 4,591 1,010 22.0
Food and Beverage 7,824 6,740 1,084 16.1 14,564 13,267 1,297 9.8
Other 1,401 1,084 317 29.2 2,306 2,164 142 6.6
Promotional Allowances 11,105 9,840 1,265 12.9 21,336 19,330 2,006 10.4
Costs and Expenses:
Casino 48,122 44,727 3,395 7.6 93,582 88,004 5,578 6.3
Rooms 1,291 781 510 65.3 2,462 1,458 1,004 68.9
Food and Beverage 2,651 2,200 451 20.5 4,659 4,152 507 12.2
Other 1,118 817 301 36.8 1,759 1,626 133 8.2
General and Administrative 2,718 2,658 60 2.3 6,623 5,070 1,553 30.6
Depreciation and Amortization 2,852 2,969 (117) (3.9) 5,816 6,058 (242) (4.0)
Income (loss) from Operations 3,913 5,330 (1,417) (26.6) 1,399 8,245 (6,846) (83.0)
Non-operating items, net (2,548) (1,035) 3,583 346.2 (4,681) (2,175) 6,856 315.2
Income Tax Benefit (Provision) (528) (1,596) (1,068) (66.9) 1,063 (2,235) (3,298) (147.6)
Revenues
Casino revenues increased $2.4 million due to increased table game drop
and hold percentages and increased slot handle for the three months ended June
30, 2001 compared with the same period in 2000. Casino revenues increased $1.2
million for the six months ended June 30, 2001 compared to the same period in
2000 due to increased table drop and slot handle, which more than offset the
impact of decreased table and slot hold percentages.
Rooms' revenue increased $1.0 million as a result of an increase in
occupied rooms and an increase in the average daily room rate (ADR) for the
three and six month periods ended June 30, 2001 compared to the same prior year
periods. The increase in occupied rooms is primarily due to the increased
inventory of available rooms as a result of the Madison House Hotel.
Food and beverage revenues increased $1.1 million and $1.3 million,
respectively, for the three and six months ended June 30, 2001 due to an
increase in revenue per cover ("average check").
19
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Other revenues increased $142,000 for the six months ended June 30, 2001,
compared to the same prior year period, as a result of increases in
entertainment and retail merchandise outlets revenue.
Promotional Allowances
Promotional allowances are comprised of (i) the estimated retail value of
goods and services provided free of charge to casino customers under various
marketing programs and (ii) the cash value of redeemable points earned under a
customer loyalty program based on their casino play. As a percentage of rooms,
food and beverage and other revenues, the component of the allowances related to
the retail value of goods and services decreased to 57.2% during the six months
ended June 30, 2001 from 57.7% during the same period of 2000. The decrease is
primarily attributable to additions to and changes in marketing programs and
other promotional activities that resulted in the increased gaming volume from
unrated players.
Departmental Expenses
Casino expenses at the Sands increased by $3.4 million and $5.6 million,
respectively, for the three and six months ended June 30, 2001 compared to the
same prior year period, as a result of the increase in costs associated with
television advertising, the allocation of complimentaries, insurance, utilities,
property taxes and facilities expenses. The increase in utilities and facilities
was a function of increased costs in procuring those services. Property taxes
increased as a result of increased tax rates and ratables. There were no
television advertising costs through the first six months of 2000.
Rooms expense increased by $510,000 and $1.0 million for the three and six
months ended June 30, 2001, respectively, compared to the same prior year
periods due to rental cost of the Madison House and payroll and related cost
offset by an increase in the allocation of rooms expense to casino expense due
to a higher percentage of rooms being utilized on a complimentary basis.
Food and beverage expense increased $451,000 and $507,000 for the three
and six months ended June 30, 2001, respectively, compared to the same prior
year periods due to an increase in revenue and the related cost of food and
beverage offset by an increase in the allocation of expenses to casino expense
due to a higher percentage of food and beverage being utilized on a
complimentary basis.
Other expenses decreased $133,000 for the six months ended June 30, 2001
compared to the same period last year, as a result of higher allocation of other
expenses to casino expense.
General and Administrative Expenses
General and administrative expenses increased $1.6 million for the six
months ended June 30, 2001 compared to the same period last year, due to the
costs associated with the attempted acquisition of the Claridge Hotel Casino and
severance packages arising from layoffs in a reorganization of operations. Also,
increases in property taxes, utilities and insurance contributed to the
variance.
20
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Depreciation and Amortization
Depreciation and amortization expense decreased $117,000 and $242,000 for
the three and six month periods ended June 30, 2001, respectively, compared to
the same prior year periods as a result of the asset valuation reduction
associated with "fresh start reporting" implemented in September 2000.
Interest Income and Expense
Interest income increased by $400,000 and $1.2 million during the three
and six month periods ended June 30, 2001, respectively, compared to the same
periods in 2000. The increase was due to earnings on increased cash reserves
since the Effective Date. Prior to September 2000, earnings on cash reserves
were recorded as a reduction of reorganization costs.
Interest expense increased $3.0 million and $6.1 million during the three
and six month periods ended June 30, 2001, respectively, compared to the same
periods in 2000. The increase is due to the accrual of interest expense on the
Notes, as the 2000 operations reflect the suspension of interest accounts during
the bankruptcy proceeding.
Income Taxes
Prior to 1997, the Company was included in the consolidated federal income
tax return of Hollywood Casino Corporation ("HCC"). The Company's operations
were included in GBCC's consolidated federal income tax returns for the years
ended December 31, 1998 and 1997 but GBCC agreed to allow the Company to become
deconsolidated from the GBCC group effective after December 31, 1998. In
accordance therewith, PCC transferred 21% of the stock ownership in Holdings to
PBV, effecting the deconsolidation of the Company from the GBCC group for
federal income tax purposes (the "Deconsolidation"). Beginning in 1999,
provision for federal income taxes is calculated and paid on a consolidated
basis including GB Holdings, Inc. and Subsidiaries only.
The Internal Revenue Service is examining the consolidated federal income
tax returns of HCC for the years 1995 and 1996 and the consolidated federal
income tax returns for GBCC for the years 1997 and 1998 in which the Company was
included (the "Audit"). As a result of such Audit, GBCC management has disclosed
in its quarterly SEC Form 10-Q, filed for the quarterly period ended June 30,
2001, that it is presently unable to estimate the impact of the Audit on the
consolidated financial position or results of operations of GBCC. The Company is
dependent upon receipt of information from HCC and GBCC as to the operations of
their affiliates and the impact of those operations on the former HCC and GBCC
consolidated groups' Federal net operating losses ("Federal NOL's"). Any such
use of Federal NOL's, by either HCC or GBCC, are subject to the terms of a
certain settlement agreement.
Federal and State income tax benefits or provisions are based upon the
results of operations for the current period and the estimated adjustments, for
income tax purposes, of certain nondeductible expenses. The Federal income tax
benefit of approximately $1.1 million for the six months ended June 30, 2001 is
a result of applying
21
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
the statutory Federal income tax rate of 35% to the pretax loss after
adjustments for income tax purposes. Management believes that over the remainder
of 2001, pretax income after similar adjustments for income tax purposes will
exceed the first half 2001 pretax loss. As such, the Federal income tax benefit
of approximately $1.1 million is offset to current deferred tax assets without
any associated provision for a valuation allowance.
At June 30, 2001, the Company has deferred tax assets including State net
operating losses and Federal credit carryforwards. The State net operating
losses ("State NOL's") begin to expire in the year 2003 for state tax purposes.
A portion of the Federal credit carryforwards, if not utilized, will expire each
year through 2019. In addition, as part of a certain settlement agreement, GBCC
may utilize Federal NOL's of the Company through December 31, 1998 to offset
Federal taxable income of GBCC and other members of its consolidated tax group.
Subsequent to the Deconsolidation, the Company had approximately $5.7 million in
Federal NOL's, which were revised from $2.8 million due to recent developments
in the on-going Audit. The Company expects to utilize approximately $5.0 million
in Federal NOL's in its amended 1999 consolidated federal tax return resulting
in approximately $700,000 in Federal NOL's available for the year 2000.
Statement of Financial Accounting Standards No. 109 ("SFAS 109") requires that
the tax benefit of NOL's and deferred tax assets resulting from temporary
differences be recorded as an asset and, to the extent that management can not
assess that the utilization of all or a portion of such NOL's and deferred tax
assets is more likely than not, requires the recording of a valuation allowance.
Due to various uncertainties impacting estimates of the tax basis in future
years, management is unable to determine that realization of the Company's
deferred tax asset is more likely than not and, thus, has provided a valuation
allowance for all but the portion resulting from the current year to date loss
at June 30, 2001. Management believes the tax benefit resulting from the year to
date loss at June 30, 2001 is realizable in its entirety.
As a result of the Confirmation Order and the occurrence of the Effective
Date and under the terms of the Plan, the Company's outstanding debt as of the
Effective Date was discharged. Pursuant to the Internal Revenue Code, debt that
is cancelled or discharged under the Bankruptcy Code does not generate taxable
income in the current period to the debtor. Instead, certain tax attributes
otherwise available to the debtor are reduced. This attribute reduction is
effective for tax purposes beginning January 1, 2001 and reduces the tax basis
of noncurrent assets by approximately $14.9 million. The Company had a change of
ownership as defined under Internal Revenue Code Section 382 upon the Effective
Date. Management currently estimates there will be no significant limitations on
the ability of the Company to use its tax attributes, if any, on a post
confirmation basis as a result of this change of ownership.
Reorganization and Other Related Costs
Reorganization and other related costs include costs associated with the
Company's reorganization under Chapter 11, including, among other things,
professional fees, costs associated with the termination of agreements, and
other administrative costs. Interest income on cash accumulated during the
reorganization is reflected as a reduction to reorganization and other related
costs.
22
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Inflation
Management believes that in the near term, modest inflation, together with
increasing competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
Seasonality
Historically, the Sands' operations have been highly seasonal in nature,
with the peak activity occurring from May to September. Consequently, the
results of operations for the first and fourth quarters are traditionally less
profitable than the other quarters of the fiscal year. In addition, the Sands'
operations may fluctuate significantly due to a number of factors, including
chance. Such seasonality and fluctuations may materially affect casino revenues
and profitability.
23
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Private Securities Litigation Reform Act
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q and other materials filed or to be filed by Holdings, GB Property
Funding or GBHC with the Securities and Exchange Commission (as well as
information included in oral statements or other written statements made by such
companies) contains statements that are forward-looking, such as statements
relating to plans for future expansion, future construction costs and other
business development activities as well as other capital spending, economic
conditions, financing sources, competition and the effects of tax regulation and
state regulations applicable to the gaming industry in general or Holdings, GB
Property Funding and GBHC in particular. Such forward-looking information
involves important risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results may differ from
those expressed in any forward-looking statements made by or on behalf of
Holdings, GB Property Funding or GBHC. These risks and uncertainties include,
but are not limited to, those relating to development and construction
activities, dependence on existing management, leverage and debt service
(including sensitivity to fluctuations in interest rates), domestic or global
economic conditions, activities of competitors and the presence of new or
additional competition, fluctuations and changes in customer preference and
attitudes, changes in federal or state tax laws or the administration of such
laws and changes in gaming laws or regulations (including the legalization of
gaming in certain jurisdictions).
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from changes in market rates and
prices, such as interest rates and foreign currency exchange rates. The Company
does not have securities subject to interest rate fluctuations and has not
invested in derivative-based financial instruments.
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PART II: OTHER INFORMATION
Item 6.(a) Exhibits
Item 6.(b) Reports on Form 8-K
The registrants did not file any reports on form 8-K for the quarter ended
June 30, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each of the Registrants has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Atlantic City, State of New Jersey on August 13, 2001.
GB HOLDINGS, INC.
GB PROPERTY FUNDING CORP.
GREATE BAY HOTEL AND CASINO, INC.
---------------------------------
Registrants
Date: August 13, 2001 By: /s/ Timothy A. Ebling
--------------- -------------------------------------
Timothy A. Ebling
Executive Vice President, Chief
Financial Officer and Principal
Accounting Officer
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