SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 9, 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
September 30, December 31,
2001 2000
------------- -------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 71,558,000 $ 77,903,000
Accounts receivable, net of allowances
of $12,185,000 and $11,408,000, respectively 11,342,000 10,972,000
Inventories 2,605,000 2,851,000
Deferred income taxes and income taxes receivable 19,000 1,159,000
Prepaid expenses and other current assets 3,496,000 2,707,000
------------- -------------
Total current assets 89,020,000 95,592,000
------------- -------------
Property and Equipment:
Land 54,814,000 54,814,000
Buildings and improvements 86,690,000 81,203,000
Equipment 21,701,000 18,252,000
Construction in progress 12,424,000 6,763,000
------------- -------------
175,629,000 161,032,000
Less - accumulated depreciation and
amortization (10,216,000) (2,706,000)
------------- -------------
Property and equipment, net 165,413,000 158,326,000
------------- -------------
Other Assets:
Obligatory investments, net of allowances of
$9,006,000 and $8,418,000, respectively 8,952,000 7,918,000
Other assets 2,102,000 2,411,000
------------- -------------
Total other assets 11,054,000 10,329,000
------------- -------------
$ 265,487,000 $ 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
September 30, December 31,
2001 2000
------------- -------------
(Unaudited)
Current Liabilities
Current maturities of long-term debt $ 19,000 $ 467,000
Accounts payable 7,419,000 9,822,000
Accured liabilities -
Salaries and wages 4,316,000 4,424,000
Interest 6,117,000 3,092,000
Reorganization costs 179,000 1,280,000
Insurance 2,628,000 2,411,000
Other 5,593,000 5,336,000
Other current liabilities 5,550,000 4,283,000
------------- -------------
Total current liabilities 31,821,000 31,115,000
------------- -------------
Long-Term Debt 110,357,000 110,371,000
------------- -------------
Other Noncurrent Liabilities 3,939,000 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 (5,630,000) (6,497,000)
------------- -------------
Total shareholder's equity 119,370,000 118,503,000
------------- -------------
$ 265,487,000 $ 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
September 30,
-----------------------------------------
Post-reorganization | Pre-reorganization
2001 | 2000
------------------- | ------------------
(Unaudited) | (Unaudited)
Revenues: |
Casino $ 65,667,000 | $ 63,810,000
Rooms 3,303,000 | 2,582,000
Food and beverage 7,960,000 | 7,855,000
Other 1,338,000 | 1,385,000
------------ | ------------
|
78,268,000 | 75,632,000
Less - promotional allowances (11,446,000) | (11,258,000)
------------ | ------------
|
Net revenues 66,822,000 | 64,374,000
------------ | ------------
|
Expenses: |
Casino 49,661,000 | 48,864,000
Rooms 959,000 | 648,000
Food and beverage 2,765,000 | 2,533,000
Other 761,000 | 1,224,000
General and administrative 2,630,000 | 2,593,000
Depreciation and amortization 2,836,000 | 3,356,000
------------ | ------------
|
Total expenses 59,612,000 | 59,218,000
------------ | ------------
|
Income from operations 7,210,000 | 5,156,000
------------ | ------------
|
Non-operating income (expense): |
Interest income 743,000 | 170,000
Interest expense (contractual interest of $5,515,000 |
for the three months ended September 30, 2000) (3,136,000) | (179,000)
Reorganization and other related costs -- | (481,000)
Loss on disposal of assets (23,000) | --
------------ | ------------
|
Total non-operating expense, net (2,416,000) | (490,000)
------------ | ------------
|
Income before income taxes 4,794,000 | 4,666,000
Income tax (provision) benefit (1,708,000) | 2,235,000
Extraordinary gain on prepetition debt discharge -- | 14,795,000
------------ | ------------
|
Net income $ 3,086,000 | $ 21,696,000
============ | ============
|
Basic/diluted income per common share $ 0.31 |
============ |
|
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
Nine Months Ended
September 30,
-----------------------------------------
Post-reorganization | Pre-reorganization
2001 | 2000
------------------- | ------------------
(Unaudited) | (Unaudited)
Revenues: |
Casino $ 180,832,000 | $ 177,731,000
Rooms 8,903,000 | 7,173,000
Food and beverage 22,525,000 | 21,122,000
Other 3,644,000 | 3,549,000
------------- | -------------
|
215,904,000 | 209,575,000
Less - promotional allowances (32,782,000) | (30,588,000)
------------- | -------------
|
Net revenues 183,122,000 | 178,987,000
------------- | -------------
|
Expenses: |
Casino 143,243,000 | 136,867,000
Rooms 3,421,000 | 2,106,000
Food and beverage 7,424,000 | 6,685,000
Other 2,520,000 | 2,851,000
General and administrative 9,253,000 | 7,663,000
Depreciation and amortization, including write-off |
of CRDA obligations 8,652,000 | 9,414,000
------------- | -------------
|
Total expenses 174,513,000 | 165,586,000
------------- | -------------
|
Income from operations 8,609,000 | 13,401,000
------------- | -------------
Non-operating income (expense): |
Interest income 2,293,000 | 518,000
Interest expense (contractual interest of $16,545,000, |
for the nine months ended September 30, 2000 (9,373,000) | (366,000)
Reorganization and other related costs -- | (2,807,000)
Loss on disposal of assets (17,000) | (10,000)
------------- | -------------
|
Total non-operating expense, net (7,097,000) | (2,665,000)
------------- | -------------
|
Income (loss) before income taxes 1,512,000 | 10,736,000
Income tax (provision) benefit (645,000) | --
Extraordinary gain on prepetition debt discharge -- | 14,795,000
------------- | -------------
|
Net income $ 867,000 | $ 25,531,000
============= | =============
|
Basic/diluted income per common share $ 0.09 |
============= |
|
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
Nine Months Ended
September 30,
-----------------------------------------
Post-reorganization | Pre-reorganization
2001 | 2000
------------------- | ------------------
Unaudited | (Unaudited)
OPERATING ACTIVITIES: |
Net income $ 867,000 | $ 25,531,000
Adjustments to reconcile net income (loss) to net cash |
provided by operating activities: |
Extraordinary gain on prepetition debt discharge -- | (14,795,000)
Depreciation and amortization 8,652,000 | 9,414,000
Loss on disposal of assets 17,000 | 10,000
Provision for doubtful accounts 2,624,000 | 1,637,000
(Increase) in accounts receivable (2,994,000) | (184,000)
(Decrease) increase in accounts payable |
and accrued liabilities (113,000) | 2,975,000
Net change in other current assets and liabilities 1,300,000 | (2,240,000)
Net change in other noncurrent assets and liabilities 149,000 | (6,410,000)
------------ | ------------
|
Net cash provided by operating activities 10,502,000 | 15,938,000
------------ | ------------
|
INVESTING ACTIVITIES: |
Purchase of property and equipment (14,487,000) | (14,422,000)
Proceeds from disposition of assets 7,000 | 13,000
Proceeds from sale of investments 114,000 | 330,000
Obligatory investments (2,019,000) | (2,014,000)
------------ | ------------
|
Net cash used in investing activities (16,385,000) | (16,093,000)
------------ | ------------
|
FINANCING ACTIVITIES: |
Proceeds from issuance of common stock -- | 65,000,000
Repayments of long-term debt (462,000) | (64,000)
------------ | ------------
|
Net cash (used in) provided by financing activities (462,000) | 64,936,000
------------ | ------------
|
Net (decrease) increase in cash and cash equivalents (6,345,000) | 64,781,000
Cash and cash equivalents at beginning of period 77,903,000 | 20,897,000
------------ | ------------
|
Cash and cash equivalents at end of period $ 71,558,000 | $ 85,678,000
============ | ============
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 September 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 Company. 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.
New York State passed legislation that was signed by the Governor in
October 2001 to allow slot machines at racetracks and six (6) Indian owned
casinos within the State of New York. The legislation also allows the State to
join the multi state Powerball lottery. The gaming portion of the legislation
may face legal challenge including a challenge based on the New York State
Constitution. Therefore, it is not possible to determine the timing or financial
impact of this legislation on Atlantic City at this time.
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.
8
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(2) Long-Term Debt
Long-term debt is comprised of the following:
September 30, December 31,
2001 2000
------------- -------------
11% notes, due 2005 (a) $ 110,000,000 $ 110,000,000
Lieber mortgage (b) -- 450,000
Other 376,000 388,000
------------- -------------
Total 110,376,000 110,838,000
Less - current maturities (19,000) (467,000)
------------- -------------
Total long-term debt $ 110,357,000 $ 110,371,000
============= =============
(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% 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 original indenture for the Notes contained various provisions,
which, among other things, restrict the ability of Holdings and GBHC
to incur certain senior secured indebtedness beyond certain
limitations and contains 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, GB Property Funding sought the consent of holders of the
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 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 Holdings or its subsidiaries
has or obtains equity or debt interests, and
9
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 Holdings, incurrence of indebtedness or the transfer
of assets to any person if 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 the 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 the 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 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.
Holders representing approximately 98% in principal amount of the
Notes provided consents to the Modifications. Under the terms of the
original indenture, the consent of holders representing a majority
in principal amount of Notes was a necessary condition to the
Modifications. Accordingly, GB Property Funding, as issuer, and
Holdings and GBHC, as guarantors, and Wells Fargo Bank Minnesota,
National Association, as Trustee, entered into an Amended and
Restated Indenture dated as of October 12, 2001, containing the
Modifications to the original indenture described in the Consent
Solicitation Statement (the "Amended and Restated Indenture"). In
accordance with the terms of the Consent Solicitation Statement,
holders of Notes, who consented to the Modifications and who did not
revoke their consents ("Consenting Noteholders"), were entitled to
$17.50 per $1,000 in principal amount of Notes, subject to certain
conditions including entry into the Amended and Restated Indenture.
Upon entry into the Amended and Restated Indenture on October 12,
2001, the Company transferred approximately $1.9 million to the
Trustee for distribution to Consenting Noteholders.
(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.
10
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Scheduled payments of long-term debt as of September 30, 2001, are set
forth below:
2001 (three months) $ 5,000
2002 19,000
2003 21,000
2004 23,000
2005 110,026,000
Thereafter 282,000
------------
Total $110,376,000
============
Interest paid amounted to $6,096,000 and $57,000, respectively, for the
nine months ended September 30, 2001 and 2000.
(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
September 30, 2001 | September 30, 2000
------------------- | ------------------
Federal income tax benefit (provision): |
Current $(645,000) | $--
Deferred -- | --
|
State income tax benefit (provision): |
Current -- | --
Deferred -- | --
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.
11
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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").
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
provision of approximately $645,000 for the nine months ended September 30, 2001
is a result of applying the statutory Federal income tax rate of 35% to the
pretax income after adjustments for income tax purposes.
At September 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.
The Company has utilized the balance of its Federal NOL's in its amended 1999
and 2000 consolidated Federal tax returns. 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 uncertainties,
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
the entire portion at September 30, 2001.
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. To effect the taxattribute
reduction, the Company has reduced the tax basis in its long term depreciable
assets held as of January 1, 2001. 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.
12
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(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 $232,000 and
$214,000, respectively, for the nine months ended September 30, 2001 and 2000.
(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 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 revised internal control processes 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 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.
13
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On a pro forma basis, for the three and nine months ended September 30,
2000, respectively, income per share would have been as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
2000 2000
------------------- -------------------
Basic income per common share:
Before extraordinary item $ 0.69 $ 1.07
Net extraordinary item 1.48 1.48
----------- -----------
Basic income per common share $ 2.17 $ 2.55
=========== ===========
Weighted average common shares outstanding 10,000,000 10,000,000
=========== ===========
(7) Supplemental Cash Flow Information
Cash paid for interest and income taxes during the nine months ended
September 30, 2001 and 2000 are set forth below:
Nine Months Ended
September 30,
--------------------------------
2001 2000
---------- --------
Interest paid $6,096,000 $ 57,000
========== ========
Income taxes paid $ 20,000 $937,000
========== ========
(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." 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.
14
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 September 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.
15
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") and $110,000,000 of 11% Notes due 2005 (the "Notes") were
issued. 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").
16
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Activities
The tragic events of September 11, 2001 had an immediate negative impact
on hotel and casino business volume. Hotel occupancy was down approximately ten
percentage points during the week that followed the terrorist attacks. Bus
passenger volume was lower than normal, especially for those bus tours
originating from the New York metropolitan area. There were approximately 17,500
fewer or 22.5% less, bus passengers during September 2001 than the same month
last year. October 2001 revenues returned to more normal levels and slightly
exceeded the gross revenues for October 2000. Management expects future results
to be somewhat adversely effected by the war on terrorism and the receding
economy. However, Management believes that the impact should not be as severe to
the Sands, and the Atlantic City market in general, due to the lack of
dependence on air travel for its respective customer base.
At September 30, 2001, the Company had cash and cash equivalents of $71.6
million. The Company generated $10.5 million in cash from operating activities
during the nine months ended September 30, 2001 compared to $15.5 million for
the nine months ended September 30, 2000. The most significant causes of such
variations are (1) unfavorable operating results and (2) an increase in accounts
receivable 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 113 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 to the
general public.
Investing Activities
Capital expenditures at the Sands for the nine months ended September 30,
2001 amounted to approximately $14.5 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.
17
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
In April 2000, GBHC acquired 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 (the "Initial Period") 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 of the reduction of the monthly license
fee to $20,000 a month after the Initial Period.
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 nine
months ended September 30, 2001 totaled $2.0 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.
In September 2001, the Sands received approval from the CRDA to
participate in the CRDA Urban Revitalization Incentive Program (URIP). The
program establishes six (6) entertainment-retail districts within Atlantic City
where certain financial incentives are available to casinos who build and
operate entertainment, retail and hotel establishments within the districts. The
financial incentives include sales tax rebates on construction materials, sales
tax rebates on revenue generated from the district and room fee rebates on hotel
room sales. The Sands project, as submitted to the CRDA, included a 357-room
hotel tower, a 1,500-parking space garage to be built on the current Atlantic
City Post Office site, and retail and entertainment elements. The Sands project
also included meeting rooms, a ballroom, a pool, a health club and a wedding
chapel. The Sands project will be built in, and adjacent to, the Sands current
facility in Atlantic City. In order to participate in the URIP, Sands had to
agree to extend its CRDA obligations for an additional five (5) years and to
sponsor a yet to be determined $20 million CRDA project or projects outside of
Atlantic City that would be funded by current and future Sands CRDA obligations
in the form of debt or equity investments in the project. If the Sands does not
commence construction of its project within a certain time frame, the Sands
project would not be an approved project under the URIP and the Sands would not
incur the five year extension of its CRDA obligations or the $20 million
investment obligation.
In August 2001, the Sands agreed that the CRDA could temporarily use $4.7
million of the Sands CRDA obligations on deposit to fund in part the widening of
Dr. Martin Luther King, Jr. Boulevard (the MLK Widening Project) for one block
between Atlantic and Pacific Avenues in Atlantic City. Dr. Martin Luther King,
Jr. Boulevard is a major thoroughfare leading to the Sands from the White Horse
Pike and is a four lane boulevard from the White Horse Pike to the Sands except
for the last block before the Sands. The MLK Widening Project also includes
relocation of the Atlantic City Post Office and the acquisition of certain
businesses and residential dwellings necessary for the street widening. In
October 2001, the Sands donated additional CRDA deposits in the amount of $3.7
million to cover legally required replacement housing costs. The temporary
funding by the Sands CRDA obligations for the MLK Widening Project is to be
recredited to the Sands if and when funding is actually received from the NJ
Department of Transportation, which has agreed to fund the project in its 2003
fiscal year commencing July 1, 2002.
18
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 principal amount of $110,000,000 were issued and distributed
pro rata to the holders of the Old Notes. Total scheduled maturities of long
term debt during the remainder of 2001 is $5,000.
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 nine months ended
September 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.
19
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
Gaming Operations
Information contained herein, regarding Atlantic City casinos other than
the Sands, was obtained from reports filed with the Commission.
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 Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
($000's, except for Units)
Units: (at end of period)
Table Games - Sands 71 80 71 80
- Atlantic City (ex. Sands) 1,073 1,105 1,073 1,105
Slot Machines - Sands 2,056 1,942 2,056 1,942
- Atlantic City (ex. Sands) 35,640 33,596 35,640 33,596
Gross Wagering (1)
Table Games - Sands $ 124,326 $ 127,226 $ 353,332 $ 348,676
- Atlantic City (ex. Sands) 1,832,300 2,027,467 5,139,111 5,500,998
Slot Machines - Sands 638,296 579,455 1,793,286 1,599,876
- Atlantic City (ex. Sands) 10,123,514 10,107,798 27,996,054 27,460,642
Hold Percentages (2)
Table Games - Sands 16.2% 14.2% 15.2% 14.8%
- Atlantic City (ex. Sands) 16.1% 15.2% 15.7% 15.7%
Slot Machines - Sands 7.0% 7.7% 7.0% 7.7%
- Atlantic City (ex. Sands) 8.1% 8.2% 8.1% 8.2%
Revenues (2)
Table Games - Sands $ 20,161 $ 18,099 $ 53,845 $ 51,424
- Atlantic City (ex. Sands) 295,112 308,512 804,458 862,767
Slot Machines - Sands 44,904 44,853 125,013 123,883
- Atlantic City (ex. Sands) 819,589 829,076 2,264,479 2,254,541
Other (3) - Sands 602 858 1,974 2,424
- 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.
20
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
(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.
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 decreased by $2.9 million (2.3%) during the three months
ended September 30, 2001 compared with the same period of 2000. For the nine
months ended September 30, 2001, the Sands table game drop increased by $4.7
million (1.3%) 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 32 units
(2.9%) at all other Atlantic City Casinos between September 2000 and September
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
6.6%. 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 6.4% for the three and nine months ended September 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 (4.0%)
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 2.0 percentage points to 16.2% for the three months
ended September 30, 2001 compared to the same period last year. For the nine
months ended September 30, 2001 compared to the same prior year period, table
game hold percentage increased 0.4 percentage points to 15.2%. Aggregate gaming
space at all other Atlantic City casinos increased by approximately 46,000
square feet at September 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 $58.8 million (11.2%) and $193.4 million
(12.1%) during the three and nine month periods ended September 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 nine
month periods ended September 30, 2001 vs. the same period in 2000 was 0.2% and
2.0%, respectively. As a result, the Sands' market share of slot machine handle
as a percentage of total industry slot handle increased to 6.0% and 5.9%,
respectively, for the three and nine months ended September 30, 2001 from 5.5%
and 5.4%, respectively, for the same prior year periods. The increased Sands
slot handle during 2001 is primarily attributable to an increased volume of play
from 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 4.0% at the Sands. On an industry-wide basis,
the number of slot machines increased by 5.0% in 2001 compared to 2000. As part
of the Sands capital expenditure program new and more popular slot machines
continue to be purchased.
21
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 nine month periods ended September 30,
2001 and 2000:
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------- -----------------------------------------------
Increase (Decrease) Increase (Decrease)
2001 2000 $ % 2001 2000 $ %
-------- ------- ------- ------- --------- -------- ------- ------
(Dollars In Thousands)
Revenues:
Casino $ 65,667 $63,810 $ 1,857 2.91 $ 180,832 $177,731 $ 3,101 1.74
Rooms 3,303 2,582 721 27.92 8,903 7,173 1,730 24.12
Food and Beverage 7,960 7,855 105 1.34 22,525 21,122 1,403 6.64
Other 1,338 1,385 (47) (3.39) 3,644 3,549 95 2.68
Promotional Allowances 11,446 11,258 188 1.67 32,782 30,588 2,194 7.17
Costs and Expenses
Casino 49,661 48,864 797 1.63 143,243 136,867 6,376 4.66
Rooms 959 648 311 47.99 3,421 2,106 1,315 62.44
Food and Beverage 2,765 2,533 232 9.16 7,424 6,685 739 11.05
Other 761 1,224 (463) (37.83) 2,520 2,851 (331) (11.61)
General and Administrative 2,630 2,593 37 1.43 9,253 7,663 1,590 20.75
Depreciation and Amortization 2,836 3,356 (520) (15.49) 8,652 9,414 (762) (8.09)
Income from Operations 7,210 5,156 2,054 39.84 8,609 13,401 (4,792) (35.76)
Non-operating items, net 2,416 490 1,926 393.06 7,097 2,665 4,432 166.30
Income Tax (Provision) Benefit (1,708) 2,235 (3,943) (176.42) (645) -- (645)
Revenues
Casino revenues increased $1.9 million due to increased table game hold
percentages and increased slot handle for the three months ended September 30,
2001 compared with the same period in 2000. Casino revenues increased $3.1
million for the nine months ended September 30, 2001 compared to the same period
in 2000 due to increased table drop, table hold percentage and slot handle,
which more than offset the impact of decreased slot hold percentages.
Rooms revenue increased $721,000 and $1.7 million, respectively, as a
result of an increase in occupied rooms and an increase in the average daily
room rate (ADR) for the three and nine month periods ended September 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 $100,000 and $1.4 million,
respectively, for the three and nine months ended September 30, 2001 due to an
increase in revenue per cover ("average check").
22
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Other revenues increased $95,000 for the nine months ended September 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 increased to 5.8% during the nine months
ended September 30, 2001 from 5.7% during the same period of 2000. The slight
increase is an indication that marketing programs and promotional activities
utilizing the "value gaming" philosophy are successfully increasing the rated
play thereby increasing table game drop by $4.7 million.
Departmental Expenses
Casino expenses at the Sands increased by $797,000 and $6.4 million,
respectively, for the three and nine months ended September 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 nine months of 2000.
Rooms expense increased by $311,000 and $1.3 million for the three and
nine months ended September 30, 2001, respectively, compared to the same prior
year periods due to Madison House rental cost, 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 $232,000 and $740,000 for the three
and nine months ended September 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 $331,000 for the nine months ended September 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 nine
months ended September 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.
23
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 $520,000 and $762,000 for
the three and nine month periods ended September 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 $573,000 and $1.8 million during the three
and nine month periods ended September 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 $9.0 million during the three
and nine month periods ended September 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, 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").
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
provision of approximately $645,000 for the nine months ended September 30, 2001
is a result of
24
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
applying the statutory Federal income tax rate of 35% to the pretax income after
adjustments for income tax purposes.
At September 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.
The Company has utilized the balance of its Federal NOL's in its amended 1999
and 2000 consolidated Federal tax returns. 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 uncertainties,
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
the entire portion at September 30, 2001.
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. To effect the taxattribute
reduction, the Company has reduced the tax basis in its long term depreciable
assets held as of January 1, 2001. 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.
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.
25
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Seasonality
Historically, the Sands' operations have been highly seasonal in nature,
with the peak activity occurring from May to September. Consequently, the
results of 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.
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.
26
PART II: OTHER INFORMATION
Item 6.(a) Exhibits
Item 6.(b) Reports on Form 8-K
During the quarter ended September 30, 2001, the Registrants filed the
following reports on form 8-K:
Items Listed Dates Filed
------------ -----------
5 August 29, 2001
5, 7 September 20, 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 November 14, 2001.
GB HOLDINGS, INC.
GB PROPERTY FUNDING CORP.
GREATE BAY HOTEL AND CASINO, INC.
Registrants
Date: November 14, 2001 By: /s/ Timothy A. Ebling
---------------------------- -------------------------------------
Timothy A. Ebling
Executive Vice President, Chief
Financial Officer and Principal
Accounting Officer
27