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, 2002
---------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 33-69716
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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)
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(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
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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 9, 2002
- --------------------------------------- --------------------------------- ------------------------------
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
GB HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2002 2001
------------- -------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 55,285,000 $ 57,369,000
Accounts receivable, net of allowances
of $12,989,000 and $14,406,000, respectively 6,529,000 8,911,000
Inventories 2,114,000 2,431,000
Income taxes receivable 441,000 759,000
Prepaid expenses and other current assets 3,260,000 2,266,000
------------- -------------
Total current assets 67,629,000 71,736,000
------------- -------------
Property and Equipment:
Land 54,814,000 54,814,000
Buildings and improvements 90,561,000 84,890,000
Equipment 34,460,000 27,321,000
Construction in progress 12,037,000 17,003,000
------------- -------------
191,872,000 184,028,000
Less - accumulated depreciation and
amortization (18,813,000) (13,016,000)
------------- -------------
Property and equipment, net 173,059,000 171,012,000
------------- -------------
Other Assets:
Obligatory investments, net of allowances of
$9,892,000 and $9,290,000, respectively 9,929,000 9,302,000
Other assets 3,477,000 3,872,000
------------- -------------
Total other assets 13,406,000 13,174,000
------------- -------------
$ 254,094,000 $ 255,922,000
============= =============
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 SHAREHOLDERS' EQUITY
June 30, December 31,
2002 2001
------------- -------------
(Unaudited)
Current Liabilities
Current maturities of long-term debt $ 20,000 $ 19,000
Accounts payable 4,924,000 6,843,000
Accrued liabilities -
Salaries and wages 3,913,000 4,144,000
Interest 3,092,000 3,092,000
Insurance 1,712,000 1,670,000
Other 5,895,000 5,421,000
Other current liabilities 3,359,000 3,873,000
------------- -------------
Total current liabilities 22,915,000 25,062,000
------------- -------------
Long-Term Debt 110,342,000 110,352,000
------------- -------------
Other Noncurrent Liabilities 3,128,000 3,839,000
------------- -------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value per share;
5,000,000 shares authorized; 0 shares outstanding -- --
Common Stock, $.01 par value per share;
20,000,000 shares authorized;
10,000,000 shares outstanding 100,000 100,000
Additional paid-in capital 124,900,000 124,900,000
Accumulated deficit (7,291,000) (8,331,000)
------------- -------------
Total shareholders' equity 117,709,000 116,669,000
------------- -------------
$ 254,094,000 $ 255,922,000
============= =============
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,
------------------------------------------------------
2002 2001
------------------------ -------------------------
(Unaudited) (Unaudited)
Revenues:
Casino $ 51,854,000 $ 61,499,000
Rooms 3,049,000 3,046,000
Food and beverage 5,752,000 7,824,000
Other 1,050,000 1,401,000
------------------------ -------------------------
61,705,000 73,770,000
Less - promotional allowances (12,123,000) (16,882,000)
------------------------ -------------------------
Net revenues 49,582,000 56,888,000
Expenses:
Casino 35,303,000 42,345,000
Rooms 1,016,000 1,141,000
Food and beverage 2,822,000 2,651,000
Other 675,000 1,118,000
General and administrative 4,032,000 2,868,000
Depreciation and amortization 3,622,000 2,852,000
Loss on impairment of fixed assets 1,282,000 -
------------------------ -------------------------
Total expenses 48,752,000 52,975,000
------------------------ -------------------------
Income from operations 830,000 3,913,000
------------------------ -------------------------
Non-operating income (expense):
Interest income 240,000 560,000
Interest expense (net of capitalized interest of
$155,000, for the three months ended June 30, 2002) (2,953,000) (3,108,000)
Gain on asset disposal 37,000 -
------------------------ -------------------------
Total non-operating expense, net (2,676,000) (2,548,000)
------------------------ -------------------------
Income (loss) before income taxes (1,846,000) 1,365,000
Income tax benefit (provision) 628,000 (528,000)
------------------------ -------------------------
Net income (loss) $ (1,218,000) $ 837,000
======================== =========================
Basic/diluted income (loss) per common share $ (0.12) $ 0.08
======================== =========================
Weighted average common shares outstanding 10,000,000 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,
------------------------------
2002 2001
------------- -------------
(Unaudited) (Unaudited)
Revenues:
Casino $ 107,524,000 $ 115,165,000
Rooms 5,795,000 5,601,000
Food and beverage 12,217,000 14,564,000
Other 1,978,000 2,306,000
------------- -------------
127,514,000 137,636,000
Less - promotional allowances (24,688,000) (32,147,000)
------------- -------------
Net revenues 102,826,000 105,489,000
------------- -------------
Expenses:
Casino 72,123,000 82,771,000
Rooms 2,120,000 2,161,000
Food and beverage 5,312,000 4,659,000
Other 1,408,000 1,759,000
General and administrative 6,944,000 6,924,000
Depreciation and amortization 6,865,000 5,816,000
Loss on impairment of fixed assets 1,282,000 --
------------- -------------
Total expenses 96,054,000 104,090,000
------------- -------------
Income from operations 6,772,000 1,399,000
------------- -------------
Non-operating income (expense):
Interest income 530,000 1,550,000
Interest expense (net of capitalized interest of
$534,000 for the six months ended June 30, 2002) (5,682,000) (6,237,000)
Gain on asset disposal 52,000 6,000
------------- -------------
Total non-operating expense, net (5,100,000) (4,681,000)
------------- -------------
Income (loss) before income taxes 1,672,000 (3,282,000)
Income tax benefit (provision) (632,000) 1,063,000
------------- -------------
Net income (loss) $ 1,040,000 $ (2,219,000)
============= =============
Basic/diluted income/(loss) per common share $ 0.10 $ (0.22)
============= =============
Weighted average common shares outstanding 10,000,000 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,
----------------------------------
2002 2001
--------------- --------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES:
Net income (loss) $ 1,040,000 $ (2,219,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,865,000 5,816,000
Loss on impairment of fixed assets 1,282,000 -
Gain on asset disposal (52,000) (6,000)
Provision for doubtful accounts 912,000 1,579,000
Decrease in income taxes receivable 318,000 -
(Increase) decrease in accounts receivable 1,470,000 (1,349,000)
Decrease in accounts payable
and accrued liabilities (1,634,000) (3,020,000)
Net change in other current assets and liabilities (1,481,000) (1,387,000)
Net change in other noncurrent assets and liabilities 131,000 170,000
--------------- --------------
Net cash provided by (used in) operating activities 8,851,000 (416,000)
--------------- --------------
INVESTING ACTIVITIES:
Purchase of property and equipment (9,696,000) (9,993,000)
Proceeds from disposition of assets 52,000 6,000
Obligatory investments (1,281,000) (1,251,000)
--------------- --------------
Net cash used in investing activities (10,925,000) (11,238,000)
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FINANCING ACTIVITIES:
Repayments of long-term debt (10,000) (42,000)
--------------- --------------
Net cash used in financing activities (10,000) (42,000)
--------------- --------------
Net decrease in cash and cash equivalents (2,084,000) (11,696,000)
Cash and cash equivalents at beginning of period 57,369,000 77,903,000
--------------- --------------
Cash and cash equivalents at end of period $ 55,285,000 $ 66,207,000
=============== ==============
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 only 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 $38.0 million and $37.9 million as of
June 30, 2002 and December 31, 2001, 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. Throughout
this document, references to Notes refer to the Notes to Consolidated
Financial Statements contained herein.
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.
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.
7
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 2001
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 consolidated 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 current year's
consolidated financial statement presentation.
(2) Long-Term Debt
Long-term debt is comprised of the following:
June 30, December 31,
2002 2001
------------- -------------
11% notes, due 2005 (a) $ 110,000,000 $ 110,000,000
Other 362,000 371,000
------------- -------------
Total 110,362,000 110,371,000
Less - current maturities (20,000) (19,000)
------------- -------------
Total long-term debt $ 110,342,000 $ 110,352,000
============= =============
(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 "New
Notes"). Interest on the New Notes is payable on March 29 and
September 29, beginning March 29, 2001. The outstanding principal
is due on September 29, 2005. The New 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 New Notes contained various provisions,
which, among other things, restricted the ability of Holdings, and GBHC
to incur certain senior secured indebtedness beyond certain limitations
and contained certain other limitations on the ability to merge,
consolidate, or to 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.
8
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In a Consent Solicitation Statement and Consent Form dated September
14, 2001, GB Property Funding sought the consent of holders of the New
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 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 subject to the release or subordination provisions of
the Modifications, (iv) to permit the sale or other conveyances of
Casino Reinvestment Development Authority investments in accordance
with the terms of a permitted security interest whether or not such
sale was made at fair value, (v) to exclude from the operation of
covenants related to the deposit into a collateral account of certain
proceeds of "asset sales" or losses to collateral any assets and any
proceeds thereof, which have been subject to the release or
subordination provisions of the Modifications, (vi) to add new
provisions authorizing the release or subordination of the collateral
securing the New 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 New
Notes provided consents to the Modifications. Under the terms of the
original indenture, the consent of holders representing a majority in
principal amount of New 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 New 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 New 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.
9
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Total scheduled maturities of long-term debt as of June 30, 2002,
are set forth below:
2002 (six months) $ 10,000
2003 21,000
2004 23,000
2005 110,026,000
2006 28,000
Thereafter 254,000
------------------
Total $ 110,362,000
==================
At June 30, 2002 and December 31, 2001, accrued interest on the
New Notes was $3,092,000 and $3,092,000, respectively.
(3) Income Taxes
The components of the benefit (provision) for income taxes are as
follows:
Six Months Ended
June 30,
--------------------------
Federal income tax benefit (provision):
Current $ (632,000) $ 1,063,000
Deferred -- --
State income tax benefit (provision):
Current -- --
Deferred -- --
----------- -----------
$ (632,000) $ 1,063,000
=========== ===========
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"). Accordingly, beginning in 1999, the Company's provision
for federal income taxes has been calculated and paid on a consolidated
basis.
10
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
At June 30, 2002, the Company had deferred tax assets including
State net operating losses, Federal credit carryforwards and temporary
differences. The State net operating losses ("State NOL's") begin to expire
in the year 2003 for state tax purposes. A portion of the credit
carryforwards, if not utilized, will begin to expire each year through
2004. The remaining credit carryforwards expire through the year 2019. In
addition, as part of a certain settlement agreement, GBCC may utilize
Federal net operating losses ("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 1999 (amended) 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 various
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 amount at June 30, 2002 and
December 31, 2001.
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"). GBCC management has disclosed in
its annual SEC Form 10-K, filed for the year ended December 31, 2001, that
the Audit is substantially complete and has resulted in adjustments to
GBCC's Federal NOL's and deferred tax assets. The Company is dependent on
HCC and was dependent on GBCC for information as to their operations
including their affiliates and the impact of those operations on the former
HCC and GBCC consolidated groups' Federal NOL's. The Company has not yet
received information regarding the details of the Audit adjustments and,
therefore, is unable to estimate their impact on the Company's financial
position or results of operations. In addition, GBCC filed a petition for
relief in the United States Bankruptcy Court for the District of Delaware
in 2001 and a plan was confirmed in 2002. GBCC's Plan provided for the
liquidation of GBCC, and GBHC was notified that the Plan became effective
in July 2002.
The State of New Jersey is examining the state corporate business
tax return of GBHC for the years 1996, 1997 and 1998. It is management's
position that any claims by the State of New Jersey against GBHC
attributable to anytime prior to January 5, 1998 are barred by applicable
provisions of the Bankruptcy Code. Management is presently unable to
estimate the impact of New Jersey's tax audit on the financial position or
results of operations of GBHC.
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 $632,000 for the six months ended June 30,
2002 is a result of applying the statutory Federal income tax rate of 35%
to the pretax income after adjustments for income tax purposes.
On July 2, 2002, the New Jersey Business Tax Reform Act (the
"BTR") was signed into law. The BTR revises and updates the New Jersey
corporation business tax and establishes filing fees for certain returns.
Included in the BTR is a deferral on the use of State NOL's until tax year
2005. Those State NOL's that would have been utilized in tax years 2002 and
2003 will be granted a two year extension of their expiration period.
Additionally, the BTR imposes an alternative minimum assessment ("AMA")
based on gross receipts or gross profits. The taxpayer pays the greater of
the AMA or the regular corporate business tax (CBT). The AMA provision is
discontinued after 2006 and any portion of the AMA in excess of the regular
CBT is allowed as a non-expiring future credit carryforward.
11
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Although the BTR is retroactive to the beginning of 2002, since it
was not enacted until the third quarter of 2002, there is no impact to the
income tax benefit (provision) for the three and six months ended June 30,
2002.
Had the BTR been enacted, it would have reduced net income by
$267,000 for the six months ended June 30, 2002. That would have resulted
in a $411,000 increase to the State current income tax provision and a
corresponding $144,000 reduction of the Federal current income tax
provision. For financial statement reporting purposes these amounts will be
included in the income tax benefit (provision) to be recorded in the
consolidated statements of operations for the three and nine months ended
September 30, 2002.
(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 through May 19, 2086 subject to termination rights
for a fee after a certain minimum term. 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 $144,000 and $128,000,
respectively, for the six months ended June 30, 2002 and 2001.
Excluding the New Notes, there were no affiliate advances and
borrowings for the six months ended June 30, 2002 and 2001, respectively.
(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, and has filed an appeal for calendar year
2002 with the Atlantic County Tax Board. The City of Atlantic City has also
appealed the amount of the assessments for the years 1996 through 2001,
inclusive, and has filed a cross-petition with the Atlantic County Tax
Board for calendar year 2002.
The Company has discovered certain failures relating to currency
transaction reporting and self-reported the situation to the applicable
regulatory agencies. The Company has conducted 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 and taken
other measures 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.
12
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company is a party in various legal proceedings with respect to the
conduct of casino and hotel operations and has received employment related
claims. 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 or claims to have a material
adverse impact upon the consolidated financial position or results of operations
of the Company, but the outcome of litigation and the resolution of claims is
subject to uncertainties and no assurances can be given. The accompanying
consolidated financial statements do not include any adjustments that might
result from these uncertainties.
(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
and diluted 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 diluted
income (loss) per share are the same. Basic income (loss) per share is
computed by dividing net income (loss) by the weighted average number of
common shares outstanding.
(7) Supplemental Cash Flow Information
Cash paid for interest and income taxes during the six months
ended June 30, 2002 and 2001 are set forth below:
Six Months Ended
June 30,
-------------------------------
2002 2001
-------------------------------
Interest paid $ 6,068,000 $ 6,084,000
============== ==============
Income taxes paid $ 1,006,000 $ 50,000
============== ==============
(8) New Accounting Pronouncement
In 2001, the Emerging Issues Task Force (the "EITF") reached a
consensus on Issue No. 01-09: "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)"
("EITF 01-09"). For a sales incentive offered voluntarily by a vendor to
its patrons, EITF 01-09 requires the vendor to recognize the cost of the
sales incentive at the later of the date at which the related revenue is
recorded by the vendor, or the date at which the sales incentive is
offered. Application of EITF 01-09 is required in annual or interim
financial statements for periods beginning after December 15, 2001. EITF
01-09 focuses on the accounting for, and presentation of, discounts,
coupons, and rebates. EITF 01-09 also requires that cash or equivalent
amounts provided or returned to customers as part of a transaction should
not be shown as an expense but should be an offset to the related revenue.
The Company offers cash inducements to encourage visitation and play at the
casino. These costs are included in promotional allowances on the
accompanying consolidated statements of operations.
13
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
With the adoption of the new standards, the prior year periods
presented have been reclassified to conform to the new presentation. This
resulted in an increase in promotional allowances (and a corresponding
reduction in casino expenses) of $5.8 million for the three months ended
June 30, 2001 and $10.8 million for the six months ended June 30, 2001. In
addition, the Company will file form 10Q-A to amend the March 31, 2002 for
the adoption of EITF 01-09 with the Securities and Exchange Commission.
That filing will result in a $3.7 million and $5.0 million increase in
promotional allowances (and a corresponding reduction of casino expenses)
for the three months ended March 31, 2002 and 2001, respectively. The
requirements of EITF 01-09 do not have an impact on previously reported
operating income or net income.
In 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," respectively. 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 is 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. The adoption of these standards did not have any impact on the
Company's results of operations or financial position, as the Company does
not have intangible assets nor goodwill.
In 2001, the FASB issued SFAS No. 143, which addresses accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This statement
is effective for fiscal years beginning after June 15, 2002. Management is
currently assessing the impact of this new standard.
In 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which
excludes from the definition of long-lived assets goodwill and other
intangibles that are not amortized in accordance with SFAS No. 142. SFAS
No. 144 requires that long-lived assets to be disposed of by sale be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
SFAS No. 144 also expands the reporting of discontinued operations to
include components of an entity that have been or will be disposed of
rather than limiting such discontinuance to a segment of a business. The
adoption of SFAS No. 144 did not have a material impact on the Company's
consolidated financial statements.
14
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(9) Common Stock Listing
The Company has been contacted by a representative of the American
Stock Exchange (the "Exchange") regarding the continued listing of its
common stock. In that regard, the Exchange noted that the Company failed to
meet several of the minimum requirements for continued listing on the
Exchange. The Company has asked the Exchange for guidance regarding the
Exchange's procedures for such situations and is currently awaiting a
response. However, it is possible that the Exchange will move to delist the
Company's securities. Delisting of the Company's common stock from the
Exchange could have an effect on the ability to raise additional capital,
its stockholders' liquidity and the price of its common stock.
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
On January 5, 1998, the Company filed petitions for relief under
Chapter 11 of 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. The Effective Date of the Plan was September 29, 2000. All material
conditions precedent to the Plan becoming effective were satisfied on or
before September 29, 2000.
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 New Notes were issued. Holders of the Old
Notes received a distribution of their pro rata shares of (i) the New Notes
and (ii) 5,375,000 shares of the Common Stock (the "Stock Distribution").
In a Consent Solicitation Statement and Consent Form dated
September 14, 2001, GB Property Funding sought the consent of holders of
the New 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 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 subject to the release or subordination provisions of the
Modifications, (iv) to permit the sale or other conveyances of Casino
Reinvestment Development Authority investments in accordance with the terms
of a permitted security interest whether or not such sale was made at fair
value, (v) to exclude from the operation of covenants related to the
deposit into a collateral account of certain proceeds of "asset sales" or
losses to collateral any assets and any proceeds thereof, which have been
subject to the release or subordination provisions of the Modifications,
(vi) to add new provisions authorizing the release or subordination of the
collateral securing the New 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.
16
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Holders representing approximately 98% in principal amount of the
New Notes provided consents to the Modifications. Under the terms of the
original indenture, the consent of holders representing a majority in
principal amount of New 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 New 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
New 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.
Operating Activities
At June 30, 2002, the Company had cash and cash equivalents of
$55.3 million. The Company generated $8.9 million of net cash from
operations during the six months ended June 30, 2002 compared to using net
cash of $416,000 during the same prior year period. During the three months
ended June 30, 2002, based on the new Chief Executive Officer's vision and
direction of the Company's marketing programs and product mix, certain
expenditures incurred for property expansion plans, that were included in
construction in progress, were determined to be unusable and resulted in a
loss on asset impairment in the amount of $1.3 million.
Financing Activities
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 physically connected at two
floors to the existing Sands casino-hotel complex and is presently
undergoing renovations to upgrade and combine the rooms into a total of 113
suites and 13 single rooms. To date, 103 of the suites and 12 of the single
rooms have been completed. It is the intention of the Sands to maintain and
operate the Madison House in the same quality as the Sands.
17
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Total scheduled maturities of long term debt as of June 30, 2002
are set forth below:
2002 (six months) $ 10,000
2003 21,000
2004 23,000
2005 110,026,000
2006 28,000
Thereafter 254,000
---------------
Total $ 110,362,000
===============
Investing Activities
Capital expenditures at the Sands for the six months ended June
30, 2002 amounted to approximately $9.7 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 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 completed
in June 2000. 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.
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 three and six months ended June 30, 2002 amounted to
$611,000 and $1,281,000, respectively. 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.
Summary
Management believes that cash flows generated from operations
during 2002, as well as available cash reserves, will be sufficient to meet
its operating plan and provide for scheduled capital expenditures.
18
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, volumes of play, hold percentages and revenues:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(Dollars in Thousands) (Dollars in Thousands)
Units: (at quarter end)
Table Games - Sands 38 73 38 73
- Atlantic City (ex. Sands) 1,181 1,201 1,181 1,201
Slot Machines - Sands 2,438 2,049 2,438 2,049
- Atlantic City (ex. Sands) 35,441 35,046 35,441 35,046
Gross Wagering (1)
Table Games - Sands $ 64,332 $ 118,285 $ 159,349 $ 229,007
- Atlantic City (ex. Sands) 1,636,075 1,692,074 3,223,664 3,306,811
Slot Machines - Sands 558,029 611,746 1,140,582 1,154,990
- Atlantic City (ex. Sands) 9,662,430 9,335,622 18,694,900 17,872,540
Hold Percentages (2) (3)
Table Games - Sands 14.1% 15.6% 15.0% 14.7%
- Atlantic City (ex. Sands) 15.9% 15.4% 16.0% 15.4%
Slot Machines - Sands 7.6% 6.9% 7.4% 6.9%
- Atlantic City (ex. Sands) 8.2% 8.1% 8.1% 8.1%
Revenues (2)
Table Games - Sands $ 9,072 $ 18,427 $ 23,925 $ 33,684
- Atlantic City (ex. Sands) 259,370 260,956 517,416 509,346
Slot Machines - Sands 42,360 42,391 82,586 80,110
- Atlantic City (ex. Sands) 788,324 752,896 1,516,526 1,444,901
Other (3) - Sands 422 681 1,013 1,371
- 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 (the "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.
19
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 $54.0 million (45.6%) during the
three months ended June 30, 2002 compared with the same prior year period.
By comparison, according to Commission reports, table game drop at all
other Atlantic City casinos during the same period decreased 3.3%. For the
six months ended June 30, 2002, the Sands table game drop decreased $69.7
million (30.4%) compared with the same prior year period. The decrease in
table game drop is attributable to the reduction of the number of table
games from 73 in 2001 to 38 by the end of the second quarter 2002. The
decrease in the number of table games was necessary in order to make room
on the casino floor for the installation of four hundred new slot machines.
During the three months ended June 30, 2002, there was considerable
disruption of the casino floor related to the removal of table games and
their replacement with slot machines. Table game hold percentage decreased
1.5 percentage points to 14.1% for the three months ended June 30, 2002
compared to the same period last year. For the six months ended June 30,
2002 the table game hold percentage increased 0.3 percentage points to
15.0% compared to the same prior year period. Aggregate gaming space at all
other Atlantic City casinos increased by approximately 24,000 square feet
at June 30, 2002 compared to June 30, 2001. The amount of gaming space at
the Sands increased approximately 2,000 square feet between periods.
Slot machine handle decreased $53.7 million (8.8%) and $14.4
million (1.2%) during the three and six months ended June 30, 2002,
respectively, compared with the same periods of 2001. By comparison, the
percentage increase in slot machine handle for all other Atlantic City
casinos in the second quarter and first half of 2002 vs. the same periods
in 2001 was 5.0% and 4.7%, respectively. The decreased Sands slot handle
during 2002 can be attributable to the disruption of the gaming floor
during the reconfiguration and installation of four hundred new slot
machines. The number of slot machines increased 19.0% at the Sands to 2,438
at June 30, 2002 compared to June 30, 2001. On an industry-wide basis, the
number of slot machines increased 1.1% in the second quarter of 2002
compared to the second quarter of 2001. Additionally, during the period the
Company's marketing direction focused on continued elimination of marketing
programs and other promotional activities that were deemed to be less
profitable and a continued focus on, and development of, the segments of
play that create more value with less expense. Certain marketing programs
have been revised to reflect this change. For example, the amount of coin
promotional allowances for the period has been reduced from $10,151,000 in
the comparative 2001 period, to $7,259,000, a 28.5% reduction. These types
of marketing program changes have a direct impact upon both gross slot
wagering and slot revenue. During this transition period, and until the
marketing plan has been fully implemented, the overall revenue growth at
the Sands may be below industry growth.
20
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, 2002 and
2001:
Three Months Ended June 30,
---------------------------------------------------------------
Increase (Decrease)
2002 2001 $ %
------------------------------- -------------- --------------
(Dollars In Thousands)
Revenues:
Casino $ 51,854 $ 61,499 $ (9,645) (15.68)
Rooms 3,049 3,046 3 0.10
Food and Beverage 5,752 7,824 (2,072) (26.48)
Other 1,050 1,401 (351) (25.05)
Promotional Allowances 12,123 16,882 (4,759) (28.19)
Expenses:
Casino 35,303 42,345 (7,042) (16.63)
Rooms 1,016 1,141 (125) (10.96)
Food and Beverage 2,822 2,651 171 6.45
Other 675 1,118 (443) (39.62)
General and Administrative 4,032 2,868 1,164 40.59
Depreciation and Amortization 3,622 2,852 770 27.00
Loss on impairment of fixed assets 1,282 - 1,282 100.00
Income/(loss) from Operations 830 3,913 (3,083) (78.79)
Non-operating items, net (2,676) (2,548) 128 5.02
Income Tax (Provision) Benefit 628 (528) 1,156 218.94
Six Months Ended June 30,
--------------------------------------------------------------
Increase (Decrease)
2002 2001 $ %
-------------- -------------- -------------- --------------
(Dollars In Thousands)
Revenues:
Casino $ 107,524 $ 115,165 $ (7,641) (6.63)
Rooms 5,795 5,601 194 3.46
Food and Beverage 12,217 14,564 (2,347) (16.12)
Other 1,978 2,306 (328) (14.22)
Promotional Allowances 24,688 32,147 (7,459) (23.20)
Expenses:
Casino 72,123 82,771 (10,648) (12.86)
Rooms 2,120 2,161 (41) (1.90)
Food and Beverage 5,312 4,659 653 14.02
Other 1,408 1,759 (351) (19.95)
General and Administrative 6,944 6,924 20 0.29
Depreciation and Amortization 6,865 5,816 1,049 18.04
Loss on impairment of fixed assets 1,282 -- 1,282 100.00
Income/(loss) from Operations 6,772 1,399 5,373 384.06
Non-operating items, net (5,100) (4,681) 419 8.95
Income Tax (Provision) Benefit (632) 1,063 (1,695) (159.45)
Revenues
Overall casino revenues decreased $9.6 million and $7.6 million,
respectively, for the three and six months ended June 30, 2002 compared to
the same prior year periods. The decrease in revenue is primarily
attributable to the reduction in table games and the disruption of gaming
operations during the reconfiguration and installation of new slot
machines.
Rooms revenue increased $3,000 and $194,000, respectively, for the
three and six months ended June 30, 2002 compared to the same prior year
periods as a result of a combination of increased occupancy and an increase
in the average daily room rate.
Food and beverage revenues decreased $2.1 million and $2.3
million, respectively, for the three and six months ended June 30, 2002
compared to the same prior year periods due to a decrease in complimentary
food and beverage sales.
21
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Other revenues decreased $351,000 and $328,000, respectively, for
the three and six months ended June 30, 2002 compared to the same prior
year periods as a result of a decrease in entertainment 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, (ii) the cash value of redeemable points
earned under a customer loyalty program based on the amount of slot play
and (iii) coin and cash coupons and discounts. As a percentage of casino
revenues, promotional allowances decreased to 23.0% during the six months
ended June 30, 2002 from 27.9% during the same period of 2001. The decrease
is primarily attributable to the elimination of marketing programs and
other promotional activities that were deemed less profitable and a
continued focus on, and development of, the segments of play that created
more volume with less expense.
Departmental Expenses
Casino expenses at the Sands decreased by $7.0 million and $10.6
million, respectively, for the three and six months ended June 30, 2002
compared to the same prior year periods. The decrease in casino expenses is
primarily due to the reduction of complimentary costs associated with
rooms, food and beverage provided free of charge. Casino payroll expenses
decreased due to the reduction in table games. The decrease in the
provision for doubtful accounts expense was caused by a reduction in credit
issuance due to lower table game activity. There was no television
advertising expense in the first half of 2002 while there were such
expenses in the same prior year period. Lower costs for customer
transportation and gaming revenue tax also contributed to the decreases in
casino expenses.
Rooms expenses decreased $125,000 and $41,000, respectively for
the three and six months ended June 30, 2002 compared to the same prior
year periods. The decreases were due to a decrease in housekeeping supplies
expense and outside maintenance contracts.
Food and beverage expenses increased $171,000 and $653,000,
respectively, for the three and six months ended June 30, 2002 compared to
the same prior year periods. The increases were due to a smaller share of
costs allocated to casino expense as a result of a decrease in casino
complimentaries. These were offset slightly by decreases in payroll,
benefits and food and beverage cost of sales as a result of the lower
volume.
Other expenses decreased $443,000 and $351,000 for the three and
six months ended June 30, 2002, respectively, compared to the same prior
year periods as a result of lower entertainment expense and payroll and
benefit costs.
22
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
General and Administrative Expenses
General and administrative expenses increased $1.2 million and
$20,000 for the three and six months ended June 30, 2002, respectively,
compared to the same periods last year due to the costs associated with
severance packages arising from layoffs in a reorganization of casino
operations during the second quarter of 2002.
Depreciation and Amortization
Depreciation and amortization expense increased $770,000 and $1.0
million for the three and six month periods ended June 30, 2002,
respectively, compared to the same prior year periods as a result of the
continued investment in infrastructure and equipment during the preceding
year.
Interest Income and Expense
Interest income decreased by $320,000 and $1.0 million during the
three and six month periods ended June 30, 2002, respectively, compared to
the same periods in 2001. The decrease was due to earnings on decreased
cash reserves and lower interest rates.
Interest expense decreased $155,000 and $555,000 during the three
and six month periods ended June 30, 2002, respectively, compared to the
same periods in 2001. The decrease is due to the accrual of capitalized
interest in 2002 with no similar accrual in 2001. It is the Company's
policy to capitalize interest on construction projects in excess of
$250,000.
Income Tax Benefit (Provision)
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"). Accordingly, beginning in 1999, the Company's provision
for federal income taxes has been calculated and paid on a consolidated
basis.
At June 30, 2002, the Company had deferred tax assets including
State net operating losses, Federal credit carryforwards and temporary
differences. The State net operating losses ("State NOL's") begin to expire
in the year 2003 for state tax purposes. A portion of the credit
carryforwards, if not utilized, will begin to expire each year through
2004. The remaining credit carryforwards expire through the year 2019. In
addition, as part of a certain settlement agreement, GBCC may utilize
Federal net operating losses ("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 1999 (amended) 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 various
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 amount at June 30, 2002.
23
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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"). GBCC management has disclosed in
its annual SEC Form 10-K, filed for the year ended December 31, 2001, that
the Audit is substantially complete and has resulted in adjustments to
GBCC's Federal NOL's and deferred tax assets. The Company is dependent on
HCC and was dependent on GBCC for information as to their operations
including their affiliates and the impact of those operations on the former
HCC and GBCC consolidated groups' Federal NOL's. The Company has not yet
received information regarding the details of the Audit adjustments and,
therefore, is unable to estimate their impact on the Company's financial
position or results of operations. In addition, GBCC filed a petition for
relief in the United States Bankruptcy Court for the District of Delaware
in 2001 and a plan was confirmed in 2002. GBCC's Plan provided for the
liquidation of GBCC, and GBHC was notified that the Plan became effective
in July 2002.
The State of New Jersey is examining the state corporate business
tax return of GBHC for the years 1996, 1997 and 1998. It is management's
position that any claims by the State of New Jersey against GBHC
attributable to anytime prior to January 5, 1998 is barred by applicable
provisions of the Bankruptcy Code. Management is presently unable to
estimate the impact of New Jersey's tax audit on the financial position or
results of operations of GBHC.
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 $632,000 for the six months ended June 30,
2002 is a result of applying the statutory Federal income tax rate of 35%
to the pretax income after adjustments for income tax purposes.
On July 2, 2002, the New Jersey Business Tax Reform Act (the
"BTR") was signed into law. The BTR revises and updates the New Jersey
corporation business tax and establishes filing fees for certain returns.
Included in the BTR is a deferral on the use of State NOL's until tax year
2005. Those State NOL's that would have been utilized in tax years 2002 and
2003 will be granted a two year extension of their expiration period.
Additionally, the BTR imposes an alternative minimum assessment ("AMA")
based on gross receipts or gross profits. The taxpayer pays the greater of
the AMA or the regular corporate business tax (CBT). The AMA provision is
discontinued after 2006 and any portion of the AMA in excess of the regular
CBT is allowed as a non-expiring future credit carryforward.
Although the BTR is retroactive to the beginning of 2002, since it
was not enacted until the third quarter of 2002, there is no impact to the
income tax benefit (provision) for the three and six months ended June 30,
2002.
Had the BTR been enacted, it would have reduced net income by
$267,000 for the six months ended June 30, 2002. That would have resulted
in a $411,000 increase to the State current income tax provision and a
corresponding $144,000 reduction of the Federal current income tax
provision. For financial statement reporting purposes these amounts will be
included in the income tax benefit (provision) to be recorded in the
consolidated statements of operations for the three and nine months ended
September 30, 2002.
24
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 and
increased 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.
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 future expansion plans, future construction costs
and other business development activities including 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).
25
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Common Stock Listing
The Company has been contacted by a representative of the American
Stock Exchange (the "Exchange") regarding the continued listing of its
common stock. In that regard, the Exchange noted that the Company failed to
meet several of the minimum requirements for continued listing on the
Exchange. The Company has asked the Exchange for guidance regarding the
Exchange's procedures for such situations and is currently awaiting a
response. However it is possible that the Exchange will move to delist the
Company's securities. Delisting of the Company's common stock from the
Exchange could have an effect on the ability to raise additional capital,
its stockholders' liquidity and the price of its common stock.
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
99.1 Certification of Principal Executive Officer of
disclosure in the quarterly report for the period ended
June 30, 2002.
99.2 Certification of Principal Financial Officer of
disclosure in the quarterly report for the period ended
June 30, 2002.
Item 6.(b) Reports on Form 8-K
During the quarter ended June 30, 2002, the Registrants filed the
following reports on Form 8-K:
Items Listed Dates Filed
------------ -----------
4 May 23, 2002
SIGNATURES
- ----------
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant 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 May 13, 2002.
GB HOLDINGS, INC.
GB PROPERTY FUNDING CORP.
GREATE BAY HOTEL AND CASINO, INC.
Registrants
Date: August 14, 2002 By: /s/ Timothy A. Ebling
----------------- ----------------------------------------------
Timothy A. Ebling
Executive Vice President, Chief
Financial Officer and Principal
Accounting Officer