10-Q 1 d01-35115.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended 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