-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fy7cJinTqunX3sz4NUv9M6iOFoli5OeoRCSw58mF1C9fg3O9ffyWqX7nqG0+0L0a 06dtqWskmB7cg3erqQpGrw== 0001125282-03-004904.txt : 20030828 0001125282-03-004904.hdr.sgml : 20030828 20030818121929 ACCESSION NUMBER: 0001125282-03-004904 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 DATE AS OF CHANGE: 20030827 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREATE BAY HOTEL & CASINO INC CENTRAL INDEX KEY: 0000906595 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 222242014 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-31657 FILM NUMBER: 03852283 BUSINESS ADDRESS: STREET 1: C/O SANDS HOTEL & CASINO STREET 2: 136 SOUTH KENTUCKY AVENUE CITY: ATLANTIC CITY STATE: NJ ZIP: 08401 BUSINESS PHONE: 6094414517 MAIL ADDRESS: STREET 1: C/O SANDS HOTEL & CASINO STREET 2: 136 SOUTH KENTUCKY AVENUE CITY: ATLANTIC CITY STATE: NJ ZIP: 08401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GB HOLDINGS INC CENTRAL INDEX KEY: 0000912926 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 752502293 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15064 FILM NUMBER: 03852284 BUSINESS ADDRESS: STREET 1: C/O SANDS HOTEL & CASINO STREET 2: 136 SOUTH KENTUCKY AVENUE CITY: ATLANTIC CITY STATE: NJ ZIP: 08401 BUSINESS PHONE: 6094414517 MAIL ADDRESS: STREET 1: C/O SANDS HOTEL & CASINO STREET 2: 136 SOUTH KENTUCKY AVENUE CITY: ATLANTIC CITY STATE: NJ ZIP: 08401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GB PROPERTY FUNDING CORP CENTRAL INDEX KEY: 0000912906 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 752502290 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16403 FILM NUMBER: 03852285 BUSINESS ADDRESS: STREET 1: C/O SANDS HOTEL & CASINO STREET 2: 136 SOUTH KENTUCKY AVENUE CITY: ATLANTIC CITY STATE: NJ ZIP: 08401 BUSINESS PHONE: 6094414517 MAIL ADDRESS: STREET 1: C/O SANDS HOTEL & CASINO STREET 2: 136 SOUTH KENTUCKY AVENUE CITY: ATLANTIC CITY STATE: NJ ZIP: 08401 10-Q 1 b326515_10q.txt QUARTERLY REPORT 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, 2003 -------------- 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) 441-4633 ------------------ (Not Applicable) - -------------------------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report.) Indicate by check mark whether each of the Registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------- Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Registrant Class Outstanding at August 13, 2003 - --------------------------------------- --------------------------------- ------------------------------- 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 CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (Unaudited)
June 30, December 31, 2003 2002 ------------- ------------- Current Assets: Cash and cash equivalents $ 46,502,000 $ 50,645,000 Accounts receivable, net of allowances of $8,833,000 and $11,301,000, respectively 4,637,000 4,976,000 Inventories 2,031,000 1,857,000 Income tax deposits 1,363,000 1,359,000 Prepaid expenses and other current assets 2,705,000 3,067,000 ------------- ------------- Total current assets 57,238,000 61,904,000 ------------- ------------- Property and Equipment: Land 54,344,000 54,344,000 Buildings and improvements 92,132,000 91,657,000 Equipment 49,925,000 46,119,000 Construction in progress 5,760,000 3,597,000 ------------- ------------- 202,161,000 195,717,000 Less - accumulated depreciation and amortization (32,687,000) (26,095,000) ------------- ------------- Property and equipment, net 169,474,000 169,622,000 ------------- ------------- Other Assets: Obligatory investments, net of allowances of $10,511,000 and $10,028,000, respectively 10,601,000 10,069,000 Other assets 2,747,000 3,117,000 ------------- ------------- Total other assets 13,348,000 13,186,000 ------------- ------------- $ 240,060,000 $ 244,712,000 ============= =============
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. 2 GB HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
June 30, December 31, 2003 2002 ------------- ------------- Current Liabilities Accounts payable $ 5,685,000 $ 5,598,000 Accrued liabilities - Salaries and wages 3,847,000 3,717,000 Interest 3,092,000 3,092,000 Gaming obligations 2,618,000 3,752,000 Self-insurance 2,193,000 1,805,000 Other 4,599,000 3,955,000 ------------- ------------- Total current liabilities 22,034,000 21,919,000 ------------- ------------- Long-Term Debt, net of current maturities 110,000,000 110,000,000 ------------- ------------- Other Noncurrent Liabilities 3,586,000 3,445,000 ------------- ------------- Commitments and Contingencies Shareholders' Equity: Preferred stock, $.01 par value per share; 20,000,000 shares authorized; 0 shares outstanding -- -- Common Stock, $.01 par value per share; 20,000,000 shares authorized; 10,000,000 shares issued and outstanding 100,000 100,000 Additional paid-in capital 124,900,000 124,900,000 Accumulated deficit (20,560,000) (15,652,000) ------------- ------------- Total shareholders' equity 104,440,000 109,348,000 ------------- ------------- $ 240,060,000 $ 244,712,000 ============= =============
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. 3 GB HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended June 30, ---------------------------- 2003 2002 ------------ ------------ Revenues: Casino $ 49,647,000 $ 51,854,000 Rooms 2,956,000 3,049,000 Food and beverage 5,511,000 5,752,000 Other 1,080,000 1,050,000 ------------ ------------ 59,194,000 61,705,000 Less - promotional allowances (13,164,000) (12,123,000) ------------ ------------ Net revenues 46,030,000 49,582,000 ------------ ------------ Expenses: Casino 33,072,000 35,303,000 Rooms 596,000 1,016,000 Food and beverage 2,425,000 2,822,000 Other 784,000 675,000 General and administrative 2,739,000 4,032,000 Depreciation and amortization, including provision for obligatory investments 3,947,000 3,622,000 Loss on impairment of fixed assets -- 1,282,000 Gain on disposal of assets (1,000) (37,000) ------------ ------------ Total expenses 43,562,000 48,715,000 ------------ ------------ Income from operations 2,468,000 867,000 ------------ ------------ Non-operating income (expense): Interest income 172,000 240,000 Interest expense (2,963,000) (2,953,000) ------------ ------------ Total non-operating expense, net (2,791,000) (2,713,000) ------------ ------------ Loss before income tax (provision) benefit (323,000) (1,846,000) Income tax (provision) benefit (184,000) 628,000 ------------ ------------ Net loss $ (507,000) $ (1,218,000) ============ ============ Basic/diluted loss per common share $ (0.05) $ (0.12) ============ ============ Basic/diluted weighted average common shares outstanding 10,000,000 10,000,000 ============ ============
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. 4 GB HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six Months Ended June 30, ------------------------------ 2003 2002 ------------- ------------- Revenues: Casino $ 93,286,000 $ 107,524,000 Rooms 5,415,000 5,795,000 Food and beverage 10,175,000 12,217,000 Other 1,963,000 1,978,000 ------------- ------------- 110,839,000 127,514,000 Less - promotional allowances (25,008,000) (24,688,000) ------------- ------------- Net revenues 85,831,000 102,826,000 ------------- ------------- Expenses: Casino 64,958,000 72,123,000 Rooms 1,030,000 2,120,000 Food and beverage 4,481,000 5,312,000 Other 1,388,000 1,408,000 General and administrative 5,261,000 6,944,000 Depreciation and amortization, including provision for obligatory investments 7,678,000 6,865,000 Loss on impairment of fixed assets -- 1,282,000 Loss (gain) on disposal of assets 3,000 (52,000) ------------- ------------- Total expenses 84,799,000 96,002,000 ------------- ------------- Income from operations 1,032,000 6,824,000 ------------- ------------- Non-operating income (expense): Interest income 361,000 530,000 Interest expense (5,958,000) (5,682,000) ------------- ------------- Total non-operating expense, net (5,597,000) (5,152,000) ------------- ------------- Income (loss) before income taxes (4,565,000) 1,672,000 Income tax provision (343,000) (632,000) ------------- ------------- Net income (loss) $ (4,908,000) $ 1,040,000 ============= ============= Basic/diluted income (loss) per common share $ (0.49) $ 0.10 ============= ============= Weighted average common shares outstanding 10,000,000 10,000,000 ============= =============
The accompanying notes to condensed consolidated financial statements are an integral part of these consolidated financial statements. 5 GB HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, ---------------------------- 2003 2002 ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ (4,908,000) $ 1,040,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization, including provision for obligatory investments 7,678,000 6,865,000 Loss on impairment of fixed assets -- 1,282,000 Loss (gain) on disposal of assets 3,000 (52,000) Provision for doubtful accounts 688,000 912,000 (Increase) decrease in income tax deposits (4,000) 318,000 (Decrease) increase in accounts receivable (349,000) 1,470,000 Increase (decrease) in accounts payable and accrued liabilities 63,000 (1,634,000) Decrease (increase) in other current assets 182,000 (1,481,000) Decrease in other noncurrent assets and liabilities 176,000 131,000 ------------ ------------ Net cash provided by operating activities 3,529,000 8,851,000 ------------ ------------ INVESTING ACTIVITIES: Purchase of property and equipment (6,576,000) (9,696,000) Proceeds from disposition of assets 2,000 52,000 Purchase of obligatory investments (1,098,000) (1,281,000) ------------ ------------ Net cash used in investing activities (7,672,000) (10,925,000) ------------ ------------ FINANCING ACTIVITIES: Repayments of long-term debt -- (10,000) ------------ ------------ Net cash used in financing activities -- (10,000) ------------ ------------ Net decrease in cash and cash equivalents (4,143,000) (2,084,000) Cash and cash equivalents at beginning of period 50,645,000 57,369,000 ------------ ------------ Cash and cash equivalents at end of period $ 46,502,000 $ 55,285,000 ============ ============
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. 6 GB HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) Organization, Business and Basis of Presentation The condensed consolidated financial statements include the accounts of GB Holdings, Inc. and subsidiaries ("Holdings" or the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. In management's opinion, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the condensed consolidated financial position as of June 30, 2003 and the condensed consolidated results of operations for the three and six months ended June 30, 2003 and 2002 have been made. The results set forth in the condensed consolidated statement of operations for the six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements were prepared following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP (accounting principles generally accepted in the United States of America) can be condensed or omitted. The Company is responsible for the unaudited financial statements included in this document. As these are condensed financial statements, they should be read in conjunction with the consolidated financial statements and notes included in the Company's latest Form 10-K. (2) Income Taxes The components of the provision for income taxes are as follows: Six Months Ending June 30, --------------------------- 2003 2002 --------- --------- Federal income tax provision: Current $ -- $(632,000) Deferred -- -- State income tax provision: Current (343,000) -- Deferred -- -- --------- --------- $(343,000) $(632,000) ========= ========= 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. Due to recurring losses, the Company has not recorded a Federal income tax benefit for the six months ended June 30, 2003. Management is unable to determine that realization of the Company's deferred tax assets are more likely than not, and, thus has provided a valuation allowance for the entire amount. 7 GB HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) The State income tax provision of $343,000 for the six months ended June 30, 2003 is a result of applying the statutory Alternative Minimum Assessment rate of 0.4% to gross receipts, as defined in the Business Tax Reform Act. (3) Transactions with Related Parties Greate Bay Hotel and Casino, Inc.'s ("GBHC") rights to the trade name "Sands" (the "Trade Name") were derived from a license agreement between Greate Bay Casino Corporation and an unaffiliated third party. Amounts payable by GBHC for these rights were equal to the amounts paid to the unaffiliated third party. GBHC was assigned by High River Limited Partnership ("High River") the rights under a certain agreement with the owner of the Trade Name to use the Trade Name as of September 29, 2000 through May 19, 2086 subject to termination rights for a fee after a certain minimum term. High River is an entity controlled by Carl C. Icahn. High River received no payments for its assignment of these rights. Payment is made directly to the owner of the Trade Name. Such charges amounted to $130,000 and $144,000, respectively, for the six months ended June 30, 2003 and 2002. The Stratosphere Casino Hotel & Tower (the "Stratosphere"), an entity controlled by Carl C. Icahn, allocates a portion of certain executive salaries, including Richard P. Brown, as well as other charges for tax preparation, legal fees, travel and entertainment to GBHC. Charges incurred from the Stratosphere for the six months ended June 30, 2003 were $108,000. There were no similar charges for the six months ended June 30, 2002. On February 28, 2003, GBHC entered into a two year agreement with XO New Jersey, Inc., a long-distance phone carrier controlled by Carl C. Icahn. The agreement can be extended beyond the two year term on a month-to-month basis. Charges incurred for the six months ended June 30, 2003 were $26,000. (4) Legal Proceedings Tax appeals on behalf of the Company and the City of Atlantic City challenging the amount of the Company's real property assessments for tax years 1996 through 2003 are pending before the NJ Tax Court. The Company discovered certain failures relating to currency transaction reporting and self-reported the situation to the applicable regulatory agencies. The Company conducted an internal examination of the matter and the New Jersey Division of Gaming Enforcement conducted a separate review. The Company has revised internal control processes and taken other measures to address the situation. The Company was advised by the Department of the Treasury that it will not pursue a civil penalty. 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 condensed consolidated financial statements do not include any adjustments that might result from these uncertainties. 8 GB HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) On February 26, 2003, the Company received a letter from counsel for Mr. Frederick H. Kraus, Executive Vice President, General Counsel and Secretary, indicating that he had been retained to represent Mr. Kraus "in regards to a constructive discharge, breach of contract, severance pay" and other claims. This matter has been amicably resolved. (5) Income (Loss) Per Share Statement of Financial Accounting Standards No. 128: "Earnings Per Share", 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 and diluted income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. (6) Supplemental Cash Flow Information Cash paid for interest and income taxes during the six months ended June 30, 2003 and 2002 are set forth below: Six Months Ended June 30, ------------------------------ 2003 2002 ---------- ---------- Interest paid $6,050,000 $6,068,000 ========== ========== Interest capitalized $ 211,000 $ 532,000 ========== ========== Income taxes paid $ 376,000 $1,006,000 ========== ========== (7) New Accounting Pronouncement On January 1, 2003, the Company adopted FAS No. 143, "Asset Retirement Obligations" ("SFAS No. 143"), which provides the accounting requirements for retirement obligations associated with tangible long-lived assets. This statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The adoption of FAS No. 143 did not have a material impact on the Company's condensed consolidated financial statements. 9 GB HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (8) Subsequent Event On July 14, 2003, a Form 8-K was filed with the Securities and Exchange Commission reporting that a committee of the independent directors of the Company approved a proposed restructuring of the Company's $110 million notes due September 29, 2005 that bear interest at 11% (the Existing Notes") together with various other corporate changes to be accomplished in connection with the proposed restructuring and issued a press release describing the restructuring and other aspects of the proposed transaction. The proposed transaction would involve the following: o The amendment of the Existing Indenture to remove certain provisions and covenants and the release of the lien on the Company's assets which is the collateral for the Existing Notes, thereby allowing the transfer of the Company's assets to a newly formed wholly-owned indirect subsidiary of the Company ("Licensee") free and clear of all liens and all obligations under the Existing Indenture. Licensee will guarantee the obligations of a new subsidiary of the Company formed to own Licensee ("Newco") under a new indenture. o The solicitation of the exchange (the "Notes Exchange") of the Existing Notes, dollar for dollar, for up to $110 million of notes (the "New Notes") due September 2008 (the "New Maturity Date") which will bear interest at 3% per annum, payable at maturity. The New Notes will be secured by a first lien on the assets of Newco and Licensee. Newco will undertake to provide the funds to the Company to meet scheduled interest payments on the Notes through their scheduled maturity. o The payment of $100 by the Company to the holders of the Existing Notes for each $1,000 in principal amount exchanged together with all interest accrued on such Existing Notes through the date of such exchange. o The distribution to the Company's common stockholders of warrants exercisable (following the occurrence of certain events) for 27.5% of the common stock of Newco (on a fully diluted basis) (the "Newco Warrants"). o The holders of a majority of the principal amount of the New Notes have the option at any time prior to the New Maturity Date to cause the entire class of New Notes to simultaneously convert into shares of Newco Stock. Shares of Newco Stock issued upon such conversion of the New Notes will represent 72.5% of the Newco Stock if all of the Existing Notes participate in the Note Exchange. If less than all of the Existing Notes participate in the Note Exchange, then in the event of a conversion of the New Notes into shares of Newco Stock, such shares would be equal on a fully diluted basis, after giving effect to the exercise of the Newco Warrants and the conversion of the New Notes, the product of (a) 72.5% and (b) a fraction, the numerator of which is the principal amount of the New Notes and the denominator of which is the total principal amount of the Existing Notes immediately prior to the Exchange Officer. 10 GB HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) o At the election of the holders of a majority of the principal amount of the New Notes, the holders of the New Notes may be given the ability to convert the New Notes at their option. o If all the Existing Notes do not participate in the Note Exchange, the proposed transaction will result in the Company owning shares of Newco Stock which would represent on a fully diluted basis (after giving effect to the exercise of the Newco Warrants and the conversion of the New Notes) a percentage of the Newco Stock equal to the product of (a) 72.5% and (b) a fraction, the numerator of which is the principal amount of the Existing Notes that are not exchanged for New Notes and the denominator of which is the total principal amount of the Existing Notes immediately prior to the Exchange Offer. This proposed transaction is subject to the consent of the holders of a majority of the Existing Notes, the exchange of a majority in principal amount of the Existing Notes, the approval of stockholders owning a majority of the common stock of the Company, the effectiveness of all required filing under applicable securities law, and the receipt of all required governmental and third party approvals. 11 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 Operating Activities At June 30, 2003, the Company had cash and cash equivalents of $46.5 million. The Company provided $3.5 million of net cash from operations during the six months ended June 30, 2003 compared to generating $8.9 million during the same prior year period. On July 1, 2003, the State of New Jersey enacted certain legislation that established a 7.5% tax on a casino's calendar year 2002 adjusted net income, as defined in the legislation (the "Casino Income Tax"). The Casino Income Tax is payable annually at a minimum of $350,000 per casino through June 2006. Since the Great Bay Hotel and Casino, Inc. ("GBHC") operated at an adjusted net loss in 2002, it is subject to the minimum annual Casino Income Tax. This tax is payable in equal quarterly installments of $87,500. Casinos can receive a portion of this amount in the form of a distribution from the CRDA for approved capital construction projects. Eligible projects include expansions that "increase the square footage of retail space, parking spaces, or hotel rooms or to create a significant physical amenity or improvement." Also enacted on July 1, 2003, was legislation to tax complimentaries at a rate of 4.25%. The minimum complimentary tax each casino will have to pay is equivalent to the tax it would have paid in calendar year 2002 if this tax were already in existence. No tax on complimentaries is imposed on the value of any service or property upon which a sales or use tax has been paid by the casino licensee. In addition, parking fees payable to the State of New Jersey increased from $1.50 per vehicle to $3.00 per vehicle. The legislation also disallows deduction of uncollectible gaming receivables in calculating the gross revenue tax on gambling winnings. Management estimates the impact of these new taxes, fees and calculations to be approximately $725,000 over the next four quarters. The incremental cost of the new taxes, fees and calculations includes $350,000 for the Casino Income tax, approximately $260,000 for taxes on complimentaries and increased parking fees and approximately $115,000 attributable to the disallowance of deducting uncollectible gaming receivables for gross revenue tax purposes. Investing Activities Capital expenditures at the Sands for the six months ended June 30, 2003 amounted to approximately $6.6 million. These expenditures included but were not limited to renovations to the new 'Swingers' Lounge, Pacific Avenue bus center, the Platinum Club players lounge and the new bus patron lobby. 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. 12 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Sands is required by the Casino Act to make certain quarterly deposits based on gross revenue with the Casino Reinvestment Development Authority ("CRDA") in lieu of a certain investment alternative tax. Deposits for the six months ended June 30, 2003 amounted to $1.1 million. Financing Activities There were no financing activities during the six months ended June 30, 2003. As of June 30, 2003, the only scheduled payment of long-term debt is the $110 million for notes due September 29, 2005 that bear interest at the rate of 11% ("the Existing Notes"). On July 14, 2003, a Form 8-K was filed with the Securities and Exchange Commission reporting that a committee of the independent directors of the Company approved a proposed restructuring of the Company's Existing Notes together with various other corporate changes to be accomplished in connection with the proposed restructuring and issued a press release describing the restructuring and other aspects of the proposed transaction. The proposed transaction would involve the following: o The amendment of the Existing Indenture to remove certain provisions and covenants and the release of the lien on the Company's assets which is the collateral for the Existing Notes, thereby allowing the transfer of the Company's assets to a newly formed wholly-owned indirect subsidiary of the Company ("Licensee") free and clear of all liens and all obligations under the Existing Indenture. Licensee will guarantee the obligations of a new subsidiary of the Company formed to own Licensee ("Newco") under a new indenture. o The solicitation of the exchange (the "Notes Exchange") of the Existing Notes, dollar for dollar, for up to $110 million of notes (the "New Notes") due September 2008 (the "New Maturity Date") which will bear interest at 3% per annum, payable at maturity. The New Notes will be secured by a first lien on the assets of Newco and Licensee. Newco will undertake to provide the funds to the Company to meet scheduled interest payments on the Notes through their scheduled maturity. o The payment of $100 by the Company to the holders of the Existing Notes for each $1,000 in principal amount exchanged together with all interest accrued on such Existing Notes through the date of such exchange. o The distribution to the Company's common stockholders of warrants exercisable (following the occurrence of certain events) for 27.5% of the common stock of Newco (on a fully diluted basis). ("Newco Warrants") o The holders of a majority of the principal amount of the New Notes have the option at any time prior to the New Maturity Date to cause the entire class of New Notes to simultaneously convert into shares of Newco Stock. Shares of Newco Stock issued upon such conversion of the New Notes will represent 72.5% of the Newco Stock if all of the Existing Notes participate in the Note Exchange. If less than all of the Existing Notes participate in the Note Exchange, then in the event of a conversion of the New Notes into shares of Newco Stock, such shares would be equal on a fully diluted basis, after giving effect to the exercise of the Newco Warrants and the conversion of the New Notes, the product of (a) 72.5% and (b) a fraction, the numerator of which is the principal amount of the New Notes and the denominator of which is the total principal amount of the Existing Notes immediately prior to the Exchange Officer. 13 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) o At the election of the holders of a majority of the principal amount of the New Notes, the holders of the New Notes may be given the ability to convert the New Notes at their option. o If all the Existing Notes do not participate in the Note Exchange, the proposed transaction will result in the Company owning shares of Newco Stock which would represent on a fully diluted basis (after giving effect to the exercise of the Newco Warrants and the conversion of the New Notes) a percentage of the Newco Stock equal to the product of (a) 72.5% and (b) a fraction, the numerator of which is the principal amount of the Existing Notes that are not exchanged for New Notes and the denominator of which is the total principal amount of the Existing Notes immediately prior to the Exchange Offer. This proposed transaction is subject to the consent of the holders of a majority of the Existing Notes, the exchange of a majority in principal amount of the Existing Notes, the approval of stockholders owning a majority of the common stock of the Company, the effectiveness of all required filing under applicable securities law, and the receipt of all required governmental and third party approvals. Summary Management believes that cash flows to be generated from operations during 2003, as well as available cash reserves, will be sufficient to meet its operating plan and provide for scheduled capital expenditures of approximately $7.5 million for the remaining six months of 2003. However, any significant other capital expenditures may require additional financing. Critical Accounting Policies and Estimates The Company's discussion and analysis of its results of operations and financial condition are based upon its condensed consolidated financial statements that have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Estimates and assumptions are evaluated on an ongoing basis and are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from estimates. The impact and any associated risks related to estimates, assumptions, and accounting policies are discussed within Management's Discussion and Analysis of Results of Operations and Financial Condition, as well as in the Notes to the Condensed Consolidated Financial Statements, if applicable, where such estimates, assumptions, and accounting policies affect the Company's reported and expected financial results. 14 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company believes the following accounting policies are critical to its business operations and the understanding of results of operations and affect the more significant judgments and estimates used in the preparation of its condensed consolidated financial statements: Allowance for Doubtful Accounts - The Company maintains accounts receivable allowances for estimated losses resulting from the inability of its customers to make required payments. Additional allowances may be required if the financial condition of the Company's customers deteriorates. Commitments and Contingencies - Litigation - On an ongoing basis, the Company assesses the potential liabilities related to any lawsuits or claims brought against the Company. While it is typically very difficult to determine the timing and ultimate outcome of such actions, the Company uses its best judgment to determine if it is probable that it will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. In assessing probable losses, the Company makes estimates of the amount of insurance recoveries, if any. The Company accrues a liability when it believes a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation and potential insurance recovery, it is possible that certain matters may be resolved for amounts materially different from any provisions or disclosures that the Company has previously made. Impairment of Long-Lived Assets - The Company periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assumptions and estimates used in the determination of impairment losses, such as future cash flows and disposition costs, may affect the carrying value of long-lived assets and possible impairment expense in the Company's condensed consolidated financial statements. Self-Insurance - The Company retains the obligation for certain losses related to customer's claims of personal injuries incurred while on the Company property as well as major-medical and dental claims for non-union employees in 2003. The Company accrues for outstanding reported claims, claims that have been incurred but not reported and projected claims based upon management's estimates of the aggregate liability for uninsured claims using historical experience, an adjusting company's estimates and the estimated trends in claim values. Although management believes it has the ability to adequately project and record estimated claim payments, it is possible that actual results could differ significantly from the recorded liabilities. Allowance for Obligatory Investments - The Company maintains obligatory investment allowances for its investments made in satisfaction of its CRDA obligation. The obligatory investments may ultimately take the form of CRDA issued bonds, which bear a below market rate of interest, direct investments or donations. Management bases its reserves on the type of investments the obligation has taken or is expected to take. CRDA bonds bear interest at approximately one-third below market rates. Donations of the Sands' quarterly deposits to the CRDA have historically yielded a 51% future credit or refund of obligations. Therefore, management has reserved the predominant balance of its obligatory investments at between 33% and 49%. 15 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 Casino Control 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, -------------------------------- ------------------------------ 2003 2002 2003 2002 --------------- --------------- -------------- -------------- (Dollars in Thousands) (Dollars in Thousands) Units: (at end of period) Table Games - Sands 61 38 61 38 - Atlantic City (ex. Sands) 1,154 1,181 1,154 1,181 Slot Machines - Sands 2,171 2,438 2,171 2,438 - Atlantic City (ex. Sands) 36,034 35,441 36,034 35,441 Gross Wagering (1) Table Games - Sands $ 53,144 $ 64,332 $ 98,315 $ 159,349 - Atlantic City (ex. Sands) 1,610,605 1,636,075 3,130,602 3,223,664 Slot Machines - Sands 514,630 558,029 993,880 1,140,582 - Atlantic City (ex. Sands) 9,787,048 9,662,430 18,502,770 18,694,900 Hold Percentages (2) Table Games - Sands 15.2% 14.1% 14.7% 15.0% - Atlantic City (ex. Sands) 16.4% 15.9% 16.5% 16.1% Slot Machines - Sands 8.0% 7.6% 7.9% 7.2% - Atlantic City (ex. Sands) 8.1% 8.2% 8.1% 8.1% Revenues (2) Table Games - Sands $ 8,085 $ 9,072 $ 14,404 $ 23,925 - Atlantic City (ex. Sands) 264,049 259,370 517,194 517,416 Slot Machines - Sands 41,259 42,360 78,421 82,586 - Atlantic City (ex. Sands) 797,265 788,324 1,496,331 1,516,526 Other (3) - Sands 303 422 461 1,013 - 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"). 16 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (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. (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. For the three and six months ended June 30, 2003 the table game drop decreased $11.2 million (17.4)% and $61.0 million (38.3%) compared to the comparable periods in 2002. These results are compared to the Atlantic City Industry table drop results of a decrease of $25.4 million (1.6%) and $93 million (2.9%) for the three months and six months ended June 30, 2003 respectively compared to the same periods in 2002. During this 2003 period, the Company reestablished its table games to 61 units compared to 38 units in the prior year. It was during May of 2002 that the Company reduced its table games and related business for the purpose of focusing entirely on the mass slot customer business. The Company changed its business strategy in late 2002 to refocus on the mid to high-end slot customer along with a balanced table game business. It should be noted that marketing adjustments regarding target audience refocus take time to come to fruition. The number of slot machine units as of the end of June 2003 was 2,171 compared to 2,438 at the same time in 2002.Table game hold percentage for the Company increased by 1.1 percentage points to 15.2% and declined 0.3 percentage points to 14.7% for the three and six month periods ended June 30, 2003 respectively compared to the same periods in 2002. Slot machine handle for the Company decreased $43.4 million (7.8%), and $146.7 (12.9%) million for the three and six month periods ended June 30, 2003 respectively compared to the same periods in 2002. By comparison, the percentage change in slot machine handle for all other Atlantic City casinos during these periods in 2003 compared to the same periods in 2002 was 1.3% increase for the three month period and a 1.0% decrease for the six month period. The Company's 2003 decrease in handle is attributed to (i) reduced hotel room occupancy from the tour and travel groups during mid-week, a carryover effect from the focus on mass slot play during the first three months of 2003; and (ii) the heavy weighting of lower denomination slot machines remaining from the 2002 mass customer strategy, and (iii) the change in strategy from early 2002 of a "Lowest Slot Hold Percentage" to a more competitive hold percentage in 2003. During June 2003, the Company shifted its weighting of denomination of slot machine units back toward the mid to high end levels. This decrease in slot machine handle was offset by an increase in the hold percentage of 0.4 percentage points to 8.0% and 0.7 percentage points to 7.9% for the three and six month periods ended June 30, 2003 compared to the same periods in 2002. This positive variance in hold percentage was not enough to offset the decrease in slot machine handle and resulted in a decrease in Slot revenue of $1.1 million (2.6%) and $4.2 million (5%) for the three and six-month periods ended June 30, 2003 respectively compared to the periods in 2002. The number of slot machine units as of the end of June 2003 was 2,171 compared to 2,438 at the same time in 2002. On an industry-wide basis, the number of slot machines increased 1.6% at June 30, 2003 compared to the same time period in 2002. 17 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 month and six month periods ended June 30, 2003 and 2002:
Three Months Ended June 30, Six Months Ended June 30, --------------------------------------------- --------------------------------------------- Increase (Decrease) Increase (Decrease) 2003 2002 $ % 2003 2002 $ % --------- --------- --------- ------ --------- --------- --------- ------ (Dollars In Thousands) Revenues: Casino $ 49,647 $ 51,854 $ (2,207) (4.26) $ 93,286 $ 107,524 $ (14,238) (13.24) Rooms 2,956 3,049 (93) (3.05) 5,415 5,795 (380) (6.56) Food and Beverage 5,511 5,752 (241) (4.19) 10,175 12,217 (2,042) (16.71) Other 1,080 1,050 30 2.86 1,963 1,978 (15) (0.76) Promotional Allowances 13,164 12,123 (1,041) (8.59) 25,008 24,688 (320) (1.30) Expenses: Casino 33,072 35,303 (2,231) (6.32) 64,958 72,123 (7,165) (9.93) Rooms 596 1,016 (420) (41.34) 1,030 2,120 (1,090) (51.42) Food and Beverage 2,425 2,822 (397) (14.07) 4,481 5,312 (831) (15.64) Other 784 675 109 16.15 1,388 1,408 (20) (1.42) General and Administrative 2,739 4,032 (1,293) (32.07) 5,261 6,944 (1,683) (24.24) Depreciation and Amortization 3,947 3,622 325 8.97 7,678 6,865 813 11.84 Loss on impairment of fixed assets -- 1,282 (1,282) (100.00) -- 1,282 (1,282) (100.00) Loss (gain) on disposal of assets (1) (37) 36 (97.30) 3 (52) 55 (105.77) Income from Operations 2,468 867 1,601 184.66 1,032 6,824 (5,792) (84.88) Non-operating expense, net (2,791) (2,713) (78) (2.88) (5,597) (5,152) (445) (8.64) Income Tax (Provision) Benefit (184) 628 (812) (129.30) (343) (632) 289 45.73 Net income (loss) (507) (1,218) 711 58.37 (4,908) 1,040 (5,948) (571.94)
Revenues Overall casino revenues decreased $2.2 million (4.3%) and $14.2 million (13.2%) for the three and six-month periods ended June 30, 2003 respectively compared to the same periods in 2002. The decreases in casino revenues are attributable to the decreases in table game drop and slot machine handle as described above, along with the related changes in hold percentage. 18 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Room revenue decreased $93,000 (3.0%) and $380,000 (6.6%) for the three and six-month periods ended June 30, 2003, respectively, compared to the same period in 2002. The decreases in room revenue is directly attributable to the decrease in average room rate for the three months ended June 30, 2003 compared to the same period in 2002 and a decrease in occupancy percentage along with a decrease in average room rate for the six months ended June 30, 2003 compared to the same period in 2002. The decreases are attributable to less tour and travel business, as described above, than 2002 which was replaced by more, lower priced complimentary rooms during the three months ended June 30, 2003 as the Company moved to reinvest more in its customer in its attempts to recapture market share with its increased table game presence and emphasis on mid to high end slots. Food and Beverage revenues decreased $241,000 (4.2%) and $2.0 million (16.7%) for the three and six-month periods ended June 30, 2003 respectively compared to the same periods in 2002. These decreases are directly attributable to the decrease in gaming volume and hotel occupancy primarily in the first three months of 2003. Other revenues increased $30,000 (2.9%) and decreased $15,000 (0.8%) for the three and six-month periods ended June 30, 2003 respectively compared to the same periods in 2002. The increase during the three-month period is primarily attributable to more entertainment shows in the Copa Room, while the decrease for the six-month period is due to a reduction in commissions ($207,000), offset by increases in entertainment ($101,000) and parking revenues ($97,000). 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. The dollar amount of promotional allowances increased $1.0 million (8.6%) and $320,000 (1.3%) for the three and six-month periods ended June 30, 2003, respectively, compared to the same periods in 2002. As a percentage of casino revenues, promotional allowances increased to 26.5% from 23.4% and 26.8 % from 23% for the three and six-month periods ended June 30, 2003, respectively, compared to the same periods in 2002. The increase in this ratio is directly attributable to the Company's focus on recapture of lost market share related to its table game enhancement and refocus on the mid to high end slots. Departmental Expenses Casino expenses at the Sands decreased by $2.2 million and $7.2 million, respectively, for the three and six months ended June 30, 2003 compared to the same prior year period. The decrease in casino expenses is primarily due to the reduction of payroll expenses ($828,000 and $2.6 million for the three and six months ended June 30, 2003, respectively) due to the reduction in table games. Also, the lower complimentary costs associated with amenities provided free of charge contributed to the favorable variance ($672,000 and $1.8 million for the three and six months ended June 30, 2003, respectively). Expenses allocated to the casino department were lower by $330,000 and $1.1 million for the three and six months ended June 30, 2003, respectively, as a result of overall cost reductions in other operating departments. Gaming revenue tax was reduced by $163,000 and $1.1 million for the three and six months ended June 30, 2003, respectively, as a result of lower casino revenues. Direct mail and radio advertising increased by $668,000 and $966,000 for the three and six months ended June 30, 2003, respectively, due to a marketing campaign aimed at spreading the new Sands "All The Way" image to key markets. 19 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Rooms expenses decreased $420,000 and $1.1 million for the three and six months ended June 30, 2003 compared to the same prior year period. Rooms payroll and benefits decreased $280,000 and $547,000 for the three and six months ended June 30, 2003, respectively, due to a reorganization of management. Also contributing to the favorable variance were reduced costs for linen usage ($18,000 and $64,000 for the three and six months ended June 30, 2003, respectively) and outside laundry expense ($10,000 and $37,000 for the three and six months ended June 30, 2003, respectively). The decreases were also due to a larger share of costs allocated to casino expenses ($206,000 for the six months ended June 30, 2003) as a result of increased room complimentaries generated by casino operations. Total complimentary room nights increased by 15,584 or 24.4% for the six months ended June 30, 2003 over the same prior year period. Food and beverage expenses decreased $397,000 and $831,000, respectively, for the three and six months ended June 30, 2003 compared to the same prior year period. The decreases were due to reductions in payroll and benefits ($1.0 million and $2.5 million for the three and six months ended June 30, 2003, respectively) and food and beverage cost of sales ($346,000 and $1.2 million for the three and six months ended June 30, 2003, respectively), which were a result of a reorganization of management, a reduction in unproductive operating hours in certain outlets and closing the employee cafeteria production kitchen. Food and beverage costs allocated to Casino expense declined $439,000 and $1.8 million for the three and six months ended June 30, 2003, respectively compared to the same prior year periods as a result of a combination of lower complimentary food and beverage activity and lower food and beverage production costs. Other expenses increased $109,000 for the three months ended June 30, 2003, compared to the same prior year period as a result of an increase in entertainment costs ($44,000) and the allocation of entertainment complimentaries by casino operations ($170,000) due to more shows. These costs were offset by favorable variances in limousine rentals ($76,000) and payroll ($68,000). General and Administrative Expenses General and administrative expenses decreased $1.3 million and $1.7 million, respectively, for the three and six months ended June 30, 2003, compared to the same prior year periods. The decreases were due to lower payroll and benefits as a result of a reduction in workforce at the beginning of 2003 ($516,000 and $1.3 million for the three and six months ended June 30, 2003, respectively) and the cost of a 2002 severance package ($1.0 million) that had no comparable cost in 2003. These were offset by increases in insurance ($310,000 and $628,000 for the three and six months ended June 30, 2003, respectively), property taxes ($222,000 and $446,000 for the three and six months ended June 30, 2003, respectively) and trash removal ($239,000 and $240,000 for the three and six months ended June 30, 2003, respectively), compared to the same prior year periods. Depreciation and Amortization, including Provision for Obligatory Investments Depreciation and amortization expense increased $325,000 and $813,000, respectively, for the three and six month periods ended June 30, 2003, compared to the same prior year periods due to an increase in depreciation expense ($179,000 and $794,000 for the three and six months ended June 30, 2003, respectively) as a result of the continued investment in infrastructure and equipment during the current and preceding year. These were offset by lower amortization of CRDA losses ($41,000 and $27,000 for the three and six months ended June 30, 2003, respectively) as a result of reduced casino revenues. 20 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest Income and Expense Interest income decreased by $68,000 and $169,000, respectively, during the three and six month period ended June 30, 2003, compared to the same prior year periods. The decrease was due to smaller earnings on decreased cash reserves and lower interest rates. Interest expense increased $10,000 and $276,000, respectively, during the three and six month period ended June 30, 2003, compared to the same periods in 2002. The increase is due to a larger accrual of capitalized interest in 2002 ($532,000) compared to 2003 ($211,000). It is the Company's policy to capitalize interest on construction projects in excess of $250,000. Income Tax (Provision) Benefit 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. Due to recurring losses, the Company has not recorded Federal income tax for the six months ended June 30, 2003. The State income tax provision of $184,000 and $343,000, respectively, for the three and six months ended June 30, 2003 is a result of applying the statutory Alternative Minimum Assessment rate of 0.4% to gross receipts, as defined in the Business Tax Reform Act. 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. 21 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Form 10-Q and other materials filed or to be filed by Holdings, GB Property Funding or GBHC with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made by such companies) contains statements that are forward-looking, such as statements relating to 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). 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. Item 4. Controls and Procedures Within the 90 days prior to the filing of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 22 PART II: OTHER INFORMATION Item 6.(a) Exhibits 31.1 Certification of Chief Executive Officer Pursuant to 13a-14 of the Securities Exchange Act of 1934, as amended 31.2 Certification of Chief Financial Officer Pursuant to 13a-14 of the Securities Exchange Act of 1934, as amended 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) Item 6.(b) Reports on Form 8-K During the quarter ended June 30, 2003 the Registrants did not file any reports on form 8-K: 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 August 14, 2003. GB HOLDINGS, INC. GB PROPERTY FUNDING CORP. GREATE BAY HOTEL AND CASINO, INC. -------------------------------- Registrants Date: August 14, 2003 By: /s/ Timothy A. Ebling -------------------------------- -------------------------------- Timothy A. Ebling Chief Financial Officer 23 EX-31.1 3 b326515ex_31-1.txt CERTIFICATION Exhibit 31.1 Certification of Chief Executive Officer Pursuant to 13a-14 of the Securities Exchange Act of 1934, as amended (the "Act") I, Richard P. Brown, Chief Executive Officer of GB Holdings, Inc., GB Property Funding Corp. and Greate Bay Hotel and Casino, Inc. certify that: (1) I have reviewed this report on Form 10-Q of GB Holdings, Inc., GB Property Funding Corp. and Greate Bay Hotel and Casino; (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in the Report. (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules Section 13a-15(e) and 15d-15(e) of the Act) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting; and /s/ Richard P. Brown - ------------------------ Name: Richard P. Brown Date: August 14, 2003 --------------- EX-31.2 4 b326515ex_31-2.txt CERTIFICATION Exhibit 31.2 Certification of Chief Financial Officer Pursuant to 13a-14 of the Securities Exchange Act of 1934, as amended (the "Act") I, Timothy A. Ebling, Chief Financial Officer of GB Holdings, Inc., GB Property Funding Corp. and Greate Bay Hotel and Casino, Inc. certify that: (1) I have reviewed this report on Form 10-Q of GB Holdings, Inc., GB Property Funding Corp. and Greate Bay Hotel and Casino; (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report. (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules Section 13a-15(e) and 15d-15(e) of the Act) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting; and /s/ Timothy A. Ebling - --------------------------- Name: Timothy A. Ebling Date: August 14, 2003 --------------- EX-32.1 5 b326515ex_32-1.txt CERTIFICATION Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) I, Richard P. Brown, Chief Executive Officer of GB Holdings, Inc., GB Property Funding Corp., and Greate Bay Hotel and Casino, Inc. (collectively, the "Registrant") certify that to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended June 30, 2003 of the Registrant (the "Report"): (1) The Report fully complies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ Richard P. Brown - ---------------------------- Name: Richard P. Brown Date: August 14, 2003 --------------- EX-32.2 6 b326515ex_32-2.txt CERTIFICATION Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) I, Timothy A. Ebling, Chief Financial Officer of GB Holdings, Inc., GB Property Funding Corp., and Greate Bay Hotel and Casino, Inc. (collectively, the "Registrant") certify that to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended June 30, 2003 of the Registrant (the "Report"): (1) The Report fully complies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ Timothy A. Ebling - ------------------------- Name: Timothy A. Ebling Date: August 14, 2003 --------------- -----END PRIVACY-ENHANCED MESSAGE-----