<PAGE>
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, 1997
-------------
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)
TWO GALLERIA TOWER, SUITE 2200
13455 NOEL ROAD, LB48
DALLAS, TEXAS 75240
- -------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (972) 386-9777
--------------
(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
<TABLE>
<CAPTION>
REGISTRANT CLASS OUTSTANDING AT AUGUST 11, 1997
- ------------------------------------ ----------------------------- -------------------------------
<S> <C> <C>
GB Property Funding Corp. Common stock, $1.00 par value 1,000 shares
GB Holdings, Inc. Common stock, $1.00 par value 1,000 shares
Greate Bay Hotel and Casino, Inc. Common stock, no par value 100 shares
</TABLE>
Each of the Registrants meet the conditions set forth in General Instruction
(H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the
reduced disclosure format.
1
<PAGE>
PART I: FINANCIAL INFORMATION
- ------------------------------
INTRODUCTORY NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------
The registered securities consist of 10 7/8% First Mortgage Notes (the "10
7/8% First Mortgage Notes") in the principal amount of $185,000,000 due January
15, 2004 issued by GB Property Funding Corp. ("GB Property Funding") and listed
on the American Stock Exchange. GB Property Funding's obligations are
unconditionally guaranteed by GB Holdings, Inc. ("Holdings"), a Delaware
corporation with principal executive offices at Two Galleria Tower, Suite 2200,
13455 Noel Road, LB48, Dallas, TX 75240 and by Greate Bay Hotel and Casino, Inc.
("GBHC"), a New Jersey corporation and a wholly owned subsidiary of Holdings
with principal offices at 136 South Kentucky Avenue, Atlantic City, New Jersey
08401.
GB Property Funding is wholly owned by Holdings. Holdings is a wholly owned
subsidiary of Pratt Casino Corporation ("PCC"), which is an indirect wholly
owned subsidiary of Greate Bay Casino Corporation ("GBCC"). GBCC is an American
Stock Exchange listed company subject to the reporting requirements of the
Securities Act of 1934.
GB Property Funding was organized during September 1993 as a special purpose
subsidiary of Holdings for the purpose of borrowing funds through the issuance
of the 10 7/8% First Mortgage Notes for the benefit of GBHC.
GBHC owns the Sands Hotel and Casino located in Atlantic City, New Jersey
(the "Sands") . Substantially all of Holdings' assets and operations relate to
the Sands. Historically, the Sands' gaming operations have been highly seasonal
in nature, with the peak activity occurring from May to September. Consequently,
the results of operations for the three and six month periods ended June 30,
1997 are not necessarily indicative of the operating results to be reported for
the full year.
The financial statements of GB Property Funding and the consolidated
financial statements of Holdings as of June 30, 1997 and for the three and six
month periods ended June 30, 1997 and 1996 have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, their respective financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly their respective financial positions as of June 30, 1997, and
their respective results of operations for the three and six month periods ended
June 30, 1997 and 1996 and their cash flows for the six month periods ended June
30, 1997 and 1996.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in GB
Property Funding, Holdings and GBHC's 1996 Annual Report on Form 10-K.
2
<PAGE>
GB PROPERTY FUNDING CORP.
(WHOLLY OWNED BY GB HOLDINGS, INC.)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 1,000 $ 1,000
Interest receivable from affiliate 9,152,000 9,277,000
Due from affiliate 4,000 -
Note receivable from affiliate 2,500,000 2,500,000
------------ ------------
Total current assets 11,657,000 11,778,000
------------ ------------
Note receivable from affiliate 180,000,000 182,500,000
------------ ------------
$191,657,000 $194,278,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current maturities of
long-term debt $ 2,500,000 $ 2,500,000
Accounts payable 4,000 -
Accrued interest payable 9,152,000 9,277,000
------------ ------------
Total current liabilities 11,656,000 11,777,000
------------ ------------
Long-term debt 180,000,000 182,500,000
------------ ------------
Shareholder's equity (Note 1):
Common stock, $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
------------ ------------
$191,657,000 $194,278,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
3
<PAGE>
GB PROPERTY FUNDING CORP.
(WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
Interest income $4,988,000 $5,030,000
Expenses:
Interest expense 4,988,000 5,030,000
---------- ----------
Net income $ - $ -
========== ==========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
4
<PAGE>
GB PROPERTY FUNDING CORP.
(WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Interest income $10,018,000 $10,060,000
Expenses:
Interest expense 10,018,000 10,060,000
----------- -----------
Net income $ - $ -
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
5
<PAGE>
GB PROPERTY FUNDING CORP.
(WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1996
---------- ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ - $ -
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in interest receivable from affiliate 125,000 -
Decrease in accrued interest payable (125,000) -
--------- ------
Net cash provided by operating activities - -
--------- ------
Net change in cash - -
Cash at beginning of period 1,000 1,000
--------- ------
Cash at end of period $ 1,000 $1,000
========= ======
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
6
<PAGE>
GB PROPERTY FUNDING CORP.
(WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND OPERATIONS
GB Property Funding Corp. ("GB Property Funding"), a Delaware corporation,
was incorporated on September 29, 1993. GB Property Funding is a wholly owned
subsidiary of GB Holdings, Inc. ("Holdings"), a Delaware corporation which is an
indirect, wholly owned subsidiary of Greate Bay Casino Corporation ("GBCC").
Holdings was incorporated in September 1993 and, on February 17, 1994, acquired
through capital contributions by its parent, all of the outstanding capital
stock of Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands Hotel
and Casino in Atlantic City, New Jersey (the "Sands"). GB Property Funding was
formed for the purpose of borrowing $185,000,000 for the benefit of GBHC; such
debt was issued during February 1994 at the rate of 10 7/8% per annum and the
proceeds were loaned to GBHC (see Note 2).
The operation of an Atlantic City casino/hotel is subject to significant
regulatory control. Under provisions of the New Jersey Casino Control Act, GBHC
is required to maintain a nontransferable license to operate a casino in
Atlantic City.
GB Property Funding has no operations and is dependent on the repayment of
its note to GBHC for servicing its debt obligations. Administrative services
for GB Property Funding are provided by other GBCC subsidiaries at no charge.
The cost of such services is not significant.
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 financial statements as of June 30, 1997 and for the three and six month
periods ended June 30, 1997 and 1996 have been prepared by GB Property Funding
without audit. In the opinion of management, these financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of GB Property Funding as of June 30,
1997, and the results of its operations for the three and six month periods
ended June 30, 1997 and 1996 and cash flows for the six month periods ended June
30, 1997 and 1996.
(2) LONG-TERM DEBT
On February 17, 1994, GB Property Funding issued $185,000,000 of non-recourse
first mortgage notes due January 15, 2004 (the "10 7/8% First Mortgage Notes").
Interest on the notes accrues at the rate of 10 7/8% per annum, payable
semiannually. Interest only was payable during the first three years. Commencing
on July 15, 1997, semiannual principal payments of $2,500,000 are due on each
interest payment date with the balance due at maturity. Such semiannual payments
may be made in cash or by
7
<PAGE>
GB PROPERTY FUNDING CORP.
(WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
tendering to the trustee 10 7/8% First Mortgage Notes previously purchased or
otherwise acquired by GB Property Funding. During May 1997, GB Property Funding
received $2,500,000 face amount of 10 7/8% First Mortgage Notes from GBHC which
were used on June 4, 1997 to make the July 15, 1997 required principal payment.
The indenture for the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of Holdings and its
subsidiaries to pay dividends to GBCC, to merge, consolidate or sell
substantially all of their assets or to incur additional indebtedness beyond
certain limitations. In addition, the indenture requires the maintenance of
certain cash balances and requires minimum expenditures, as defined in the
indenture, for property and fixture renewals, replacements and betterments at
the Sands. The proceeds of the 10 7/8% First Mortgage Notes were loaned to GBHC
on the same terms and conditions.
Interest paid and received with respect to the 10 7/8% First Mortgage Notes
and the loan to GBHC was $10,143,000 and $10,060,000, respectively, during the
six month periods ended June 30, 1997 and 1996.
(3) INCOME TAXES
GB Property Funding is included in the consolidated federal income tax return
of GBCC and, for periods prior to December 31, 1996, was included in the
consolidated federal income tax return of Hollywood Casino Corporation ("HCC"),
GBCC's parent prior to that date. Pursuant to agreements between Holdings and
GBCC, GB Property Funding's provision for federal income taxes is calculated as
if a separate federal return were filed. For the six month periods ended June
30, 1997 and 1996, no provision or payments were made under the agreements.
8
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 17,336,000 $ 15,624,000
Accounts receivable, net of allowances
of $14,521,000 and $15,524,000, respectively 9,107,000 10,112,000
Inventories 3,619,000 3,873,000
Due from affiliate 2,141,000 2,382,000
Refundable deposits and other current assets 3,648,000 3,180,000
------------- -------------
Total current assets 35,851,000 35,171,000
------------- -------------
Property and Equipment:
Land 38,093,000 38,093,000
Buildings and improvements 185,508,000 185,508,000
Operating equipment 92,924,000 91,865,000
Construction in progress 1,755,000 1,535,000
------------- -------------
318,280,000 317,001,000
Less - accumulated depreciation and
amortization (167,435,000) (160,987,000)
------------- -------------
Net property and equipment 150,845,000 156,014,000
------------- -------------
Other Assets:
Obligatory investments 7,178,000 6,382,000
Due from affiliate 18,355,000 17,606,000
Deferred financing costs and other assets 8,731,000 9,265,000
------------- -------------
Total other assets 34,264,000 33,253,000
------------- -------------
$ 220,960,000 $ 224,438,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
9
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 2,512,000 $ 2,512,000
Short-term credit facilities - 2,000,000
Short-term borrowings from affiliates 13,000,000 6,500,000
Accounts payable 5,849,000 7,881,000
Accrued liabilities -
Salaries and wages 5,152,000 4,981,000
Interest 12,448,000 10,978,000
Insurance 3,195,000 3,112,000
Other 7,207,000 6,683,000
Due to affiliates 1,018,000 826,000
Other current liabilities 4,365,000 5,429,000
------------ ------------
Total current liabilities 54,746,000 50,902,000
------------ ------------
Long-Term Debt 190,424,000 192,930,000
------------ ------------
Other Noncurrent Liabilities 1,436,000 1,550,000
------------ ------------
Commitments and Contingencies
Shareholder's Deficit:
Common stock, $1.00 par value per share;
1,000 shares authorized and
outstanding 1,000 1,000
Additional paid-in capital 18,438,000 18,438,000
Accumulated deficit (44,085,000) (39,383,000)
------------ ------------
Total shareholder's deficit (25,646,000) (20,944,000)
------------ ------------
$220,960,000 $224,438,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
10
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Casino $ 61,823,000 $ 65,310,000
Rooms 2,455,000 2,254,000
Food and beverage 8,457,000 8,787,000
Other 947,000 1,308,000
------------ ------------
73,682,000 77,659,000
Less - promotional allowances (6,201,000) (7,035,000)
------------ ------------
Net revenues 67,481,000 70,624,000
------------ ------------
Expenses:
Casino 51,396,000 58,484,000
Rooms 671,000 737,000
Food and beverage 2,881,000 2,724,000
Other 616,000 654,000
General and administrative 4,653,000 4,915,000
Depreciation and amortization 3,659,000 5,203,000
------------ ------------
Total expenses 63,876,000 72,717,000
------------ ------------
Income (loss) from operations 3,605,000 (2,093,000)
------------ ------------
Non-operating income (expenses):
Interest income 453,000 393,000
Interest expense (5,826,000) (5,452,000)
Gain (loss) on disposal of assets 17,000 (2,000)
------------ ------------
Total non-operating expense, net (5,356,000) (5,061,000)
------------ ------------
Loss before income taxes and extraordinary item (1,751,000) (7,154,000)
Income tax provision - (6,151,000)
------------ ------------
Loss before extraordinary item (1,751,000) (13,305,000)
Gain on early extinguishment of debt 310,000 -
------------ ------------
Net loss $ (1,441,000) $(13,305,000)
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
11
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Casino $120,153,000 $122,915,000
Rooms 4,692,000 4,389,000
Food and beverage 16,377,000 17,311,000
Other 1,912,000 2,997,000
------------ ------------
143,134,000 147,612,000
Less - promotional allowances (12,456,000) (14,154,000)
------------ ------------
Net revenues 130,678,000 133,458,000
------------ ------------
Expenses:
Casino 100,405,000 112,978,000
Rooms 1,267,000 1,270,000
Food and beverage 5,220,000 5,188,000
Other 1,145,000 1,192,000
General and administrative 9,313,000 9,548,000
Depreciation and amortization 7,533,000 10,310,000
------------ ------------
Total expenses 124,883,000 140,486,000
------------ ------------
Income (loss) from operations 5,795,000 (7,028,000)
------------ ------------
Non-operating income (expenses):
Interest income 825,000 814,000
Interest expense (11,656,000) (10,920,000)
Gain on disposal of assets 24,000 13,000
------------ ------------
Total non-operating expense, net (10,807,000) (10,093,000)
------------ ------------
Loss before income taxes and extraordinary item (5,012,000) (17,121,000)
Income tax provision - (2,417,000)
------------ ------------
Loss before extraordinary item (5,012,000) (19,538,000)
Gain on early extinguishment of debt 310,000 -
------------ ------------
Net loss $ (4,702,000) $(19,538,000)
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
12
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (4,702,000) $(19,538,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Extraordinary item (310,000) -
Depreciation and amortization 7,533,000 10,310,000
Gain on disposal of assets (24,000) (13,000)
Provision for doubtful accounts 1,559,000 894,000
Deferred income tax provision - 2,417,000
(Increase) decrease in accounts receivable (554,000) 485,000
Increase in accounts payable and accrued expenses 216,000 2,254,000
Net change in other current assets and liabilities (1,313,000) (347,000)
Net change in other noncurrent assets and liabilities (474,000) (681,000)
------------ ------------
Net cash provided by (used in) operating activities 1,931,000 (4,219,000)
------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions (1,279,000) (3,660,000)
Proceeds from disposition of assets 24,000 13,000
Obligatory investments (1,333,000) (1,432,000)
------------ ------------
Net cash used in investing activities (2,588,000) (5,079,000)
------------ ------------
FINANCING ACTIVITIES:
(Repayments) borrowings on credit facilities (2,000,000) 2,000,000
Borrowings from affiliates 6,500,000 -
Repayments of long-term debt (2,131,000) (5,000)
------------ ------------
Net cash provided by financing activities 2,369,000 1,995,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,712,000 (7,303,000)
Cash and cash equivalents at beginning of period 15,624,000 21,769,000
------------ ------------
Cash and cash equivalents at end of period $ 17,336,000 $ 14,466,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
13
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
GB Holdings, Inc. ("Holdings") is a Delaware corporation and a wholly owned
subsidiary of Pratt Casino Corporation ("PCC"), also a Delaware corporation. PCC
was incorporated during September 1993 and is wholly owned by PPI Corporation, a
New Jersey corporation and a wholly owned subsidiary of Greate Bay Casino
Corporation ("GBCC"). On February 17, 1994, Holdings acquired Greate Bay Hotel
and Casino, Inc. ("GBHC"), a New Jersey corporation, through a capital
contribution by its parent. GBHC's principal business activity is its ownership
of the Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"). The
Sands is managed by New Jersey Management, Inc. ("NJMI"), also a wholly owned
subsidiary of PCC. GB Property Funding Corp. ("GB Property Funding"), a Delaware
corporation and a wholly owned subsidiary of Holdings, was incorporated in
September 1993 for the purpose of borrowing funds through the issuance of
$185,000,000 of ten-year, nonrecourse first mortgage notes for the benefit of
GBHC; such debt was issued in February 1994 at the rate of 10 7/8% per annum and
the proceeds were loaned to GBHC (see Note 3). Holdings has no operating
activities and its only significant asset is its investment in GBHC. The
accompanying consolidated financial statements include the accounts and
operations of Holdings, GBHC and GB Property Funding; all significant
intercompany balances and transactions have been eliminated.
GBHC estimates that a significant amount of the Sands' revenues are derived
from patrons living in southeastern Pennsylvania, northern New Jersey and
metropolitan New York City. Competition in the Atlantic City gaming market is
intense and management believes that this competition will continue or intensify
in the future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
GBHC is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, GBHC's ultimate liability
may differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" requires, among other things, that an entity
review its long-lived assets and certain related intangibles for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. As a result of its review, GBHC does not believe
that any material impairment currently exists related to its long-lived assets.
14
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The consolidated financial statements as of June 30, 1997 and for the three
and six month periods ended June 30, 1997 and 1996 have been prepared by
Holdings without audit. In the opinion of management, these consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the consolidated financial
position of Holdings as of June 30, 1997, the results of its operations for the
three and six month periods ended June 30, 1997 and 1996 and cash flows for the
six month periods ended June 30, 1997 and 1996.
The accompanying consolidated financial statements have been prepared
assuming Holdings will continue as a going concern. Holdings incurred an
operating cash flow deficit of $6,070,000 in 1996 and, as a consequence, had to
rely on borrowings from affiliates in early 1997 to meet its debt service
requirements and to fund working capital needs during its seasonal low operating
periods. The availability of additional borrowings from GBCC and other
subsidiaries of GBCC during the remainder of 1997 is limited. Hollywood Casino
Corporation ("HCC") which, prior to December 31, 1996, owned approximately 80%
of the outstanding common stock of GBCC, loaned $6,500,000 to GBCC in 1996 for
use by the Sands (see Note 5); HCC is subject to certain indenture provisions
which restrict its ability to provide ongoing financial support to an additional
$3,500,000. There is no assurance that HCC, which is no longer the parent of
GBCC, will agree to provide such additional financial support, if needed.
Operating results for the first six months of 1997 reflected a substantial
improvement over 1996 and were on target with management's operating plan due to
mild winter weather conditions compared to a year ago, an abatement of the
intense marketing competition for bus customers and implementation of cost
containment measures. Holdings' operating results for July, although 34% above
July 1996 results, were significantly below expectations primarily due to
declines in both gross table games wagering and table games hold percentage and
reduced its cash reserves to minimum levels. Revenues for the first ten days of
August reflect significant improvement and have thus far enabled Holdings to
maintain acceptable working capital levels without additional borrowings from
affiliates. In order to meet its debt service requirements of approximately
$12,500,000 in January 1998, Holdings will need to achieve its operating plan
for the remainder of 1997. Although there can be no assurance that Holdings
will achieve projected operating results, management believes that its operating
plan for the remainder of 1997 is attainable in the absence of a resumption of
marketing wars or other unforeseen events.
(2) SHORT-TERM CREDIT FACILITIES
As of December 31, 1996, GBHC had $2,000,000 outstanding under a bank line
of credit. Borrowings under the line of credit were guaranteed to the extent of
$2,000,000 by PCC, which pledged a certificate of deposit in the face amount of
$2,000,000 as collateral for the line of credit. The line of credit was repaid
upon maturity of the certificate of deposit during January 1997 with proceeds
from affiliate borrowings (see Note 5) and the line of credit was cancelled.
15
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of Holdings' and GBHC's assets are pledged in connection
with their long-term indebtedness.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
10 7/8% first mortgage notes, due 2004 (a) $182,500,000 $185,000,000
14 5/8% affiliate loan, due 2005 (b) 10,000,000 10,000,000
Other 436,000 442,000
------------ ------------
Total indebtedness 192,936,000 195,442,000
Less - current maturities (2,512,000) (2,512,000)
------------ ------------
Total long-term debt $190,424,000 $192,930,000
============ ============
- --------------------------
</TABLE>
(a) On February 17, 1994, the Sands obtained $185,000,000 from GB Property
Funding, which issued $185,000,000 of non-recourse first mortgage notes due
January 15, 2004 (the "10 7/8% First Mortgage Notes"). Interest on the notes
accrues at the rate of 10 7/8% per annum, payable semiannually commencing
July 15, 1994. Interest only was payable during the first three years.
Commencing on July 15, 1997, semiannual principal payments of $2,500,000 are
due on each interest payment date with the balance due at maturity. Such
semiannual payments may be made in cash or by tendering 10 7/8% First
Mortgage Notes previously purchased or otherwise acquired by Holdings.
Holdings acquired $2,500,000 face amount of 10 7/8% First Mortgage Notes at
a discount during May 1997 which it used during June to make its July 15,
1997 required principal payment. The 10 7/8% First Mortgage Notes are
redeemable at the option of the issuer, in whole or in part, on or after
January 15, 1999 at stated redemption prices ranging up to 104.08% of par
plus accrued interest.
The indenture for the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of Holdings and
its subsidiaries to pay dividends to GBCC, to merge, consolidate or sell
substantially all of their assets or to incur additional indebtedness beyond
certain limitations. In addition, the indenture requires the maintenance of
certain cash balances and requires minimum expenditures, as defined in the
indenture, for property and fixture renewals, replacements and betterments
at the Sands.
(b) On February 17, 1994, GBHC issued a $10,000,000 subordinated promissory note
to an affiliate. The note bears interest at the rate of 14 5/8% per annum,
payable semiannually commencing
16
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
August 17, 1994, subject to maintaining average daily cash balances required
by the indenture for the 10 7/8% First Mortgage Notes, with the principal
due in February 2005. As a result of such payment restrictions, interest has
been paid only through February 17, 1996.
Scheduled payments of long-term debt as of June 30, 1997 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1997 (six months) $ 6,000
1998 5,013,000
1999 5,014,000
2000 5,016,000
2001 5,017,000
Thereafter 172,870,000
------------
Total $192,936,000
============
</TABLE>
Interest paid amounted to $10,186,000 and $10,916,000, respectively, during
the six month periods ended June 30, 1997 and 1996.
(4) INCOME TAXES
Components of the provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1997 1996 1997 1996
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Benefit in lieu of (provision
for) federal income taxes:
Current $ 504,000 $(2,643,000) $ 1,452,000 $ -
Deferred (82,000) (2,618,000) (15,000) (2,364,000)
State income tax benefit
(provision):
Current 135,000 (762,000) 400,000 -
Deferred (23,000) (128,000) (4,000) (53,000)
Valuation allowance (534,000) - (1,833,000) -
--------- ----------- ----------- -----------
$ - $(6,151,000) $ - $(2,417,000)
========= =========== =========== ===========
</TABLE>
17
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Holdings is included in the consolidated federal income tax return of GBCC
and, for periods prior to December 31, 1996, was included in the consolidated
federal income tax return of HCC, GBCC's parent prior to that date. Pursuant to
agreements between Holdings, PCC and GBCC, Holdings' provision for federal
income taxes is based on the amount of tax which would be provided if a separate
federal income tax return were filed. The payment of taxes in accordance with
the tax allocation agreements is subject to the approval of the New Jersey
Casino Control Commission (the "Casino Commission"). Holdings made no federal
or state income tax payments during the six month periods ended June 30, 1997
and 1996.
Federal and state income tax provisions or benefits are based upon estimates
of the results of operations for the current period and reflect the
nondeductibility for income tax purposes of certain items, including certain
amortization, meals and entertainment and other expenses.
Deferred income taxes result primarily from the use of the allowance method
rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal and state income tax purposes
and differences in the timing of deductions taken between tax and financial
reporting purposes for contributions of and adjustments to the carrying value of
certain investment obligations and for vacation and other accruals.
18
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of the deferred tax asset as of June 30, 1997 and December 31,
1996 were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 12,598,000 $ 10,746,000
Allowance for doubtful accounts 5,967,000 6,429,000
Other liabilities and accruals 2,905,000 2,734,000
Other 2,472,000 2,037,000
------------ ------------
Total deferred tax assets 23,942,000 21,946,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (8,683,000) (8,520,000)
Other (597,000) (597,000)
------------ ------------
Total deferred tax liabilities (9,280,000) (9,117,000)
------------ ------------
Net deferred tax asset 14,662,000 12,829,000
Valuation allowance (14,662,000) (12,829,000)
------------ ------------
$ - $ -
============ ============
</TABLE>
At June 30, 1997, Holdings and its subsidiaries have net operating loss
carryforwards ("NOL's") totaling approximately $28 million, none of which expire
before the year 2009 for federal tax purposes and the year 2001 for state tax
purposes. Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("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, a
valuation allowance should be recorded. Due to the continued availability of
NOL's originating in prior years for federal and state tax purposes and the book
and tax losses sustained in 1997 to date, management is unable to determine that
the realization of such asset is more likely than not and thus, has provided a
valuation allowance for the entire deferred tax asset at both June 30, 1997 and
December 31, 1996.
Sales or purchases of Holdings' common stock could cause a "change of
control", as defined in Section 382 of the Internal Revenue Code of 1986, as
amended, which would limit the ability of Holdings to utilize these loss
carryforwards in later tax periods. Should such a change of control occur, the
amount of annual loss carryforwards available for use would most likely be
substantially reduced. Future treasury
19
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
regulations, administrative rulings or court decisions may also effect Holdings'
future utilization of its loss carryforwards.
The Internal Revenue Service is currently examining the consolidated Federal
income tax returns of HCC for the years 1993 and 1994 in which Holdings' was
included. Management believes that the results of such examination will not
have a material adverse effect on the consolidated financial position of
Holdings.
Net receivables from and payables to affiliates representing deferred
federal income taxes in connection with the aforementioned tax allocation
agreements were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- -------------
<S> <C> <C>
Due from affiliate - current $1,600,000 $2,010,000
Due from affiliate - non-current 9,174,000 8,892,000
Due to affiliate - current - (129,000)
</TABLE>
(5) TRANSACTIONS WITH RELATED PARTIES
NJMI, under a management agreement with the Sands, is responsible for the
supervision, direction and control of the day-to-day operations of the Sands.
NJMI is entitled to receive annually (i) a basic consulting fee of 1.5% of
"adjusted gross revenues," as defined, and (ii) incentive compensation of
between 5% and 7.5% of gross operating profits in excess of certain stated
amounts should annual "gross operating profits," as defined, exceed $5,000,000.
Such fees amounted to $1,497,000 and $2,802,000, respectively, during the three
and six month periods ended June 30, 1997 and $1,176,000 and $2,160,000,
respectively, during the three and six month periods ended June 30, 1996 and are
included in general and administrative expenses in the accompanying consolidated
financial statements. Management fees payable to NJMI at June 30, 1997 and
December 31, 1996 amounted to $542,000 and $231,000, respectively.
GBHC licenses the trade name "Sands" from GBCC, which licenses the name from
an unaffiliated third party. Amounts payable by the Sands under this agreement
are equal to the amounts paid to the unaffiliated third party. Such charges
amounted to $73,000 and $70,000, respectively, for the three month periods ended
June 30, 1997 and 1996 and $140,000 and $131,000, respectively, for the six
month periods ended June 30, 1997 and 1996.
20
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
An advance to a GBCC subsidiary in the amount of $5,672,000 was outstanding
as of June 30, 1997 and December 31, 1996 which accrues interest at the rate of
16.5% per annum. Interest receivable with respect to this advance was
$3,510,000 and $3,042,000 at June 30, 1997 and December 31, 1996, respectively.
The advance and related interest receivable are both included in noncurrent due
from affiliates in the accompanying consolidated balance sheets.
During the third quarter of 1996, GBCC borrowed a total of $6,500,000 from
HCC which it then loaned to GBHC for working capital purposes. Such borrowings
accrue interest at the rate of 13 3/4% per annum payable quarterly commencing
October 1, 1996. During the first quarter of 1997, GBHC borrowed an additional
$1,500,000 from GBCC on similar terms. GBHC also borrowed $5,000,000 from
another subsidiary of GBCC during January 1997 at the rate of 14 5/8% per annum
payable semiannually commencing July 15, 1997. Interest accrued on affiliate
loans in the amount of $1,288,000 and $410,000 is included in interest payable
in the accompanying consolidated balance sheets at June 30, 1997 and December
31, 1996, respectively. Repayment of such borrowings and the payment of the
related interest are subject to approval by the Casino Commission.
Interest (expense) income incurred with respect to affiliate advances and
borrowings is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net advances $(227,000) $ 234,000 $(410,000) $ 468,000
Affiliate loan (Note 3) (366,000) (366,000) (731,000) (731,000)
</TABLE>
Interest accrued on the Affiliate loan (Note 3) of $2,007,000 and $1,276,000
is included in interest payable in the accompanying consolidated balance sheets
at June 30, 1997 and December 31, 1996, respectively.
GBHC performs certain services for other subsidiaries of GBCC and for HCC and
its subsidiaries and invoices those companies for the Sands' cost of providing
those services. Similarly, GBHC is charged
21
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
for certain legal, accounting and other expenses incurred by GBCC and HCC and
their respective subsidiaries that relate to the Sands' business. Such affiliate
transactions are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
1997 1996 1997 1996
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Billings to affiliates $ 303,000 $ 357,000 $ 658,000 $ 783,000
Charges from affiliates (439,000) (204,000) (730,000) (500,000)
</TABLE>
(6) LITIGATION
GBHC is a party in various legal proceedings with respect to the conduct of
casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of these proceedings should not have a material adverse
impact upon the consolidated financial position or results of operations of
Holdings and GBHC. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of the uncertainties
described above.
(7) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1997 consolidated financial statement
presentation. Such reclassifications include the reallocation of certain costs
among the various operating departments and general and administrative expenses
resulting from the completion of a comprehensive internal review during 1996 of
departmental allocations. Management believes that such reclassifications
better reflect the matching of costs with the associated revenues.
22
<PAGE>
GB HOLDINGS, INC.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements about
the business, financial condition and prospects of Holdings. The actual results
could differ materially from those indicated by the forward-looking statements
because of various risks and uncertainties including, among other things,
changes in competition, economic conditions, tax regulations, state regulations
applicable to the gaming industry in general or Holdings in particular, and
other risks indicated in Holdings' filings with the Securities and Exchange
Commission. Such risks and uncertainties are beyond management's ability to
control and, in many cases, can not be predicted by management. When used in
this Quarterly Report on Form 10-Q, the words "believes", "estimates",
"anticipates" and similar expressions as they relate to Holdings or its
management are intended to identify forward-looking statements.
GENERAL
The Sands earned income from operations of $3.6 million and $5.8 million,
respectively, during the three and six month periods ended June 30, 1997
compared to losses from operations of $2.1 million and $7 million, respectively,
reported for the three and six month periods ended June 30, 1996. Operating
results during the first six months of 1997 were favorably impacted by operating
efficiencies and by management's decision to discontinue certain aggressive
marketing programs. Operating results during the first six months of 1996 were
adversely affected by the advent of both unprecedented and highly aggressive
marketing programs instituted by certain other Atlantic City casinos seeking to
increase their market share together with record snowstorms in January and
weekend snowstorms in February. Although overall net revenues declined for the
periods (to $67.5 million and $130.7 million in 1997 from $70.6 million and
$133.5 million in 1996 for the three and six month periods, respectively),
operating expenses decreased significantly, specifically marketing and
advertising costs which decreased by $4.9 million and $7.6 million (23.1% and
19.5%), respectively, as a result of management's efforts to control costs while
maintaining positive gross operating profit.
23
<PAGE>
GB HOLDINGS, INC.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating
data relating to the Sands' operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 19,665 $ 20,405 $ 39,156 $ 40,580
Slot machines 41,370 43,830 79,370 80,271
Other (1) 788 1,075 1,627 2,064
-------- -------- -------- --------
Total $ 61,823 $ 65,310 $120,153 $122,915
======== ======== ======== ========
TABLE GAMES:
Gross Wagering
(Drop) (2) $131,589 $148,995 $262,633 $283,383
======== ======== ======== ========
Hold Percentages: (3, 4)
Sands 14.9% 13.7% 14.9% 14.3%
Atlantic City 15.2% 15.6% 15.2% 15.8%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $505,719 $536,139 $959,909 $975,519
======== ======== ======== ========
Hold Percentages: (3, 4)
Sands 8.2% 8.2% 8.3% 8.2%
Atlantic City 8.5% 8.3% 8.4% 8.3%
</TABLE>
- ----------------------------
(1) Consists of revenues from poker and simulcast horse racing wagering.
(2) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (collectively, the "drop") and
coins wagered in slot machines ("handle").
(3) 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".
(4) The Sands' hold percentages are reflected on an accrual basis. Comparable
data for the Atlantic City gaming industry is not available; consequently,
industry percentages have been calculated based on information available
from the New Jersey Casino Control Commission.
24
<PAGE>
GB HOLDINGS, INC.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Table game drop at the Sands declined $17.4 million (11.7%) and $20.8
million (7.3%), respectively, during the three and six month period ended June
30, 1997 compared with the same periods of 1996. The Sands' decreases compare to
increases of .1% and 5.7%, respectively, in table drop for all other Atlantic
City casinos during the same periods. As a result, the Sands' table game market
share (expressed as a percentage of the Atlantic City industry aggregate table
game drop) decreased to 7% and 7.1%, respectively, during the three and six
month periods ended June 30, 1997 from 7.9% and 8%, respectively, during the
same periods of 1996. The Sands' table game drop decreases are primarily
attributable to declines in patron volume from the unrated or "mass" segment.
Expansions of other Atlantic City casinos resulted in an increase of over 87,000
square feet of gaming space and 90 tables at June 30, 1997 compared to June 30,
1996. Such expansions typically result in intense marketing campaigns which lure
the "mass" segment to the new facility. Gaming space at the Sands has remained
virtually unchanged since mid-1996 and the number of table games has decreased
by 4%. The decline in table game drop during the second quarter of 1997 also
reflects management's decision to discontinue certain promotional activities,
including the use of "special odds" offered at table games, which has caused a
decline in the rated table market segment.
Slot machine handle decreased $30.4 million (5.7%) and $15.6 million (1.6%),
respectively, during the three and six month periods ended June 30, 1997
compared with the same periods of 1996. The Sands' decreases in slot machine
handle compare with increases of .5% and 2.7%, respectively, in handle for all
other Atlantic City casinos. The Sands' average number of slot machines remained
virtually unchanged during 1997 compared to an increase of 8.7% for all other
Atlantic City casinos. The below industry-wide performance in handle experienced
by the Sands is a result of the same competitive pressures resulting from casino
expansions and related marketing campaigns at other properties as discussed
above with respect to table games.
REVENUES
Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, decreased slightly by $3.5 million (5.3%) and $2.8 million
(2.2%), respectively, for the three and six month periods ended June 30, 1997
compared with the same periods of 1996. Decreases in both slot machine and
table game wagering were partially offset by improvements in the table game hold
percentage and, for the first quarter of 1997, in the slot machine hold
percentage.
Rooms revenue increased $201,000 (8.9%) and $303,000 (6.9%), respectively,
during the three and six month periods ended June 30, 1997 compared with 1996
primarily due to an increase in the average daily rate earned on rooms. Food and
beverage revenues decreased $330,000 (3.8%) and $934,000 (5.4%), respectively,
for the three and six month periods ended June 30, 1997 compared with the prior
year periods as a result of reduced patron volume, the rescheduling of unit
operating hours to increase overall profitability and the reduction of certain
promotional activities. Other revenues decreased $361,000
25
<PAGE>
GB HOLDINGS, INC.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(27.6%) and $1.1 million (36.2%), respectively, during the three and six month
periods ended June 30, 1997 compared to the 1996 periods as a result of less
frequent theater entertainment.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs. As
a percentage of rooms, food and beverage and other revenues at the Sands, these
allowances decreased to 52.3% and 54.2% , respectively, during the three and six
month periods ended June 30, 1997 from 57% and 57.3%, respectively, during the
three and six month periods ended June 30, 1996. Such decreases are primarily
attributable to reductions in certain marketing programs and other promotional
activities.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands decreased $7.1 million (12.1%) and $12.6
million (11.1%), respectively, during the three and six month periods ended June
30, 1997 compared with 1996. During 1996, an unprecedented and highly aggressive
industry-wide attempt to increase market share resulted in significantly higher
costs with respect to coin incentive packages. The abatement of these
competitive pressures during 1997 together with management's ongoing efforts to
create operating efficiencies, have significantly reduced expenses. Such factors
have also resulted in a reduction in the allocation of rooms, food and beverage
and other expenses to casino expense.
Rooms expense decreased $66,000 (9%), during the three month period ended
June 30, 1997 compared to the same period of 1996 bringing the six month period
in line with 1996. Food and beverage expense increased by $157,000 (5.8%) during
the three month period ended June 30, 1997 compared to the same period in 1996
also bringing the six month period in line with 1996. Other expenses did not
change significantly during the 1997 three and six month periods compared with
1996 as cost savings with respect to theater entertainment were offset through
reduced allocations to the casino department.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $262,000 (5.3%) during the
three month period ended June 30, 1997 compared to the 1996 period resulting in
a six month 1997 expense slightly below that for the same period in 1996. Much
of the reduction is attributable to decreases in other taxes and professional
fees.
DEPRECIATION AND AMORTIZATION
As a result of the revision in estimated useful life of its buildings
effective October 1, 1996 and the completion of amortization with respect to
certain long lived assets, the Sands' depreciation and amortization expense for
the second quarter and first six months of 1997 decreased by $1.5 million
(29.7%) and $2.8 million (26.9%), respectively, compared to the same periods
during 1996.
26
<PAGE>
GB HOLDINGS, INC.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST
Interest income increased $60,000 (15.3%) during the three month period
ended June 30, 1997 compared to the same period during 1996 bringing the six
month total in line with the prior year. Interest expense increased $374,000
(6.9%) and $736,000 (6.7%), respectively, during the 1997 periods compared to
the prior year primarily due to additional interest with respect to GBHC's
borrowings from affiliates.
INCOME TAX BENEFIT
Holdings' operations are included in GBCC's consolidated federal income tax
return and, for periods through December 31, 1996, were included in HCC's
consolidated federal income tax return. Pursuant to agreements between Holdings
and GBCC, Holdings' provision for federal income taxes is based on the amount of
tax which would have been provided if a separate return were filed.
As of June 30, 1997, Holdings and its subsidiaries have net operating loss
carryforwards ("NOL's") totaling approximately $28 million, none of which expire
before the year 2009 for federal tax purposes and the year 2001 for state tax
purposes. Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("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, a
valuation allowance should be recorded. Due to the continued availability of
NOL's originating in prior years for federal and state tax purposes and the book
and tax losses sustained in 1997 to date, management is unable to determine that
the realization of such asset is more likely than not and, thus, has provided a
valuation allowance for the entire deferred tax asset at June 30, 1997.
EXTRAORDINARY ITEM
Holdings acquired $2.5 million of its 10 7/8% First Mortgage Notes at a
discount of $375,000 with which to make its scheduled July 1997 principal
payment (see "Liquidity and Capital Resources - Financing Activities" below).
Such gain was partially offset by the write off of associated financing costs,
resulting in a net gain from early extinguishment of debt amounting to $310,000.
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.
27
<PAGE>
GB HOLDINGS, INC.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
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 Holdings' 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 Holdings' casino revenues and profitability.
LIQUIDITY AND CAPITAL RESOURCES
Holdings' only operations and resulting sources of liquidity and capital
resources are those of its wholly owned subsidiary, GBHC, whose only operations
in turn are those of the Sands. Prior to 1996, GBHC's earnings before
depreciation, interest, amortization, taxes and intercompany management fees
were sufficient to meet its debt service obligations (other than certain
maturities of principal that have been refinanced) and to fund a substantial
portion of its capital expenditures. GBHC has also used short-term borrowings
to fund seasonal cash needs and for certain capital projects.
OPERATING ACTIVITIES
At June 30, 1997, GBHC had cash and cash equivalents of $17.3 million.
During the six month period ended June 30, 1997, net cash provided by operating
activities was $1.9 million compared with net cash used in operations of $4.2
million during the 1996 period. GBHC utilized its cash from operations and
borrowings from affiliates during the first six months of 1997 to make its
required principal payment with respect to the 10 7/8% First Mortgage Notes, to
repay its $2 million bank line of credit, to fund capital additions totaling
$1.3 million and to make obligatory investments of $1.3 million.
FINANCING ACTIVITIES
During February 1994, GBHC refinanced virtually all of its outstanding debt
as part of an overall restructuring by GBCC (the "GBCC Recapitalization"). The
refinancing was completed through a public offering of $270 million of debt
securities consisting of $185 million of 10 7/8% First Mortgage Notes due
January 15, 2004 and $85 million of 11 5/8% Senior Notes due April 15, 2004.
Proceeds from the debt offerings were used, in part, to refinance the Sands'
first mortgage and other indebtedness scheduled to mature in 1994 and to provide
partial funding for an expansion of gaming space at the Sands. As part of the
GBCC Recapitalization, a subsidiary of GBCC also issued $15 million of 14 5/8%
junior subordinated notes due in 2005 to HCC; the subsidiary loaned $10 million
of such proceeds to GBHC on the same terms. Interest on this subordinated
affiliate debt is payable semiannually commencing August 17, 1994, with payment
subject to meeting certain tests required by the indenture for the 10 7/8% First
Mortgage Notes. As a result of such payment restrictions, interest has been paid
only through February 17, 1996.
28
<PAGE>
GB HOLDINGS, INC.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During the third quarter of 1996, GBHC borrowed $6.5 million from GBCC for
working capital purposes with interest at the rate of 13 3/4% per annum payable
quarterly commencing October 1, 1996. During the first quarter of 1997, GBHC
borrowed an additional $1.5 million from GBCC on similar terms and borrowed an
additional $5 million from another subsidiary of GBCC at the rate of 14 5/8% per
annum payable semiannually commencing July 15, 1997. Repayment of such
borrowings and payment of the related accrued interest is subject to regulatory
approval.
GBHC repaid its $2 million bank line of credit during January 1997 with
proceeds from affiliate borrowings and the line of credit was cancelled.
Commencing in July 1997, semiannual principal payments of $2.5 million are
due with respect to the 10 7/8% First Mortgage Notes. Such semiannual payments
may be made in cash or by tendering 10 7/8% First Mortgage Notes previously
purchased or otherwise acquired by Holdings. Holdings acquired $2.5 million face
amount of 10 7/8% First Mortgage Notes at a discount during May 1997 which it
used during June to make its July 15, 1997 required principal payment. Total
scheduled maturities of long-term debt during the remainder of 1997 are $6,000.
CAPITAL EXPENDITURES AND OBLIGATORY INVESTMENTS
Capital expenditures at the Sands during the six month period ended June 30,
1997 amounted to $1.3 million and management anticipates capital expenditures
during the remainder of 1997 will be approximately $3.2 million. Projects
currently planned during 1997 include additional slot machines, upgrades and
improvements to rooms at the Sands, including its higher-end suite product, and
other departmental expenditures.
The Sands is required by the New Jersey Casino Control Act to make certain
investments with the Casino Reinvestment Development Authority, a governmental
agency which administers the statutorily mandated investments made by casino
licensees. Deposit requirements for the first six months of 1997 totaled $1.3
million and are anticipated to be approximately $1.7 million during the
remainder of 1997.
SUMMARY
Holdings incurred an operating cash flow deficit of $6.1 million in 1996
and, as a consequence, had to rely on borrowings from affiliates in early 1997
to meet its debt service requirements and to fund working capital needs during
its seasonal low operating periods. The availability of additional borrowings
from GBCC and other subsidiaries of GBCC during the remainder of 1997 is
limited. HCC, which loaned $6.5 million to GBCC in 1996 for use by the Sands,
is subject to certain indenture provisions which restrict its ability to provide
ongoing financial support to an additional $3.5 million. There is no assurance
that HCC, which is no longer the parent of GBCC, will agree to provide such
additional financial support, if needed.
29
<PAGE>
GB HOLDINGS, INC.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating results for the first six months of 1997 reflected a substantial
improvement over 1996 and were on target with management's operating plan due to
mild winter weather conditions compared to a year ago, an abatement of the
intense marketing competition for bus customers and implementation of cost
containment measures. Holdings' operating results for July, although 34% above
July 1996 results, were significantly below expectations primarily due to
declines in both gross table games wagering and table games hold percentage and
reduced its cash reserves to minimum levels. Revenues for the first ten days of
August reflect significant improvement and have thus far enabled Holdings to
maintain acceptable working capital levels without additional borrowings from
affiliates. In order to meet its debt service requirements of approximately
$12.5 million in January 1998, Holdings will need to achieve its operating plan
for the remainder of 1997. Although there can be no assurance that Holdings
will achieve projected operating results, management believes that its operating
plan for the remainder of 1997 is attainable in the absence of a resumption of
marketing wars or other unforeseen events.
30
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrants did not file any reports on Form 8-K during the quarter
ended June 30, 1997.
SIGNATURES
- ----------
Pursuant to the requirements 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.
GB HOLDINGS, INC.
GB PROPERTY FUNDING CORP.
-------------------------
Registrants
Date: August 12, 1997 By: /s/ John C. Hull
--------------- -------------------
John C. Hull
Principal Accounting Officer
31
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GB PROPERTY FUNDING CORP. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000912906
<NAME> GB PROPERTY FUNDING CORP.
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 1 1
<SECURITIES> 0 0
<RECEIVABLES> 11,656 11,656
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 11,657 11,657
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 191,657 191,657
<CURRENT-LIABILITIES> 11,656 11,656
<BONDS> 180,000 180,000
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 191,657 191,657
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 0 0
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GB HOLDINGS, INC. AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000912926
<NAME> GB HOLDINGS INC.
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 17,336 17,336
<SECURITIES> 0 0
<RECEIVABLES> 23,628 23,628
<ALLOWANCES> 14,521 14,521
<INVENTORY> 3,619 3,619
<CURRENT-ASSETS> 35,851 35,851
<PP&E> 318,280 318,280
<DEPRECIATION> 167,435 167,435
<TOTAL-ASSETS> 220,960 220,960
<CURRENT-LIABILITIES> 54,746 54,746
<BONDS> 190,424 190,424
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (25,647) (25,647)
<TOTAL-LIABILITY-AND-EQUITY> 220,960 220,960
<SALES> 0 0
<TOTAL-REVENUES> 67,481 130,678
<CGS> 0 0
<TOTAL-COSTS> 54,655 106,478
<OTHER-EXPENSES> 8,295 16,822
<LOSS-PROVISION> 909 1,559
<INTEREST-EXPENSE> 5,373 10,831
<INCOME-PRETAX> (1,751) (5,012)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,751) (5,012)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 310 310
<CHANGES> 0 0
<NET-INCOME> (1,441) (4,702)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GB HOLDING, INC. AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000912926
<NAME> GB HOLDINGS INC.
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 14,466 14,466
<SECURITIES> 0 0
<RECEIVABLES> 25,727 25,727
<ALLOWANCES> 15,756 15,756
<INVENTORY> 3,997 3,997
<CURRENT-ASSETS> 35,931 35,931
<PP&E> 315,157 315,157
<DEPRECIATION> 153,324 153,324
<TOTAL-ASSETS> 229,548 229,548
<CURRENT-LIABILITIES> 41,380 41,380
<BONDS> 195,437 195,437
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (9,113) (9,113)
<TOTAL-LIABILITY-AND-EQUITY> 229,548 229,548
<SALES> 0 0
<TOTAL-REVENUES> 70,624 133,458
<CGS> 0 0
<TOTAL-COSTS> 62,272 119,734
<OTHER-EXPENSES> 10,120 19,845
<LOSS-PROVISION> 327 894
<INTEREST-EXPENSE> 5,059 10,106
<INCOME-PRETAX> (7,154) (17,121)
<INCOME-TAX> 6,151 2,417
<INCOME-CONTINUING> (13,305) (19,538)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (13,305) (19,538)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
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