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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
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Commission file number 333-110484
ATLANTIC COAST ENTERTAINMENT
HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
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Delaware |
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54-2131349 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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c/o Sands Hotel & Casino |
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08401 |
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Indiana Avenue & Brighton Park |
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(Zip Code) |
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Atlantic City, New Jersey |
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(Address of principal executive offices) |
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(609) 441-4633
(Registrant’s telephone number, including area code)
(Not Applicable)
(Former name, former address, and former fiscal year, if
changed since last report.)
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark whether the registrant (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 registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (§228.405
of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K. þ
As of June 30, 2004 there was no public market for the
registrant’s equity.
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock, as of the last
practicable date.
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Outstanding at March 30, 2005 |
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Atlantic Coast Entertainment Holdings, Inc.
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Common stock, $.01 par value |
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2,882,938 shares |
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
1
PART I
Atlantic Coast Entertainment Holdings, Inc. (“Atlantic
Holdings”) is a Delaware corporation formed in October 2003
and was a wholly-owned subsidiary of Greate Bay Hotel and
Casino, Inc. (“GBHC”) which was a wholly-owned
subsidiary of GB Holdings, Inc (“GB Holdings”). Until
July 22, 2004, GBHC was the owner and operator of The Sands
Hotel and Casino in Atlantic City (“The Sands”). ACE
Gaming LLC (“ACE”), a New Jersey limited liability
company and a wholly-owned subsidiary of Atlantic Holdings was
formed in November 2003 to own and operate The Sands. Atlantic
Holdings and ACE were formed in connection with a transaction
(the “Transaction”), which included a Consent
Solicitation and Offer to Exchange in which holders of
$110 million of 11% Notes due 2005 (“GB Holdings
11% Notes”), issued by GB Property Funding Corp.
(“Property”), a wholly-owned subsidiary of GB
Holdings, were given the opportunity to exchange such notes, on
a dollar for dollar basis, for $110 million of
3% Notes due 2008 (“3% Notes”), issued by
Atlantic Holdings and guaranteed by ACE. The Transaction was
consummated on July 22, 2004, and holders of
$66.3 million of GB Holdings 11% Notes exchanged such
notes for $66.3 million of 3% Notes. The Transaction
included, among other things, the transfer of substantially all
of the assets of GB Holdings to Atlantic Holdings. The
3% Notes are guaranteed by ACE. Atlantic Holdings and its
subsidiary had limited operating activities prior to
July 22, 2004.
In connection with the Consent Solicitation and Offer to
Exchange, an aggregate principal amount of approximately
$66,259,000 of GB Holdings 11% Notes, representing 60.2% of
the outstanding GB Holdings 11% Notes, were tendered to
Atlantic Holdings, on a dollar for dollar basis, in exchange for
an aggregate principal amount of approximately $66,259,000 of
3% Notes. At the election of the holders of a majority in
principal amount of the outstanding 3% Notes, each $1,000
principal amount of 3% Notes is payable in or convertible
into 65.909 shares of common stock, par value $.01 per
share (“Atlantic Holdings Common Stock”), of Atlantic
Holdings, subject to adjustments for stock dividends, stock
splits, recapitalizations and the like. Holders of the GB
Holdings 11% Notes that tendered in the Consent
Solicitation and Offer to Exchange also received their pro rata
share of the aggregate consent fees ($6.6 million) at the
rate of $100 per $1,000 principal amount of the GB Holdings
11% Notes tendered, plus accrued interest
($2.3 million) on the GB Holdings 11% Notes tendered,
which amounts were paid at the consummation of the transaction.
As part of the Transaction an aggregate of 10,000,000 warrants
were distributed on a pro rata basis to the stockholders of GB
Holdings upon the consummation of the Transaction. Such Warrants
allow the holders to purchase from Atlantic Holdings at an
exercise price of $.01 per share, an aggregate of
2,750,000 shares of Atlantic Holdings Common Stock and are
only exercisable following the earlier of (a) either the
3% Notes being paid in cash or upon conversion, in whole or
in part, into Atlantic Holdings Common Stock, (b) payment
in full of the outstanding principal of the GB Holdings
11% Notes not exchanged, or (c) a determination by a
majority of the board of directors of Atlantic Holdings
(including at least one independent director of Atlantic
Holdings) that the Warrants may be exercised. Also on
July 22, 2004, in connection with the consummation of the
Transaction and the Consent Solicitation and Offer to Exchange,
Property and GBHC merged into GB Holdings, with GB Holdings as
the surviving entity. In connection with the transfer of the
assets and certain liabilities of GB Holdings including those of
GBHC, Atlantic Holdings issued 2,882,937 shares of Atlantic
Holdings Common Stock to GBHC which following the merger of GBHC
became the sole asset of GB Holdings. Substantially all of the
assets, and liabilities of GB Holdings and GBHC (with the
exception of the remaining GB Holdings 11% Notes and
accrued interest thereon, the Atlantic Holdings Common Stock and
the related pro rata share of deferred financing costs) were
transferred to Atlantic Holdings or ACE. The Sands New Jersey
gaming license was transferred to ACE in accordance with the
approval of the New Jersey Casino Control Commission (the
“Commission” or “CCC”). The transfer of
assets has been accounted for as an exchange of net assets
between entities under common control, whereby the entity
receiving the assets shall initially recognize the assets and
liabilities transferred at their historical carrying amount in
the accounts of the transferring entity at the date of transfer.
No gain or loss was recorded relating to the transfer.
In accordance with the Contribution Agreement pursuant to which
GB Holdings contributed substantially all of its assets to
Atlantic Holdings, GB Holdings normal, ordinary course
operating expenses (including legal and accounting costs,
directors’ and officers’ insurance premiums, and fees
for SEC filings) not to exceed
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in the aggregate $250,000 in any twelve month period are to be
paid by Atlantic Holdings subject to a number of conditions.
Currently, affiliates of Mr. Icahn own approximately 96% of
the 3% Notes and have the ability, which they may exercise
at any time in their sole discretion, to determine when and
whether the 3% Notes will be paid in or convertible into
Atlantic Holdings Common Stock at, or prior to maturity thereby
making the Warrants exercisable. If the 3% Notes are
converted into Atlantic Holdings Common Stock and if the
Warrants are exercised, GB Holdings will own 28.8% of the
Atlantic Holdings Common Stock and affiliates of Carl Icahn will
beneficially own approximately 63.4% of the Atlantic Holdings
Common Stock (without giving effect to the affiliates of Mr.
Icahn’s interest in Atlantic Holdings Common Stock which is
owned by GB Holdings). Affiliates of Carl Icahn currently
own approximately 77.5% of GB Holdings’ common stock.
The consolidated financial statements included in Item 8
include the accounts and operations of Atlantic Holdings and ACE
(collectively, the “Company”). All significant
intercompany balances and transactions have been eliminated.
Throughout this document, references to Notes are referring to
the Notes to Consolidated Financial Statements contained herein.
The Company primarily generates revenues from gaming operations
in its Atlantic City facility. Although the Company’s other
business activities including rooms, entertainment, retail store
and food and beverage operations also generate revenues, which
are nominal in comparison to the casino operations. The
non-casino operations primarily support the casino operation by
providing complimentary goods and services to deserving casino
customers. The Company competes in a capital intensive industry
that requires continual reinvestment in its facility and
technology. Please refer to the consolidated financial
statements included in Item 8 of this Form 10-K for
further information on revenues from these operations.
The Sands
For a description of The Sands’ facilities, please refer to
“Item 2. — Properties.”
The Sands has segregated its gaming customers into three broad
segments:
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The Premium Segment — Those customers
who have a high potential loss per trip. This segment has the
lowest profit margin percentage per customer. |
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The Middle Segment — Those customers who
have a high repeat trip frequency along with a potential loss
per trip that equates to a high annual potential loss per
customer. |
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The Mass Segment — Those customers who
have a low casino loyalty and a low potential loss per trip.
This category has the highest profit margin percentage per
customer. |
Business Strategy. Traditionally, The Sands’
marketing strategy in the highly competitive Atlantic City
market has consisted of seeking premium category patrons. In the
past, The Sands has been successful in its marketing efforts
towards these premium patrons through its offering of private,
limited-access facilities, related amenities and use of
information technology to monitor patron play, control certain
casino operating costs and target marketing efforts toward
frequent visitors with above average gaming budgets. While The
Sands strived to maintain market share within this category,
competition within the industry for the premium category (both
table and slot) reduced The Sands ability to retain or attract
this type of player on a profitable basis.
In the second quarter of 2002, The Sands changed its marketing
strategy to reduce its focus on the lower profit margin premium
table games and slot business segments and focus almost
exclusively on the mass slot machine segment. In the process,
The Sands reduced the number of table games from 69 to 26 and
increased its number of slot machines by 400. Towards the end of
2002, it had become apparent that the gain in slot machine
revenue could not offset the loss of table game revenue. In
addition, the volume required from the mass slot player segment,
to make up the loss of the middle to premium slot player
segments, could not be
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accommodated in a property with the physical constraints of The
Sands. Subsequent review of marketing data revealed that the
loss in table game play had a direct effect on the loss in some
slot machine play, as many slot patrons who frequented The Sands
with family and friends were forced to patronize competitors to
find the variety of gaming experience they desired. As a result,
by the end of the fourth quarter of 2002, The Sands had
redirected its marketing strategy to focus more on the middle to
premium categories of slot players and try to recapture the
table game segment. The Company continues to direct its
marketing strategy to both the middle and premium slot and table
game segments and is aggressively focused on the recovery of
inactive players, those specific players who have had prior play
at The Sands and are not current customers, and the acquisition
of new players with a strong program to generate repeat visits.
There will be a significant emphasis to grow the player database
through an aggressive attraction program and the redistribution
of events, entertainment and promotion expenditures to target
the defined customer segments.
The Company has recognized that The “Sands” name has a
strong brand recognition and a rich heritage in gaming that went
back to the original property in Las Vegas, Nevada of the
1950’s. Beginning in 2003, the Company began to leverage
the heritage of The Sands and promote the property as a boutique
casino hotel that provides outstanding value and service that
exceeds expectations. The tagline “The Players Place”
was developed and encapsulates the benefits of playing slots and
tables, as well as communicating the promise that we provide
personalized service to our players in an intimate atmosphere
offering outstanding gaming odds, highest table game limits,
more liberal player rewards towards the avid customer and
unparalleled, personal boutique service.
During the prior three years, The Sands has continued to invest
in improvements and upgrades to the casino hotel complex that
support this theme. These improvements included new slot
machines, renovations to the first floor casino, the showroom,
two private lounges for casino guests and hotel room and suite
renovations to both The Sands and the Madison House Hotel (see
“Item 2. — Properties”).
The first floor casino renovation included the addition of a
high limit pit and Swingers lounge was constructed in the center
of the casino to provide a multi-faceted state-of-the-art
entertainment experience. The Swingers lounge includes bartop
slot machines and is staffed by “Flair Bartenders”
(part mixologist, part performance artist). In addition, further
renovations to the bus lobby entrance, the promotions center and
the Platinum Club improved the customer experience by providing
easier access to facilities. The slot product has continually
been upgraded including converting a majority of all slot
machines to ticket-in/ticket-out system technology. These slots
accept paper cash, coin or coupons and allow the player an
option to return winnings or cash-outs in the form of redeemable
tickets.
This technology has gained customer acceptance at competitors
and management believes it will enhance profitability by
reducing labor intensive slot transactions while providing
greater customer service and more uninterrupted player time on
machines.
The Sands uses a player tracking system to record and rate
patrons’ play through the use of identification cards,
which it issues to patrons (“casino players’
cards”). All Sands’ slot machines are connected with,
and information with respect to table games activity can be
input into, a computer network. When patrons insert their casino
players’ card into slot machines or present them to
supervisors at table games, meaningful information, including
amounts wagered and duration of play, is transmitted in
real-time to a casino management database. The information
contained in the database facilitates the implementation of
targeted and cost effective marketing programs, which
appropriately recognize and reward patrons during current and
future visits to The Sands. Certain of these marketing programs
allow patrons to obtain complimentaries based on levels of play.
Such complimentaries include free meals, hotel accommodations,
entertainment, retail merchandise, parking, and sweepstakes
giveaways. Management believes that its ability to reward its
customers on a “same-visit” basis is valuable in
encouraging the loyalty of repeat visits. The computer systems
also allow The Sands to monitor, analyze and control the
granting of gaming credit, promotional expenses and other
marketing costs.
Management primarily focuses its marketing efforts on patrons
who have been identified by its casino management computer
system as profitable patrons. Management believes that its
philosophy of encouraging participation in its casino
players’ card program, using the information obtained
thereby to identify the relative
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playing patterns of patrons and tailoring specific marketing
programs and property amenities to this market category enhances
profitability of The Sands.
The Sands also markets to the mass casino patron market through
various forms of direct and indirect advertising, and group and
bus tour programs. Once new patrons are introduced to The Sands
players’ card program, management uses its information
technology capabilities to directly market to these patrons to
encourage repeat patronage.
Competition. The Sands faces intense competition from the
eleven other Atlantic City casinos, including the Borgata which
opened in July 2003. According to reports of the Commission, the
twelve Atlantic City casinos currently offer approximately
1.4 million square feet of gaming space.
On July 3, 2003, the Borgata, a joint venture of Boyd
Gaming Corporation and MGM Mirage, opened in the marina district
of Atlantic City. The Borgata features a 40-story tower with
2,010 rooms and suites, as well as a 135,000 square-foot
casino, restaurants, retail shops, a spa and pool, and
entertainment venues. This project represents a significant
increase to capacity in the market. In addition, other of the
Company’s competitors in Atlantic City have recently
completed expansions of their hotels or have announced expansion
projects. For example, Resorts Casino opened a 399-room hotel
tower addition in July 2004 and the Tropicana Atlantic City has
completed a significant expansion which included a 502-room
hotel tower, a 25-room conference center, a 2,400 space parking
garage, an expanded casino floor and a 200,000 square foot
themed shopping, dining and entertainment complex called The
Quarter. During 2003, Showboat Atlantic City opened a new
544-room hotel tower and expanded its gaming space to
101,000 square feet and increased its slot machines to
3,972 and has recently announced an expansion and affiliation
with House of Blues. The business of the Company may be
adversely impacted (i) by the additional gaming and room
capacity generated by this increased competition in Atlantic
City and/or (ii) by other projects not yet announced in New
Jersey or in other markets (e.g., Pennsylvania, New York and
Maryland). Accordingly, the existing and future competing forces
could have a materially adverse impact on the operations of The
Sands.
After the announced acquisition of Caesars Entertainment Corp.
by Harrahs Entertainment, Inc. and the related divestiture of
the Atlantic City Hilton, of the twelve Atlantic City casinos,
Harrahs Entertainment will control four casinos, and Colony
Capital will control two. Harrahs Entertainment will also
control the so-called Traymore site located between the
boardwalk and The Sands and has acquired a property contiguous
to The Sands parking garage that formerly contained the
Continental Motel property. The Trump Organization controls
three of the twelve Atlantic City casinos. The gaming industry
is highly competitive and the Company’s competitors may
have greater resources than the Company. If other properties
operate more successfully, if existing properties are enhanced
or expanded, or if additional hotels and casinos are established
in and around the location in which the Company conducts
business, the Company may lose market share. In particular,
expansion of gaming in or near the geographic area from which
the Company attracts or expects to attract a significant number
of customers could have a significant adverse effect on the
Company’s business, financial condition and results of
operations. The Sands competes, and will in the future compete,
with all forms of existing legalized gaming and with any new
forms of gaming that may be legalized in the future.
Additionally, the Company faces competition from all other types
of entertainment.
The Casino Reinvestment Development Authority (“CRDA”)
is a governmental agency that administers the statutorily
mandated investments required to be funded by casino licensees.
Legislation enacted during 1993 and 1996 allocated an aggregate
of $175 million of CRDA funds and credits to subsidize and
encourage the construction of additional hotel rooms by Atlantic
City casino licensees. Competitors of The Sands that have the
financial resources to construct hotel rooms can take advantage
of such credits more readily than The Sands. The Sands has an
approved hotel expansion program with the CRDA and a retail
entertainment development project. Plans have been announced by
other casino operators to complete expansions within the
required subsidy period. The expansion of existing gaming
facilities and the addition of new casinos will continue to
increase competition within the Atlantic City market.
In April 2004, the casino industry, the CRDA and the New Jersey
Sports and Exposition Authority agreed to a plan regarding New
Jersey video lottery terminals (“VLTs”). Under the
plan, casinos will pay a total of $96 million over a period
of four years, of which $10 million will fund, through
project grants, North
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Jersey CRDA projects and $86 million will be paid to the
New Jersey Sports and Exposition Authority who will then
subsidize certain New Jersey horse tracks to increase purses and
attract higher-quality races that would allow them to compete
with horse tracks in neighboring states. In return, the race
tracks and New Jersey have committed to postpone any attempts to
install VLTs for at least four years. $52 million of the
$86 million would be donated by the CRDA from the
casinos’ North Jersey obligations and $34 million
would be paid by the casinos directly. It is currently estimated
that The Sands current CRDA deposits for North Jersey projects
are sufficient to fund The Sands proportionate obligations with
respect to the $10 million and $52 million
commitments. The Sands proportionate obligation with respect to
the $34 million commitment is estimated to be approximately
$1.3 million payable over a four year period. The Sands
proportionate obligation with respect to the combined
$10 million and $52 million commitment is estimated to
be approximately $2.5 million payable over a four year
period.
On March 1, 2005, the Acting Governor of the State of New
Jersey proposed a state budget for the 2005-2006 fiscal year
which includes as a revenue source the proceeds from
installation and operation of 1,500 to 2,000 VLTs at the
Meadowlands Racetrack in East Rutherford, New Jersey. This
location in Northern New Jersey would be in direct competition
for gamblers who now frequent the Atlantic City casinos. At this
time, there is no certainty that the Legislature of New Jersey
will enact the necessary legislation to permit the installation
and operation of these VLTs.
The Sands also competes with legalized gaming from casinos
located on Native American tribal lands. In July 2004, the
Appellate Division of the Supreme Court of New York unanimously
ruled that Native American owned casinos could legally be
operated in New York under the New York State law passed in
October 2001. That law permits three casinos in Western New
York, all of which would be owned by the Seneca Indian Nation.
The law also permits up to three casinos in the Catskills in
Ulster and Sullivan Counties, also to be owned by Native
American Tribes. In addition, the legislation allows slot
machines to be placed in Native American-owned casinos. The
court also ruled that New York could participate in the
Multi-State Mega Millions Lottery Game.
The New York law had also permitted the installation of VLTs at
five racetracks situated across the State of New York. In the
July 2004 ruling, the Appellate Division ruled that a portion of
the law was unconstitutional because it required a portion of
the VLTs revenues to go to horse-racing, breeding funds and
track purses. It is anticipated that ruling will be appealed.
The Pennsylvania legislature passed and the governor signed a
bill in July 2004 that will allow for up to 61,000 slot machines
state wide in up to 14 different locations, seven or eight of
which would be racetracks plus four or five slot parlors in
Philadelphia and Pittsburgh and two small resorts.
Maryland is among the other states contemplating some form of
gaming legislation. Maryland’s proposed legislation would
authorize VLTs at some of Maryland’s racing facilities. The
Maryland Legislature did not enact any legalized gaming
legislation during their 2004 legislative sessions.
In this highly competitive environment, each property’s
relative success is affected by a great many factors that relate
to its location and facilities. These include the number of
parking spaces and hotel rooms it possesses, close proximity to
Pacific Avenue, the Boardwalk and to other casino/hotels and
access to the main expressway entering Atlantic City. During
2003, the Pacific Avenue front entrance was redesigned and
refurbished as an exclusive entrance for Sands bus patrons,
complete with a new and expanded bus waiting lounge. Also during
2003, the porte cochere was renovated and expanded in order to
make The Sands more easily accessible to the drive-in customer.
In 2004, the Company renovated an entire floor of standard rooms
into suites providing a competitive resource to attract and
retain customers in the Middle and Premium Segments. The Company
continued to invest in its slot product by purchasing new slot
machines, most of which included ticket-in/ticket-out
technology. The ticket-in/ticket-out slot machines are less
labor intensive in operation than traditional slot machines.
Industry Developments. On July 1, 2003, the State of
New Jersey amended the NJCCA to impose various tax increases on
Atlantic City casinos, including The Sands. Among other things,
the amendments to the NJCCA include the following new tax
provisions: (i) a new 4.25% tax on casino complimentaries,
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proceeds deposited to the Casino Revenue Fund; (ii) an 8%
tax on casino service industry multi-casino progressive slot
machine revenue, with the proceeds deposited to the Casino
Revenue Fund; (iii) a 7.5% tax on adjusted net income of
licensed casinos (the “Casino Net Income Tax) in State
fiscal years 2004 through 2006, with the proceeds deposited to
the Casino Revenue Fund; (iv) a fee of $3.00 per day
on each hotel room in a casino hotel facility that is occupied
by a guest, for consideration or as a complimentary item, with
the proceeds deposited into the Casino Revenue Fund in State
fiscal years 2004 through 2006, and beginning in State fiscal
year 2007, $2.00 of the fee deposited into the Casino Revenue
Fund and $1.00 to be transferred to the Casino Reinvestment
Development Authority (“CRDA”); (v) an increase
of the minimum casino hotel parking fee from $1.50 to $3.00,
with $1.50 of the fee to be deposited into the Casino Revenue
Fund in State fiscal years 2004 through 2006, and beginning in
State fiscal year 2007, $0.50 to be deposited into the Casino
Revenue Fund and $1.00 to be transferred to the CRDA for its
purposes pursuant to law, and for use by the CRDA to post a bond
for $30 million for deposit into the Casino Capital
Construction Fund, which was also created by the July 1,
2003 Act; and (vi) the elimination of the deduction from
casino licensee calculation of gross revenue for uncollectible
gaming debt. These changes to the NJCCA, and the new taxes
imposed on The Sands and other Atlantic City casinos, will
reduce the Company’s profitability. For the year ended
December 31, 2004, these new and increased taxes have cost
The Sands approximately $1.9 million annually in additional
net expenses.
Slot machines continue to be more popular than table games
particularly with frequent patrons and with recreational and
other casual visitors. Casino operators have been catering
increasingly to slot patrons through new forms of promotions and
incentives such as slot machines that are linked among the
various casinos enabling the pay out of large pooled jackpots,
and through more attractive and entertaining gaming machines
with secondary jackpots. Various competitors have committed
efforts to provide ticket-in/ticket-out technology in their slot
product, which appears to be an industry trend for the future.
Slot machines generally produce higher margins and profitability
than table games because they require less labor and have lower
operating costs. As a result, slot machine revenue growth has
outpaced table game revenue growth in recent years. In 2004,
according to Commission filings, slot win accounted for
approximately 73.8% of total Atlantic City gaming win. However,
table games remain important to a select category of gaming
patrons and industry table game drop has shown two consecutive
years of growth in 2004 and 2003 after three straight years of
decline. Management believes the availability of table games
provides a varied gaming experience that benefits both slot and
table game revenues.
Casino Credit. Casino operations are conducted on both a
credit and a cash basis. Patron gaming debts incurred in
accordance with the NJCCA are enforceable under New Jersey law.
For the year ended December 31, 2004, gaming credit
extended to The Sands’ table game patrons accounted for
approximately 21.8% of overall table game wagering, and table
game wagering accounted for approximately 12.1% of overall
casino wagering during the period. At December 31, 2004,
gaming receivables amounted to $7.8 million before an
allowance for uncollectible gaming receivables of
$3.5 million. Management believes that such allowance is
adequate.
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. Such
seasonality and fluctuations may materially affect casino
revenues and profitability.
Environmental Matters. We are subject to various federal,
state and local laws, ordinances and regulations that
(1) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water or
(2) may impose liability for the costs of cleaning up and
certain damages resulting from sites of past spills, disposals
or other releases of hazardous or toxic substances or wastes. We
endeavor to maintain compliance with environmental laws, but
from time to time, current or historical operations on, or
adjacent to, our property may have resulted or may result in
noncompliance or liability for cleanup pursuant to environmental
laws. In that regard, we may incur costs for cleaning up
contamination relating to historical uses of certain of our
properties.
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License Agreement. The Company’s rights to the trade
name “The Sands” (the “Trade Name”) were
derived from a license agreement with an unaffiliated third
party. Amounts payable by the Company for these rights were
equal to the amounts paid to the unaffiliated third party. On
September 29, 2000, High River Limited Partnership
(“High River”) assigned the Company 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. On or about July 14, 2004, the
Company entered into a license agreement with the Las Vegas
Sands, Inc., for the use of the trade name “Sands”
through May 19, 2086, subject to termination rights for a
fee after a certain minimum term. This new license agreement
superseded and replaced the above-mentioned trade name rights
assigned to the Company by High River. In connection with the
Transaction discussed above, the July 14, 2004 license
agreement was assigned to ACE as of July 22, 2004. The
Sands made payments to the licensor in connection with the trade
name amounts to $259,000, $263,000 and $272,000, respectively,
for the years ended December 31, 2004, 2003 and 2002.
Employees and Labor Relations. In Atlantic City, all
employees, except certain hotel employees, must be licensed
under the NJCCA. Due to the seasonality of the operations of The
Sands, the number of employees varies during the course of the
year. At December 31, 2004, The Sands had approximately
1,938 employees. The Sands has collective bargaining
agreements with three unions that represent approximately
804 employees. Management considers its labor relations to
be good.
Available Information
We file annual and quarterly reports and other information with
the Securities and Exchange Commission. You may read and copy
any document that we file at the Securities and Exchange
Commission’s Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call
1-800-SEC-0300 for further information on the operation of the
Public Reference Room. Reports and other information regarding
issuers, including us, that file electronically with the
Securities and Exchange Commission are also available to the
public from the Securities and Exchange Commission’s Web
site at http://www.sec.gov.
Casino Regulation
Casino gaming is strictly regulated in Atlantic City under the
NJCCA and the regulations of the Commission, which affect
virtually all aspects of the operations of The Sands. The NJCCA
and regulations affecting Atlantic City casino licensees concern
primarily the financial stability, integrity and character of
casino operators, their employees, their debt and equity
security holders and others financially interested in casino
operations; the nature of casino/hotel facilities; the operation
methods (including rules of games and credit granting
procedures); and financial and accounting practices used in
connection with casino operations. A number of these regulations
require practices that are different from those in casinos in
Nevada and elsewhere, and some of these regulations result in
casino operating costs greater than those in comparable
facilities in Nevada and elsewhere.
Casino Licenses. The NJCCA requires that all casino
owners and management contractors be licensed by the Commission
and that all employees (except for certain non-casino related
job positions), major shareholders and other persons or entities
financially interested in the casino operation be either
licensed or approved by the Commission. A license is not
transferable and may be revoked or suspended under certain
circumstances by the Commission. A plenary license authorizes
the operation of a casino with the games authorized in an
operation certificate issued by the Commission, and the
operation certificate may be issued only on a finding that the
casino conforms to the requirements of the NJCCA and applicable
regulations and that the casino is prepared to entertain the
public. Under such determination, ACE has been issued a plenary
casino license. The plenary license issued to The Sands was
renewed by the Commission in September 2004 for a period of four
years.
In order to renew the casino license for The Sands, the
Commission determined that Atlantic Holdings and ACE are
financially stable. In order to be found “financially
stable” under the NJCCA, Atlantic Holdings
8
and ACE must demonstrate, among other things, their ability to
pay, exchange, or refinance debts that mature or otherwise
become due and payable during the license term, or to otherwise
manage such debts. During July 2004, a timely renewal
application of the casino license for a four year term was
filed. The CCC approved the casino license renewal application
for a four year term on September 29, 2004 with certain
conditions, including monthly written reports on the status of
the GB Holdings 11% Notes, and a definitive plan by GB
Holdings to address the maturity of the GB Holdings
11% Notes to be submitted no later than August 1, 2005
as well as other standard industry reporting requirements.
The NJCCA provides for a casino license fee of not less than
$200,000 based upon the cost of the investigation and
consideration of the license application, and a renewal fee of
not less than $100,000 or $200,000 for a one year or four year
renewal, respectively, based upon the cost of maintaining
control and regulatory activities. In addition, a licensee must
pay annual taxes of 8% of casino win (as defined in the NJCCA).
The NJCCA also requires casino licensees to pay an investment
alternative tax of 2.5% of Gross Revenue (the “2.5%
Tax”) or, in lieu thereof, to make quarterly deposits of
1.25% of quarterly Gross Revenue with the CRDA (the
“Deposits”). The Deposits are then used to purchase
bonds at below-market interest rates from the CRDA or to make
qualified investments approved by the CRDA. The CRDA administers
the statutorily mandated investments required to be funded by
casino licensees and is required to expend the monies received
by it for eligible projects as defined in the NJCCA. The Sands
has elected to make the Deposits with the CRDA rather than pay
the 2.5% Tax.
The NJCCA also imposes certain restrictions upon the ownership
of securities issued by a corporation that holds a casino
license or is a holding company of a corporate licensee. Among
other restrictions, the sale, assignment, transfer, pledge or
other disposition of any security issued by a corporate licensee
or holding company is subject to the regulation of the
Commission. The Commission may require divestiture of any
security held by a disqualified holder such as an officer,
director or controlling stockholder who is required to be
qualified under the NJCCA.
Note holders are also subject to the qualification provisions of
the NJCCA and may, in the sole discretion of the Commission, be
required to make filings, submit to regulatory proceedings and
qualify under the NJCCA. If an investor is an
“Institutional Investor” such as a retirement fund for
governmental employees, a registered investment company or
adviser, a collective investment trust, or an insurance company,
then, in the absence of a prima facie showing by the New Jersey
Division of Gaming Enforcement that the “Institutional
Investor” may be found unqualified, the Commission shall
grant a waiver of this qualification requirement with respect to
publicly traded debt or equity securities of parent companies or
affiliates if the investor will own (i) less than 10% of
the common stock of the company in question on a fully diluted
basis, or (ii) less than 20% of such company’s overall
indebtedness provided the investor owns less than 50% of an
outstanding issue of indebtedness of such company; the
Commission, upon a showing of good cause, may, in its sole
discretion, grant a waiver of qualification to an
“Institutional Investor” not satisfying the above
percentage criteria. An “Institutional Investor” must
also purchase securities for investment and have no intent to
influence the management or operations of such company. The
Commission may, in its sole discretion, grant a waiver of the
qualification requirement to investors not qualifying as
“Institutional Investors” under the NJCCA if such
investors will own less than 5% of the publicly traded common
stock of such company on a fully diluted basis or less than 15%
of the publicly traded outstanding indebtedness of such company.
The Sands is located in Atlantic City, New Jersey on
approximately 6.1 acres of land one-half block from the
Boardwalk at Brighton Park between Indiana Avenue and
Dr. Martin Luther King, Jr. Boulevard. The Sands
facility currently consists of a casino and simulcasting
facility with approximately 78,000 square feet of gaming
space containing approximately 2,205 slot machines and
approximately 73 table games; two hotels (see discussion on
the Madison House Hotel immediately below) with an overall total
of 620 rooms (including 187 suites); five restaurants; two
cocktail lounges; two private lounges for invited guests; an
800-seat cabaret theater; retail space; an adjacent nine-story
office building with approximately 77,000 square
9
feet of office space for its executive, financial and
administrative personnel; the “People Mover”, an
elevated, enclosed, one-way moving sidewalk connecting The Sands
to the Boardwalk using air rights granted by an easement from
the City of Atlantic City and a garage and surface parking for
approximately 1,684 vehicles.
The Sands entered into a long-term lease of the Madison House
Hotel. The initial lease period is from December 2000 to
December 2012 with lease payments ranging from $1.8 million
per year to $2.2 million per year. The Madison House is
physically connected at two floors to the existing Sands
casino-hotel complex. The Sands completed renovations in 2002 to
upgrade and combine the rooms of the Madison House into a total
of 113 suites and 13 single rooms. It is the intention of The
Sands to maintain and operate the Madison House at the same
quality level as The Sands.
With the exception of the land over which the People Mover is
constructed and the Madison House Hotel land, the Company owns
the land and improvements comprising The Sands facility. The
Sands owns and operates the casino, the hotel, all of the
restaurants, the cocktail lounge, the private lounges, the
theatre and a retail gift shop. In addition, the Company has
licensed certain space within the hotel building to unrelated
third parties who operate a beauty shop, a peanut shop, a game
room and a coffee stand.
|
|
| Item 3. |
Legal Proceedings |
We are, from time to time, parties to various legal proceedings
arising out of our businesses. We believe, however, that other
than the proceedings discussed below, there are no proceedings
pending or threatened against us, which, if determined
adversely, would have a material adverse effect upon our
business financial conditions, results of operations or
liquidity.
Tax appeals on behalf of ACE and the City of Atlantic City
challenging the amount of ACE’s real property assessments
for tax years 1996 through 2003 are pending before the NJ Tax
Court.
By letter dated January 23, 2004, Sheffield Enterprises,
Inc. asserted potential claims against the Company under the
Lanham Act for permitting a show entitled The Main Event, to run
at The Sands during 2001. Sheffield also asserts certain
copyright infringement claims growing out of the Main Event
performances. This matter was concluded by a confidential
settlement entered in to by the parties in January 2005. Under
the settlement, the Company was fully indemnified by Main
Event’s insurer for the amount of the stipulated damages.
The Company was responsible for payment of its own legal fees,
which were not material.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
During the fourth quarter of 2004, the Company did not submit
any matter to a stockholder vote.
PART II
|
|
| Item 5. |
Market for the Registrant’s Common Stock and Related
Security Holder Matters |
Atlantic Holdings’ voting securities consist of an
aggregate of 2,882,938 shares of common stock with a par value
of .01 per share. As of March 30, 2005, GB Holdings
was the only holder of record of Atlantic Holdings Common Stock
and there is no established public trading market for the
Atlantic Holdings Common Stock. Atlantic Holdings is the sole
member of ACE.
The Company has not paid any cash dividends in the past and has
no current intentions to pay any cash dividends in the future.
10
|
|
| Item 6. |
Selected Financial Data |
The following table summarizes certain selected historical
consolidated financial data of Atlantic Holdings, and is
qualified in its entirety by, and should be read in conjunction
with, Atlantic Holdings’ Consolidated Financial Statements
and related Notes thereto contained elsewhere herein. The data
as of December 31, 2004 and 2003, and for the year ended
December 31, 2004 have been derived from the audited
consolidated financial statements of Atlantic Holdings at those
dates and for that period.
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
| |
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
12/31/04 | |
| |
|
| |
| |
|
(Dollars in | |
| |
|
thousands | |
| |
|
except share | |
| |
|
data) | |
|
Statement of Operations Data:
|
|
|
|
|
|
Total Revenues
|
|
$ |
82,896 |
|
|
Promotional Allowances
|
|
|
(10,323 |
) |
| |
|
|
|
|
Net revenues
|
|
|
72,573 |
|
| |
|
|
|
|
Expenses:
|
|
|
|
|
| |
Departmental
|
|
|
68,834 |
|
| |
Depreciation and amortization
|
|
|
6,844 |
|
| |
Provision for obligatory investments
|
|
|
508 |
|
| |
Loss on disposal of fixed assets
|
|
|
187 |
|
| |
|
|
|
| |
|
Total Expenses
|
|
|
76,373 |
|
| |
|
|
|
| |
Loss from operations
|
|
|
(3,800 |
) |
| |
|
|
|
|
Non-operating income (expense):
|
|
|
|
|
| |
Interest income
|
|
|
172 |
|
| |
Interest expense
|
|
|
(1,837 |
) |
| |
Debt restructuring costs
|
|
|
(475 |
) |
| |
|
|
|
| |
|
Total non-operating expense, net
|
|
|
(2,140 |
) |
| |
|
|
|
|
Loss before income taxes
|
|
|
(5,940 |
) |
|
Income tax provision
|
|
|
(474 |
) |
| |
|
|
|
|
Net loss
|
|
$ |
(6,414 |
) |
| |
|
|
|
|
Basic/diluted loss per common share:
|
|
$ |
(5.00 |
) |
| |
|
|
|
| |
|
Weighted average common shares outstanding
|
|
|
1,283,929 |
|
|
Other Data:
|
|
|
|
|
| |
|
Capital Expenditures
|
|
$ |
10,269 |
|
| |
|
Ratio of earnings to fixed charges(1)
|
|
|
(1.8 |
)x |
| |
|
Deficiency of less than one-to-one ratio
|
|
$ |
5,940 |
|
11
| |
|
|
|
|
|
|
|
|
| |
|
As of | |
|
As of | |
| |
|
12/31/04 | |
|
12/31/03 | |
| |
|
| |
|
| |
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
216,789 |
|
|
$ |
1 |
|
|
Total current portion capital leases
|
|
|
248 |
|
|
|
— |
|
|
Total non-current capital leases
|
|
|
432 |
|
|
|
— |
|
|
Total long-term debt
|
|
|
66,259 |
|
|
|
— |
|
|
Shareholder’s equity
|
|
|
123,603 |
|
|
|
1 |
|
|
|
| (1) |
For purposes of calculating this ratio, earnings consist of the
sum of (a) pretax income, (b) fixed charges and
(c) amortization of capitalized interest, less the sum of
interest capitalized. Fixed charges consists of
(a) interest expensed and capitalized, (b) amortized
premiums, discounts and capitalized expenses related to
indebtedness, and (c) our estimate of the interest within
rental expense. |
12
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
This Annual Report on Form 10-K contains forward-looking
statements about the business, financial condition and prospects
of Atlantic Coast Entertainment Holdings, Inc. (“Atlantic
Holdings”) and ACE Gaming LLC (“ACE”) and
collectively with Atlantic Holdings, (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 Annual Report on
Form 10-K, the words “believes”,
“estimates”, “anticipates”,
“expects”, “intends” and similar expressions
as they relate to Atlantic Holdings, ACE or its management are
intended to identify forward-looking statements (see
“Private Securities Litigation Reform Act” below).
Overview
Atlantic Holdings is a Delaware corporation and was a
wholly-owned subsidiary of Greate Bay Hotel and Casino, Inc.
(“GBHC”) which was a wholly-owned subsidiary of GB
Holdings, Inc. (“GB Holdings”). Until July 22,
2004, GBHC was the owner and operator of The Sands Hotel and
Casino in Atlantic City (“The Sands”). ACE a New
Jersey limited liability company and a wholly-owned subsidiary
of Atlantic Holdings was formed in November 2003. Atlantic
Holdings and ACE were formed in connection with a transaction
(the “Transaction”), which included a Consent
Solicitation and Offer to Exchange in which holders of
$110 million of 11% Notes due 2005 (the “GB
Holdings 11% Notes”), issued by GB Property Funding
Corp. (“Property”), a wholly-owned subsidiary of GB
Holdings, were given the opportunity to exchange such notes on a
dollar for dollar basis for $110 million of 3% Notes
due 2008 (the “3% Notes”), issued by Atlantic
Holdings and guaranteed by ACE. The Transaction was consummated
on July 22, 2004, and holders of approximately
$66.3 million of GB Holdings 11% Notes exchanged such
notes for approximately $66.3 million of 3% Notes. In
connection with the Consent Solicitation and Offer to Exchange,
the indenture governing the GB Holdings 11% Notes was
amended to eliminate certain covenants and to release the liens
on the collateral securing such notes. The Transaction included,
among other things, the transfer of substantially all of the
assets of GB Holdings to Atlantic Holdings. The transfer of
assets has been accounted for as an exchange of net assets
between entities under common control, whereby the entity
receiving the assets shall initially recognize the assets and
liabilities transferred at their historical carrying amount in
the accounts of the transferring entity at the date of transfer.
No gain or loss was recorded relating to the transfer. The
3% Notes are guaranteed by ACE. Atlantic Holdings and its
subsidiary had limited operating activities prior to
July 22, 2004. Also on July 22, 2004, in connection
with the consummation of the Transaction and the Consent
Solicitation and Offer to Exchange, Property and GBHC, merged
into GB Holdings, with GB Holdings as the surviving entity. In
connection with the transfer of the assets and certain
liabilities of GB Holdings, including the assets and certain
liabilities of GBHC, Atlantic Holdings issued
2,882,937 shares of common stock, par value $.01 per
share (the “Atlantic Holdings Common Stock”) of
Atlantic Holdings to GBHC which following the merger of GBHC
became the sole asset of GB Holdings. Substantially all of the
assets and liabilities of GB Holdings and GBHC (with the
exception of the remaining GB Holdings 11% Notes and
accrued interest thereon, the Atlantic Holdings Common Stock,
and the related pro rata share of deferred financing costs) were
transferred to Atlantic Holdings or ACE. As part of the
Transaction an aggregate of 10,000,000 warrants, issued by
Atlantic Holdings, were distributed on a pro rata basis to the
stockholders of GB Holdings upon the consummation of the
Transaction. Such Warrants allow the holders to purchase from
Atlantic Holdings, at an exercise price of $.01 per share,
an aggregate of 2,750,000 shares of Atlantic Holdings
Common Stock and are only exercisable following the earlier of
(a) either the 3% Notes being paid in cash or upon
conversion, in whole or in part, into Atlantic Holdings Common
Stock, (b) payment in full of the outstanding principal of
the GB Holdings 11% Notes exchanged, or (c) a
determination by a majority of the board of directors of
Atlantic Holdings (including at least one independent director
of Atlantic Holdings) that the Warrants may be exercised. The
Sands New Jersey gaming license was transferred to ACE in
accordance with the approval of the CCC.
13
Currently, affiliates of Mr. Icahn own approximately 96% of
the 3% Notes and have the ability, which they may exercise
at any time in their sole discretion, to determine when and
whether the 3% Notes will be paid in or convertible into
Atlantic Holdings Common Stock at, or prior to maturity thereby
making the Warrants exercisable. If the 3% Notes are
converted into Atlantic Holdings Common Stock and if the
Warrants are exercised, GB Holdings will own 28.8% of the
Atlantic Holdings Common Stock and affiliates of Carl Icahn will
beneficially own approximately 63.4% of the Atlantic Holdings
Common Stock (without giving effect to the affiliates of
Mr. Icahn’s interest in Atlantic Holdings Common Stock
which is owned by GB Holdings). Affiliates of Carl Icahn
currently own approximately 77.5% of GB Holdings’ common
stock.
The Company primarily generates revenues from gaming operations
in its Atlantic City facility. Although the Company’s other
business activities including rooms, entertainment, retail
store, food and beverage operations also generate revenues,
which are nominal in comparison to the casino operations. The
non-casino operations primarily support the casino operation by
providing complimentary goods and services to deserving casino
customers. The Company competes in a capital intensive industry
that requires continual reinvestment in its facility and
technology.
The Company faces a number of competitive challenges during
fiscal 2005, including increased competition from other existing
casinos that invested in capital improvements, and a
corresponding increase in competition for both table game and
slot machine players.
In connection with the Consent Solicitation and Offer to
Exchange described above, holders of approximately
$66.3 million of GB Holdings 11% Notes exchanged such
notes for an equal principal amount of 3% Notes.
In accordance with the Contribution Agreement pursuant to which
GB Holdings contributed substantially all of its assets to
Atlantic Holdings, GB Holdings normal, ordinary course operating
expenses (including legal and accounting costs, directors’
and officers’ insurance premiums, and fees for SEC filings)
not to exceed in the aggregate $250,000 in any twelve month
period are to be paid by Atlantic Holdings subject to a number
of conditions.
Liquidity and Capital Resources
Management believes that cash flows generated from operations
during 2005, as well as available cash reserves, will be
sufficient to meet its operating plan. Based upon expected cash
flow generated from operations, management determined that it
would be prudent for the Company to obtain a line of credit to
provide additional cash availability, to meet the Company’s
working capital needs, in the event that anticipated cash flow
is less than expected or expenses exceed those anticipated. As a
result of this determination, on November 12, 2004,
Atlantic Holdings and ACE entered into a senior secured
revolving credit facility, with Fortress Credit Corp.
(“Fortress”), which provides for working capital loans
of up to $10 million to be used for working capital
purposes, in the operation of The Sands. The loan agreement and
the loans thereunder have been designated by the Board of
Directors of Atlantic Holdings and Atlantic Holdings, as manager
of ACE, as Working Capital Indebtedness (as that term is defined
in the Indenture, dated as of July 22, 2004, among Atlantic
Holdings, as issuer, ACE, as guarantor, and Wells Fargo Bank,
National Association, as trustee). As of December 31, 2004,
The Company had not borrowed any funds from the $10 million
credit facility.
We are currently exploring various plans for potential expansion
and improvements. If we decide to expand and improve the
facilities, the Company would be required to obtain additional
financing since internally generated funds and amounts available
for borrowing under existing facilities would not be sufficient.
The Company may not be able to obtain the required consents or
additional financing.
14
At December 31, 2004, the Company had cash and cash
equivalents of $12.8 million. The Company generated $44,000
of net cash provided by operating activities during the year
ended December 31, 2004.
Capital expenditures for the year ended December 31, 2004
amounted to $10.3 million primarily for new slot machines
and other gaming equipment. In order to enhance its competitive
position in the market place, The Company may incur additional
substantial costs and expenses to maintain, improve and expand
its facilities and operations depending on availability of cash
flow.
The Company is required by the NJCCA to make certain quarterly
deposits based on gross revenue with the CRDA in lieu of a
certain investment alternative tax. Deposits for the year ended
December 31, 2004, while The Sands was owned and operated
by ACE, amounted to $932,000.
In connection with the Consent Solicitation and Offer to
Exchange described above, holders of approximately $66,259,000
of GB Holdings 11% Notes exchanged such notes for an equal
principal amount of 3% Notes that mature on July 22,
2008. As a result, approximately $43,741,000 of principal amount
of the GB Holdings 11% Notes remain outstanding and mature
on September 29, 2005. GB Holding’s ability to pay the
remaining GB Holdings 11% Notes at maturity on
September 29, 2005 will depend upon its ability to
refinance such Notes on favorable terms, or at all, or to derive
sufficient funds from the sale of its Atlantic Holdings Common
Stock or from a borrowing. If GB Holdings is unable to pay the
remaining GB Holdings 11% Notes at maturity it could result
in, among other things, the possibility of GB Holdings seeking
or being forced into bankruptcy or reorganization.
Accrued interest on the 3% Notes was $883,000 at
December 31, 2004. Interest is payable at maturity of the
3% Notes on July 22, 2008.
On November 12, 2004, Atlantic Holdings and ACE entered
into a Loan and Security Agreement (the “Loan
Agreement”), by and among Atlantic Holdings, as borrower,
ACE, as guarantor, and Fortress Credit Corp., as lender, and
certain related ancillary documents, pursuant to which, Fortress
agreed to make available to Atlantic Holdings a senior secured
revolving credit line providing for working capital loans of up
to $10 million (the “Loans”), to be used for
working capital purposes in the operation of The Sands, located
in Atlantic City, New Jersey. The Loan Agreement and the Loans
thereunder have been designated by the Board of Directors of
Atlantic Holdings and Atlantic Holdings, as manager of ACE, as
Working Capital Indebtedness (as that term is defined in the
Indenture) (the “Indenture”), dated as of
July 22, 2004, among Atlantic Holdings, as issuer, ACE, as
guarantor, and Wells Fargo Bank, National Association, as
trustee (the “Trustee”).
The aggregate amount of the Loans shall not exceed
$10 million plus interest. All Loans under the Loan
Agreement are payable in full by no later than the day
immediately prior to the one-year anniversary of the Loan
Agreement, or any earlier date on which the Loans are required
to be paid in full, by acceleration or otherwise, pursuant to
the Loan Agreement.
The outstanding principal balance of the Loan Agreement will
accrue interest at a fixed rate to be set monthly which is equal
to one month LIBOR (but not less than 1.5%), plus 8% per
annum. In addition to interest payable on the principal balance
outstanding from time to time under the Loan Agreement, Atlantic
Holdings is required to pay to Fortress an unused line fee for
each preceding three-month period during the term of the Loan
Agreement in an amount equal to .35% of the excess of the
available commitment over the average outstanding monthly
balance during such preceding three-month period.
The Loans are secured by a first lien and security interest on
all of Atlantic Holdings’ and ACE’s personal property
and a first mortgage on The Sands. Fortress entered into an
Intercreditor Agreement, dated as of November 12, 2004,
with the Trustee pursuant to the Loan Agreement. The Liens (as
that term is defined in
15
the Indenture) of the Trustee on the Collateral (as that term is
defined in the Indenture), are subject and inferior to Liens
which secure Working Capital Indebtedness such as the Loans.
Fortress may terminate its obligation to advance and declare the
unpaid balance of the Loans, or any part thereof, immediately
due and payable upon the occurrence and during the continuance
of customary defaults which include payment default, covenant
defaults, bankruptcy type defaults, attachments, judgments, the
occurrence of certain material adverse events, criminal
proceedings, and defaults by Atlantic Holdings or ACE under
certain other agreements.
The Borrower and Guarantor on the Loan Agreement are required to
maintain the following financial covenants; (1) a minimum
EBITDA (as defined in the Loan Agreement) of $12.5 million,
which shall be measured and confirmed as of the twelve month
period ended each respective January 1, April 1,
July 1 and October 1 of each year until the full and
final satisfaction of the loan and (2) a Minimum Leverage
Ratio of which the Borrower shall not permit its ratio of
defined Total Debt to EBITDA, as measured and confirmed annually
on a trailing twelve month basis to exceed 6.25:1. As of
December 31, 2004, The Company is in compliance with these
covenants.
Pursuant to New Jersey law, the corporate owner of The Sands is
required to maintain a casino license in order to operate The
Sands. The gaming licenses required to own and operate The Sands
were required to be renewed in 2004, which required that the CCC
determine that among other things, Atlantic Holdings and ACE are
financially stable. In order to be found “financially
stable” under NJCCA, Atlantic Holdings and ACE had to
demonstrate among other things, its ability to pay, exchange, or
refinance debts that mature or otherwise become due and payable
during the license term, or to otherwise manage such debts.
During July 2004, a timely renewal application of the casino
license for a four year term was filed. The CCC approved the
casino license renewal application on September 29, 2004
with certain conditions, including monthly written reports on
the status of the GB Holdings 11% Notes, a definitive plan
by GB Holdings to address the maturity of the GB Holdings
11% Notes, to be submitted no later than August 1,
2005 as well as other standard industry reporting requirements.
|
|
|
Critical Accounting Policies and Estimates |
The Company’s discussion and analysis of its results of
operations and financial condition are based upon its
consolidated financial statements that have been prepared in
accordance with US generally accepted accounting principles
(“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
Financial Condition and Results of Operations, as well as in the
Notes to the Consolidated Financial Statements, if applicable,
where such estimates, assumptions, and accounting policies
affect the Company’s reported and expected financial
results.
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 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. The adequacy of the allowance is determined
by management based on a periodic review of the receivable
portfolio. 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
16
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.
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 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 workers compensation claims and major medical claims for
non-union employees. 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, and 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.
Income Taxes — The Company accounts for
income tax assets and liabilities in accordance with Statement
of Financial Accounting Standards, Accounting for Income Taxes,
or SFAS No. 109. SFAS No. 109 requires the
recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that includes the
enactment date. The Company maintains valuation allowances where
it is determined more likely than not that all or a portion of a
deferred tax asset will not be realized. Changes in valuation
allowances from period to period are included in the tax
provision in the period of change. In determining whether a
valuation allowance is warranted, Management takes into account
such factors as prior earnings history, expected future
earnings, carryback and carryforward periods, and tax planning
strategies. Management believes that it is more likely than not
that the tax benefits of certain future deductible temporary
differences will be realized based on the reversal of existing
temporary differences, and therefore, a valuation allowance has
not been provided for these deferred tax assets. Additionally,
management has determined that the realization of certain of the
Company’s deferred tax assets is not more likely than not
and, as such, has provided a valuation allowance against those
deferred tax assets at December 31, 2004.
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 interest at below market rates, direct
investments or donations. CRDA bonds bear interest at
approximately one-third below market rates. Management bases its
reserves on the type of investments the obligation has taken or
is expected to take. 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%.
Results of Operations
As summarized in the following, the presentation in the Results
of Operations section for the year ended December 31, 2004,
refers to GB Holdings for the period prior to (and including)
July 22, 2004 and Atlantic Holdings for the period
subsequent to July 22, 2004. The operations of The Sands
was included in GB
17
Holdings’ results from January 1, 2004 to
July 22, 2004 at which time the operations of The Sands
were transferred to Atlantic Holdings as part of the
Transaction. The Atlantic Holdings results subsequent to
July 22, 2004 include the operations of The Sands. For
comparative purposes, Management included GB Holdings results of
operations for the years ended December 31, 2003 and 2002.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
GB | |
|
|
|
|
|
|
| |
|
|
|
Holdings | |
|
Combined | |
|
|
|
|
| |
|
Atlantic | |
|
Period | |
|
Results | |
|
|
|
|
| |
|
Holdings | |
|
from | |
|
of Operations | |
|
|
| |
|
Period from | |
|
January 1, | |
|
for | |
|
GB Holdings Results of | |
| |
|
July 23, 2004 | |
|
2004 | |
|
the Year | |
|
Operations for the Year Ended | |
| |
|
through | |
|
through | |
|
Ended | |
|
December 31, | |
| |
|
December 31, | |
|
July 22, | |
|
December 31, | |
|
| |
| |
|
2004 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total revenues
|
|
$ |
82,896 |
|
|
$ |
111,493 |
|
|
$ |
194,389 |
|
|
$ |
191,683 |
|
|
$ |
213,273 |
|
| |
Promotional allowances
|
|
|
(10,323 |
) |
|
|
(12,823 |
) |
|
|
(23,146 |
) |
|
|
(23,934 |
) |
|
|
(23,356 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net revenues
|
|
|
72,573 |
|
|
|
98,670 |
|
|
|
171,243 |
|
|
|
167,749 |
|
|
|
189,917 |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Departmental
|
|
|
68,834 |
|
|
|
84,253 |
|
|
|
153,087 |
|
|
|
155,122 |
|
|
|
169,046 |
|
| |
Depreciation and amortization
|
|
|
6,844 |
|
|
|
8,054 |
|
|
|
14,898 |
|
|
|
14,123 |
|
|
|
13,292 |
|
| |
Provision for obligatory investments
|
|
|
508 |
|
|
|
657 |
|
|
|
1,165 |
|
|
|
1,434 |
|
|
|
1,521 |
|
| |
Loss on impairment of assets
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,282 |
|
| |
Loss (gain) on disposal of fixed assets
|
|
|
187 |
|
|
|
(35 |
) |
|
|
152 |
|
|
|
28 |
|
|
|
185 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total expenses
|
|
|
76,373 |
|
|
|
92,929 |
|
|
|
169,302 |
|
|
|
170,707 |
|
|
|
185,326 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from operations
|
|
$ |
(3,800 |
) |
|
$ |
5,741 |
|
|
$ |
1,941 |
|
|
$ |
(2,958 |
) |
|
$ |
4,591 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information contained herein, regarding Atlantic City casinos
other than The Sands, was obtained from reports filed with the
Commission.
Table game drop increased by $30.0 million (13.8%) during
2004 compared with 2003 and decreased by $24.7 million
(10.2%) in 2003 compared to 2002. By comparison, according to
Commission reports, table game drop at all other Atlantic City
casinos increased 10.3% in 2004 compared to 2003 and by 2.6% in
2003 compared to 2002. During 2004, The Sands has gradually
increased its number of table games to 83 units at
December 31, 2004 after increasing to 73 units in 2003
from 40 units at the end of 2002. The table game product
was supported by marketing, player development and customer
service programs that focused on attracting premium and middle
category table game players.
Slot machine handle decreased $124.0 million (6.5%) during
2004, compared with 2003 and $307.5 million (13.8%) in 2003
compared to 2002. By comparison, according to Commission
reports, the percentage increase in slot machine handle for all
other Atlantic City casinos for the same periods was 6.7% and
2.1%, respectively. The decreased Sands slot handle during 2004
and 2003 can be attributed to an increase in competitive
capacity of both gaming space and hotel rooms in the Atlantic
City market. The number of slot machines increased slightly at
The Sands to 2,205 at December 31, 2004 compared to 2,202
at December 31, 2003. For all other Atlantic City casinos,
the number of slot machines decreased 1.9% in 2004 compared to
2003.
18
Casino revenues at The Sands increased by $2.8 million
(1.8%) in 2004 compared to 2003 and decreased by
$20.3 million (11.5%) in 2003 compared to 2002. The 2004
increase was due to the $7.0 million increase in table game
revenues, which was a result of the $30.0 million (13.8%)
increase in table game drop and a 1.0% increase in table hold
percentage. An increase in slot hold percentage from 7.78% in
2003 to 8.15% in 2004 slightly offset the impact of the decrease
in slot handle. The 2003 decrease was due to the
$19.3 million decline in slot revenues, which was a result
of the $307.5 million (13.8%) decrease in slot handle. The
decrease in slot handle was primarily due to an increase in
competitive capacity in the Atlantic City market.
Room revenues decreased by $86,000 (0.8%) in 2004 compared to
2003 and by $149,000 (1.3%) in 2003 compared to 2002. The 2004
decrease is due to a decrease in occupied room nights offset
slightly by an increase in average room rates. The 2004 decrease
in occupied room nights was due to the continuing increased
rooms inventory in the Atlantic City market and a conscious
decision to reduce the number of complimentary rooms allotted to
lower rated customers as compared to the prior year. The 2003
decrease is due to a decrease in occupied room nights while
average room rates remained flat. This was a result of a
decrease in occupied room nights for cash sales, offset slightly
by an increase in occupied room nights for complimentary rooms.
The 2003 decline in occupied room nights for cash sales is
primarily due to the increased rooms inventory in the Atlantic
City market as a result of the Borgata, which opened in July
2003, as well as room additions at existing competitors.
Food and beverage revenues decreased $64,000 (0.3%) in 2004
compared to 2003 and decreased by $1.4 million (5.8%) in
2003 compared to 2002. The 2004 decrease is due to a $662,000
decrease in food revenue offset by a $598,000 increase in
beverage revenues. The decrease in food revenue is primarily due
to a decrease in cash sales and covers in the Boardwalk Buffet.
The increase in beverage revenue is due to increased sales (cash
and complimentary) in Swingers Lounge. The 2003 decrease is due
to a decrease in food revenue ($2.2 million) partially
offset by an increase in beverage revenues ($841,000). The
decrease in food revenue occurred predominantly in the high
volume outlets (Boardwalk Buffet and Food Factory). The Food
Factory has been closed since December 2002. In 2002, these
outlets were the preferred choice of and marketed to the mass
category slot player. The 2003 increase in beverage revenue is
primarily due to the new Swingers lounge, which opened in July
2003, as well as increases in room service and casino service
bars.
Other revenues increased $26,000 (0.7%) in 2004 compared to 2003
and by $179,000 (4.8%) in 2003 compared to 2002. The 2004
increase is due to increased revenue from outlet rentals,
parking and commissions offset by decreases in entertainment and
retail sales. The 2003 increase is due to increased revenue in
entertainment , lobby store sales and parking. These increases
were primarily from complimentaries provided to customers in the
middle and premium segments.
Promotional allowances are comprised of the estimated retail
value of goods and services provided free of charge to casino
customers under various marketing programs. As a percentage of
casino revenues, promotional allowances decreased to 14.7%
during 2004 compared to 15.5% during 2003 and increased from
13.3% in 2002. The 2004 decrease is primarily attributable to a
Company emphasis to provide increased profitability of customers
and less reliance on lower rated room customers. The 2003
increase is a result of the marketing, player development and
customer service programs implemented to maintain and recapture
lost market share in the middle and premium player segments due
to the reduction in table games and the marketing program during
the summer of 2002 that focused on the mass slot player segments.
Casino expenses at The Sands decreased by $2.2 million
(4.2%) in 2004 compared to 2003 and by $7.3 million (12.2%)
in 2003 compared to 2002. The 2004 decrease is primarily due to
reduced payroll and benefits costs ($1.9 million) as a
result of the increased utilization of ticket-in/ticket-out slot
technology, which reduces related slot and cashier labor. The
2003 decrease is primarily due to a reduction in casino payroll
and employee benefits ($2.4 million) as a result of a full
year of lower employment levels related to a
19
series of layoffs and job eliminations beginning in 2001. Other
favorable casino expense variances in 2003 were directly related
to the lower casino revenues, including gaming taxes
($1.8 million). The 2002 decrease in casino expenses is
primarily due to the reduction of complimentary costs associated
with food and beverage and decreased Casino payroll expenses due
to the reduction in table games. The decrease in the provision
for doubtful accounts expense was caused by a reduction in
credit issuance due to lower table game activity. Lower costs
for customer transportation were a result of reduced volume in
air travel and ground transportation. Reductions in advertising
expense and gaming revenue tax also contributed significantly to
the decreases in casino expenses in 2002.
Rooms expenses increased by $720,000 (26.9%) in 2004 compared to
2003 and decreased by $962,000 (26.4%) in 2003 compared to 2002.
The 2004 increase is primarily due to less allocable cost
related to a decrease in complimentary rooms utilization by
Casino and Marketing departments ($849,000). The 2003 decrease
is primarily due to reductions in staffing, which reduced
payroll and employee benefits. Linen usage and laundry expense
decreased as a result of fewer occupied rooms in 2003 compared
to 2002.
Food and beverage expenses decreased by $551,000 (6.5%) in 2004
compared to 2003 and by $1.9 million (18.0%) in 2003
compared to 2002. The 2004 decrease is primarily due to lower
payroll and employee benefits ($1.2 million) and cost of
food sales ($139,000) offset by increased costs as a result of
lower allocable costs for complimentaries ($366,000) and
employee meals ($240,000). Cost of beverage sales increased also
($203,000) as a direct result of increased sales. The 2003
decrease is due to a decrease in payroll and employee benefits
as a result of staffing reductions. Food cost of sales decreased
as a result of lower food costs in the Boardwalk Buffet and the
closing of the Food Factory in 2002. These favorable variances
were offset slightly by lower allocable food and beverage costs
transferred to other departments.
Other expenses decreased by $427,000 (32.9%) in 2004 compared to
2003 and increased by $75,000 (6.1%) in 2003 compared to 2002.
The 2004 decrease is due to lower costs for headline
entertainment and allocable cost of complimentaries as a result
of fewer headline shows in 2004 than 2003. The 2003 increase was
due to increased entertainment costs as the theatre was open
more often with headliner entertainers than it was in 2002.
Selling, general and administrative expenses increased by
$413,000 (0.5%) in 2004 compared to 2003 and decreased by
$3.9 million (4.1%) in 2003 compared to 2002. The 2004
increase is due to increases in utilities ($443,000),
advertising and payroll taxes ($362,000) partially offset by
decreases in allocated cost of complimentaries
($1.0 million). The 2003 decrease was primarily due to
lower payroll and benefits costs ($2.1 million) as a result
of continued labor efficiencies. Also contributing to the
decrease in 2003, was lower severance payouts
($1.6 million) than in 2002 as a result of smaller
adjustments in staffing levels than in the prior year. These
favorable variances were offset somewhat by increases in
insurance premiums and reserves due to market conditions and
higher payouts and more significant claims in 2003.
Depreciation and amortization increased by $775,000 (5.5%) in
2004 compared to 2003 and by $831,000 (5.7%) in 2003 compared to
2002. The 2004 and 2003 increase is due to increased
depreciation expense ($773,000 and $826,000, respectively)
resulting from further renovations and upgrades to
infrastructure and public areas such as the replacement of slot
machines, the 15th floor suite renovations, Swingers
Lounge, Platinum Club and the new bus entrance and waiting area.
|
|
|
Interest Income and Expense |
Interest income is due to invested cash reserves.
Interest expense in 2004 is due to the interest on
$66.3 million of notes at an interest rate of 3% issued on
July 22, 2004, partially offset by capitalized interest.
Income tax provision is due to income taxes on the operations of
Atlantic Holdings during the year ended December 31, 2004.
20
The following table sets forth the contractual obligations of
the Company at December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period | |
| |
|
| |
| |
|
|
|
Less Than | |
|
|
|
More Than | |
| Contractual Obligations |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
4-5 Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Long-Term Debt
|
|
$ |
66,259,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
66,259,000 |
|
|
$ |
— |
|
|
Capital Lease Obligations
|
|
|
760,000 |
|
|
|
286,000 |
|
|
|
474,000 |
|
|
|
— |
|
|
|
— |
|
|
Obligatory Contributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
CRDA Obligation
|
|
|
4,736,000 |
|
|
|
74,000 |
|
|
|
154,000 |
|
|
|
2,244,000 |
|
|
|
2,264,000 |
|
| |
VLT Agreement
|
|
|
2,860,000 |
|
|
|
953,000 |
|
|
|
1,907,000 |
|
|
|
— |
|
|
|
— |
|
|
Operating Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Madison House
|
|
|
16,226,000 |
|
|
|
1,800,000 |
|
|
|
3,996,000 |
|
|
|
3,996,000 |
|
|
|
6,434,000 |
|
| |
Equipment
|
|
|
167,000 |
|
|
|
167,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total Contractual Obligations
|
|
$ |
91,008,000 |
|
|
$ |
3,280,000 |
|
|
$ |
6,531,000 |
|
|
$ |
72,499,000 |
|
|
$ |
8,698,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-K and other materials
filed or to be filed by Atlantic Holdings, 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
Atlantic Holdings 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
Atlantic Holdings. 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).
Risk Factors Related to the Business of the Company
|
|
|
The Company is newly formed and has no operating
history. |
The Company has no operating history nor historical financial
results for investors to evaluate except for GB Holdings’
historical consolidated financial results. On July 22,
2004, Atlantic Holdings and ACE consummated the Consent
Solicitation and Offer to Exchange and the Transaction. As a
result, no assurances can be given that the Company will be
successful or profitable.
|
|
|
The Sands must maintain its casino license in order to
operate. |
Pursuant to New Jersey law, the corporate owner of The Sands is
required to maintain a casino license in order to operate The
Sands. The gaming licenses required to own and operate The Sands
were required to be renewed in 2004, which required that the CCC
determine that among other things, Atlantic Holdings and ACE are
financially stable. In order to be found “financially
stable” under the NJCCA, Atlantic Holdings and ACE must
demonstrate among other things, their ability to pay, exchange,
or refinance debts that mature or otherwise become due and
payable during the license term, or to otherwise manage such
debts. During July
21
2004, a timely renewal application of the casino license for a
four year term was filed. The CCC approved the casino license
renewal application for a four year term on September 29,
2004 with certain conditions, including monthly written reports
on the status of the GB Holdings 11% Notes, a definitive
plan by GB Holdings to address the maturity of the GB Holdings
11% Notes, to be submitted no later than August 1,
2005 as well as other standard industry reporting requirements.
|
|
|
The Company may need to increase capital expenditures to
compete effectively. |
Capital expenditures, such as room refurbishments, amenity
upgrades and new gaming equipment, are necessary from time to
time to preserve the competitiveness of The Company. The gaming
industry market is very competitive and is expected to become
more competitive in the future. If cash from operations is
insufficient to provide for needed levels of capital
expenditures, The Sands’ competitive position could
deteriorate if Atlantic Holdings or ACE is unable to generate or
borrow funds required for such purposes.
|
|
|
If the Company fails to offer competitive products and
services or maintain the loyalty of The Sands patrons, its
business will be adversely affected. |
In addition to capital expenditures, the Company is required to
anticipate the changing tastes of The Sands’ patrons and
offer both competitive and innovative products and services to
ensure that repeat patrons return and new patrons visit The
Sands. The demands of meeting the Company’s debt service
payments and the need to make capital expenditures limits the
available cash to finance such products and services. In
addition, the consequences of incorrect strategic decisions may
be difficult or impossible to anticipate or correct in a timely
manner.
|
|
|
Increased state taxation of gaming and hospitality
revenues could adversely affect the Company’s results of
operations. |
The casino industry represents a significant source of tax
revenues to the various jurisdictions in which casinos operate.
Gaming companies are currently subject to significant state and
local taxes and fees in addition to normal federal and state
corporate income taxes. For example, casinos in Atlantic City
pay for licenses as well as special taxes to the city and state.
New Jersey taxes annual gaming revenues at the rate of 8.0%. New
Jersey also levies an annual investment alternative tax of 2.5%
on annual gaming revenues in addition to normal federal and
state income taxes. This 2.5% obligation, however, can be
satisfied by purchasing certain bonds or making certain
investments in the amount of 1.25% of annual gaming revenues. On
July 3, 2002, the State of New Jersey passed the New Jersey
Business Tax Reform Act, which, among other things, suspended
the use of the New Jersey net operating loss carry forwards for
two years and introduced a new alternative minimum assessment
under the New Jersey corporate business tax based on gross
receipts or gross profits. For the year ended December 31,
2004, there was a charge to income tax provision of $298,000
related to the impact of the New Jersey Business Tax Reform Act.
On July 1, 2003, the State of New Jersey amended the NJCCA
to impose various tax increases on Atlantic City casinos,
including The Sands. Among other things, the amendments to the
NJCCA include the following new tax provisions: (i) a new
4.25% tax on casino complimentaries, with proceeds deposited to
the Casino Revenue Fund; (ii) an 8% tax on casino service
industry multi-casino progressive slot machine revenue, with the
proceeds deposited to the Casino Revenue Fund; (iii) a 7.5%
tax on adjusted net income of licensed casinos (the “Casino
Net Income Tax) in State fiscal years 2004 through 2006, with
the proceeds deposited to the Casino Revenue Fund; (iv) a
fee of $3.00 per day on each hotel room in a casino hotel
facility that is occupied by a guest, for consideration or as a
complimentary item, with the proceeds deposited into the Casino
Revenue Fund in State fiscal years 2004 through 2006, and
beginning in State fiscal year 2007, $2.00 of the fee deposited
into the Casino Revenue Fund and $1.00 to be transferred to the
Casino Reinvestment Development Authority (“CRDA”);
(v) an increase of the minimum casino hotel parking fee
from $1.50 to $3.00, with $1.50 of the fee to be deposited into
the Casino Revenue Fund in State fiscal years 2004 through 2006,
and beginning in State fiscal year 2007, $0.50 to be deposited
into the Casino Revenue Fund and $1.00 to be transferred to the
CRDA for its purposes pursuant to law, and for use by the CRDA
to post a bond for $30 million for deposit into the Casino
Capital Construction Fund, which was also created by the
July 1, 2003
22
Act; and (vi) the elimination of the deduction from casino
licensee calculation of gross revenue for uncollectible gaming
debt. These changes to the NJCCA, and the new taxes imposed on
The Sands and other Atlantic City casinos, will reduce the
Company’s profitability.
Future changes in state taxation of casino gaming companies in
New Jersey where the Company operates cannot be predicted and
any such changes could adversely affect the Company’s
profitability.
|
|
|
Energy price increases may adversely affect the
Company’s costs of operations and revenues of The
Sands. |
The Sands uses significant amounts of electricity, natural gas
and other forms of energy. While no shortages of energy have
been experienced, substantial increases in the cost of forms of
energy in the U.S. will negatively affect the Company’s
operating results. The extent of the impact is subject to the
magnitude and duration of the energy price increases, but this
impact could be material. In addition, higher energy and
gasoline prices which affect The Sands’ customers may
result in reduced visitation to The Sands’ properties and a
reduction in revenues.
|
|
|
A downturn in general economic conditions may adversely
affect the Company’s results of operations. |
The Company’s business operations are affected by
international, national and local economic conditions. A
recession or downturn in the general economy, or in a region
constituting a significant source of customers for The
Sands’ properties, could result in fewer customers visiting
the Company’s property and a reduction in spending by
customers who do visit the Company’s property, which would
adversely affect the Company’s revenues while some of its
costs remain fixed, resulting in decreased earnings.
A majority of The Sands’ patrons are from automobile travel
and bus tours. Higher gasoline prices could reduce automobile
and bus travel to The Sands’ location and could increase
bus fares to The Sands. In addition, adverse winter weather
conditions could reduce automobile travel to The Sands’
location and could reduce bus travel. Accordingly, the
Company’s business, assets, financial condition and results
of operations could be adversely affected by a weakening of
regional economic conditions and higher gasoline prices or
adverse winter weather conditions.
|
|
|
Acts of terrorism and the uncertainty of the outcome and
duration of the activity in Iraq and elsewhere, as well as other
factors affecting discretionary consumer spending, have impacted
the gaming industry and may harm the Company’s operating
results and the Company’s ability to insure against certain
risks. |
The potential for future terrorist attacks, the national and
international responses to terrorist attacks and other acts of
war or hostility have created many economic and political
uncertainties which could adversely affect the Company’s
business and results of operations. Future acts of terror in the
U.S. or an outbreak of hostilities involving the United
States, may again reduce The Sands’ guests’
willingness to travel with the result that the Company’s
operations will suffer.
|
|
|
The Company may incur losses that would not be covered by
insurance and the cost of insurance will increase. |
Although the Company has agreed in the Indenture governing the
3% Notes to maintain insurance customary and appropriate
for its business, the Company cannot assure you that insurance
will be available or adequate to cover all loss and damage to
which the Company’s business or the Company’s assets
might be subjected. In connection with insurance renewals
subsequent to September 11, 2001, the insurance coverage
for certain types of damages or occurrences has been diminished
substantially and is unavailable at commercial rates. The
Company is self-insured for certain risks. The lack of insurance
for certain types or levels of risk could expose the Company to
significant losses in the event that an uninsured catastrophe
occurred. Any losses the Company incurs that are not covered by
insurance may decrease its future operating income, require it
to find replacements or repairs for destroyed property and
reduce the funds available for payments of its obligations on
the 3% Notes.
23
|
|
|
There are risks related to the creditworthiness of patrons
of the casinos. |
The Company is exposed to certain risks related to the
creditworthiness of its patrons. Historically The Sands has
extended credit on a discretionary basis to certain qualified
patrons. For the year ended December 31, 2004, gaming
credit extended to The Sands’ table game patrons accounted
for approximately 21.8% of overall table game wagering, and
table game wagering accounted for approximately 12.1% of overall
casino wagering during the period. At December 31, 2004,
gaming receivables amounted to $7.8 million before an
allowance for uncollectible gaming receivables of
$3.5 million. There can be no assurance that defaults in
the repayment of credit by patrons of The Sands would not have a
material adverse effect on the results of operations of The
Sands and, consequently the Company.
|
|
|
The Company’s success depends in part on the
availability of qualified management and personnel and on the
Company’s ability to retain such employees. |
The quality of individuals hired for positions in the hotel and
gaming operations will be critical to the success of the
Company’s business. It may be difficult to attract, retain
and train qualified employees due to the competition for
employees with other gaming companies and their facilities in
the Company’s jurisdictions and nationwide. The Borgata,
which opened in July 2003 and is located in the marina district
of Atlantic City, has aggravated this problem. In Atlantic City
the Company cannot assure you that it will be successful in
retaining current personnel or in hiring or retaining qualified
personnel in the future. A failure to attract or retain
qualified management and personnel at all levels or the loss of
any of the Company’s key executives could have a material
adverse effect on the Company’s financial condition and
results of operations.
Risk Factors Related to the Gaming Industry
|
|
|
The gaming industry is highly competitive. |
The gaming industry is highly competitive and the Company’s
competitors may have greater resources than the Company. If
other properties operate more successfully, if existing
properties are enhanced or expanded, or if additional hotels and
casinos are established in and around the location in which the
Company conducts business, the Company may lose market share. In
particular, expansion of gaming in or near the geographic area
from which the Company attracts or expects to attract a
significant number of customers could have a significant adverse
effect on the Company’s business, financial condition and
results of operations. The Sands competes, and will in the
future compete, with all forms of existing legalized gaming and
with any new forms of gaming that may be legalized in the
future. Additionally, the Company faces competition from all
other types of entertainment.
|
|
|
Pending and enacted gaming legislation from neighboring
States and New Jersey may harm The Sands. |
In the summer of 2003, the State of New Jersey considered
approving VLTs at the racetracks in the state and on
July 1, 2003, the NJCCA was amended to impose various new
and increased taxes on casino license revenues. There is no
guarantee that New Jersey will not consider approving VLTs in
the future, and if VLTs are approved, it could adversely affect
the Company’s operations, and an increase in the gross
gaming tax without a significant simultaneous increase in
revenue would adversely affect the Company’s results of
operations.
In April 2004, the casino industry, the CRDA and the New Jersey
Sports and Exposition Authority agreed to a plan regarding VLTs.
Under the plan, casinos will pay a total of $96 million
over a period of four years, of which $10 million will
fund, through project grants, North Jersey CRDA projects and
$86 million will be paid to the New Jersey Sports and
Exposition Authority who will then subsidize certain New Jersey
horse tracks to increase purses and attract higher-quality races
that would allow them to compete with horse tracks in
neighboring states. In return, the race tracks and New Jersey
have committed to postpone any attempts to install VLTs for at
least four years. $52 million of the $86 million would
be donated by the CRDA from the casinos’ North Jersey
obligations and $34 million would be paid by the casinos
directly. It is currently estimated that The Sands current CRDA
deposits for North Jersey projects are sufficient to fund The
Sands proportionate obligations with respect to the
$10 million and $52 million commitments. The Sands
24
proportionate obligation with respect to the $34 million
commitment is estimated to be approximately $1.3 million
payable over a four year period. The Sands proportionate
obligation with respect to the combined $10 million and
$52 million commitment is estimated to be approximately
$2.5 million payable over a four year period.
The Sands also competes with legalized gaming from casinos
located on Native American tribal lands. In July 2004, the
Appellate Division of the Supreme Court of New York unanimously
ruled that Native American owned casinos could legally be
operated in New York under the New York State law passed in
October 2001. That law permits three casinos in Western New
York, all of which would be owned by the Seneca Indian Nation.
The law also permits up to three casinos in the Catskills in
Ulster and Sullivan Counties, also to be owned by Native
American Tribes. In addition, the legislation allows slot
machines to be placed in Native American-owned casinos. The
court also ruled that New York could participate in the
Multi-State Mega Millions Lottery Game.
The New York law had also permitted the installation of VLTs at
five racetracks situated across the State of New York. In the
July 2004 ruling, the Appellate Division ruled that a portion of
the law was unconstitutional because it required a portion of
the VLTs revenues to go to horse-racing, breeding funds and
track purses. It is anticipated that ruling will be appealed.
The Pennsylvania legislature passed and the governor signed a
bill in July 2004 that will allow for up to 61,000 slot machines
state wide in up to 14 different locations, seven or eight of
which would be racetracks plus four or five slot parlors in
Philadelphia and Pittsburgh and two small resorts.
Maryland is among the other states contemplating some form of
gaming legislation. Maryland’s proposed legislation would
authorize VLTs at some of Maryland’s racing facilities. The
Maryland Legislature did not enact any legalized gaming
legislation during their 2004 legislative sessions which ended
September 30, 2004.
The Sands’ market is primarily a drive-to market, and
legalized gambling in Pennsylvania, the Catskills and any other
neighboring state within close proximity to New Jersey could
have a material adverse effect on the Atlantic City gaming
industry overall, including The Sands.
On March 1, 2005, the Acting Governor of the State of New
Jersey proposed a state budget for the 2005-2006 fiscal year
which includes as a revenue source the proceeds from
installation and operation of 1,500 to 2,000 VLTs at the
Meadowlands Racetrack in East Rutherford, New Jersey. This
location in Northern New Jersey would be in direct competition
for gamblers who now frequent the Atlantic City casinos. At this
time, there is no certainty that the Legislature of New Jersey
will enact the necessary legislation to permit the installation
and operation of these VLTs.
|
|
|
Holders of Atlantic Holdings Common Stock, Warrants, and
3% Notes are subject to the CCC and the NJCCA. |
The holders of Atlantic Holdings Common Stock, the holders of
the Warrants, and the holders of the 3% Notes will be
subject to certain regulatory restrictions on ownership. While
holders of publicly traded obligations such as the 3% Notes
are generally not required to be investigated and found suitable
to hold such securities, the CCC has the discretionary authority
to (i) require holders of securities of corporations
governed by New Jersey gaming law to file applications;
(ii) investigate such holders; and (iii) require such
holders to be found suitable or qualified to be an owner or
operator of a gaming establishment. Pursuant to the regulations
of the CCC such gaming corporations may be sanctioned, including
the loss of its approvals, if, without prior approval of the
CCC, it (i) pays to the unsuitable or unqualified person
any dividend, interest or any distribution whatsoever;
(ii) recognizes any voting right by such unsuitable or
unqualified person in connection with the securities;
(iii) pays the unsuitable or unqualified person
remuneration in any form; or (iv) makes any payments to the
unsuitable or unqualified person by way of principal,
redemption, conversion, exchange, liquidation, or similar
transaction. If Atlantic Holdings is served with notice of
disqualification of any holder, such holder will be prohibited
by the NJCCA from receiving any payments on, or exercising any
rights connected to, the Atlantic Holdings Common Stock, the
Warrants, or the 3% Notes, as applicable.
25
|
|
| Item 7a. |
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. The note entitled
“Long-Term Debt” in the Notes to the Consolidated
Financial Statements included in Item 8 of this report
outlines the principal amounts, interest rates, fair values and
other terms required to evaluate the expected sensitivity of
interest rate changes on the fair value of our long-term debt.
26
|
|
| Item 8. |
Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of Atlantic Coast Entertainment Holdings,
Inc.:
We have audited the accompanying consolidated balance sheets of
Atlantic Coast Entertainment Holdings, Inc. and subsidiary as of
December 31, 2004 and 2003, and the related consolidated
statements of operations, shareholders’ equity and cash
flows for the year ended December 31, 2004 and for the
period from inception (October 30, 2003) thru
December 31, 2003. In connection with our audits of the
2004 and 2003 consolidated balance sheets and the related
consolidated statements of operations, shareholders’
equity, and cash flows for the year ended December 31, 2004
and for the period from inception (October 30, 2003) thru
December 31, 2003, we also audited the related 2004
consolidated financial statement schedule. These consolidated
financial statements and financial statement schedule are the
responsibility of the company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements and consolidated financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Atlantic Coast Entertainment Holdings, Inc. and
subsidiary as of December 31, 2004 and 2003 and the results
of their operations and their cash flows for the year ended
December 31, 2004 and for the period from inception
(October 30, 2003) thru December 31, 2003, in
conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related 2004 consolidated
financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
Short Hills, New Jersey
March 11, 2005, except for the last sentence of
Note 5 which is as of March 29, 2005
28
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
ASSETS |
|
Current Assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
12,756,000 |
|
|
$ |
1,000 |
|
| |
Accounts receivable, net of allowances of $3,862,000
|
|
|
5,223,000 |
|
|
|
— |
|
| |
Inventories
|
|
|
2,499,000 |
|
|
|
— |
|
| |
Deferred financing costs
|
|
|
2,094,000 |
|
|
|
— |
|
| |
Insurance deposits
|
|
|
3,017,000 |
|
|
|
— |
|
| |
Prepaid expenses and other current assets
|
|
|
1,686,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
27,275,000 |
|
|
|
1,000 |
|
| |
|
|
|
|
|
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
| |
Land
|
|
|
54,344,000 |
|
|
|
— |
|
| |
Buildings and improvements
|
|
|
88,147,000 |
|
|
|
— |
|
| |
Equipment
|
|
|
73,675,000 |
|
|
|
— |
|
| |
Construction in progress
|
|
|
2,040,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
218,206,000 |
|
|
|
— |
|
| |
Less — accumulated depreciation and amortization
|
|
|
(46,566,000 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
| |
Property and equipment, net
|
|
|
171,640,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
| |
Obligatory investments, net of allowances of $12,500,000
|
|
|
11,647,000 |
|
|
|
— |
|
| |
Other assets
|
|
|
6,227,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Total other assets
|
|
|
17,874,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
$ |
216,789,000 |
|
|
$ |
1,000 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND SHAREHOLDER’S EQUITY |
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
| |
Current portion capital leases
|
|
$ |
248,000 |
|
|
$ |
|
|
| |
Accounts payable
|
|
|
7,082,000 |
|
|
|
— |
|
| |
Accrued liabilities —
|
|
|
|
|
|
|
|
|
| |
|
Payroll and related expenses
|
|
|
4,379,000 |
|
|
|
— |
|
| |
|
Gaming obligations
|
|
|
3,363,000 |
|
|
|
— |
|
| |
|
Insurance
|
|
|
4,330,000 |
|
|
|
— |
|
| |
|
Other
|
|
|
2,173,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
21,575,000 |
|
|
|
— |
|
|
Long-Term Debt
|
|
|
66,259,000 |
|
|
|
— |
|
|
Non-current capital leases
|
|
|
432,000 |
|
|
|
— |
|
|
Other Non-current Liabilities:
|
|
|
4,920,000 |
|
|
|
— |
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
Shareholder’s Equity:
|
|
|
|
|
|
|
|
|
| |
Common Stock, $.01 par value per share; 20,000,000 shares
authorized;
|
|
|
— |
|
|
|
— |
|
| |
|
2,882,938 shares outstanding in 2004 and 1 share
outstanding in 2003 |
|
|
29,000 |
|
|
|
— |
|
| |
Additional paid-in capital
|
|
|
86,401,000 |
|
|
|
1,000 |
|
| |
Warrants outstanding
|
|
|
43,587,000 |
|
|
|
— |
|
| |
Accumulated deficit
|
|
|
(6,414,000 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Total shareholder’s equity
|
|
|
123,603,000 |
|
|
|
1,000 |
|
| |
|
|
|
|
|
|
| |
|
$ |
216,789,000 |
|
|
$ |
1,000 |
|
| |
|
|
|
|
|
|
See notes to consolidated financial statements.
29
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
From the Date of |
| |
|
|
|
Inception |
| |
|
|
|
(October 30, 2003) |
| |
|
Year Ended | |
|
through |
| |
|
December 31, 2004 | |
|
December 31, 2003 |
| |
|
| |
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
| |
Casino
|
|
$ |
66,208,000 |
|
|
$ |
— |
|
| |
Rooms
|
|
|
5,054,000 |
|
|
|
— |
|
| |
Food and beverage
|
|
|
9,830,000 |
|
|
|
— |
|
| |
Other
|
|
|
1,804,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
82,896,000 |
|
|
|
— |
|
| |
Less — promotional allowances
|
|
|
(10,323,000 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Net revenues
|
|
|
72,573,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
| |
Casino
|
|
|
22,250,000 |
|
|
|
— |
|
| |
Rooms
|
|
|
1,724,000 |
|
|
|
— |
|
| |
Food and beverage
|
|
|
3,316,000 |
|
|
|
— |
|
| |
Other
|
|
|
402,000 |
|
|
|
— |
|
| |
Selling, general and administrative
|
|
|
41,142,000 |
|
|
|
— |
|
| |
Depreciation and amortization
|
|
|
6,844,000 |
|
|
|
— |
|
| |
Provision for obligatory investments
|
|
|
508,000 |
|
|
|
— |
|
| |
Loss on disposal of assets
|
|
|
187,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Total expenses
|
|
|
76,373,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,800,000 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
| |
Interest income
|
|
|
172,000 |
|
|
|
— |
|
| |
Interest expense
|
|
|
(1,837,000 |
) |
|
|
— |
|
| |
Debt restructuring costs
|
|
|
(475,000 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
| |
Total non-operating expense, net
|
|
|
(2,140,000 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(5,940,000 |
) |
|
|
— |
|
| |
Income tax provision
|
|
|
(474,000 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
Net loss
|
|
$ |
(6,414,000 |
) |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Basic/diluted loss per common share
|
|
$ |
(5.00 |
) |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
1,283,929 |
|
|
|
|
|
| |
|
|
|
|
|
|
See notes to consolidated financial statements.
30
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common Stock | |
|
Additional | |
|
|
|
|
|
|
| |
|
| |
|
Paid-In | |
|
|
|
Accumulated | |
|
|
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Warrants | |
|
Deficit | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
BALANCE at Inception, October 30, 2003
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Capital contributions from GB Holdings, Inc.
|
|
|
1 |
|
|
|
— |
|
|
|
1,000 |
|
|
|
— |
|
|
|
— |
|
|
|
1,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2003
|
|
|
1 |
|
|
$ |
— |
|
|
$ |
1,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,000 |
|
| |
Capital contributions from GB Holdings, Inc.
|
|
|
— |
|
|
|
— |
|
|
|
91,173,000 |
|
|
|
— |
|
|
|
— |
|
|
|
91,173,000 |
|
| |
Issue of common shares
|
|
|
2,882,937 |
|
|
|
29,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29,000 |
|
| |
Warrants exercisable for 2,750,000 common shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
43,587,000 |
|
|
|
— |
|
|
|
43,587,000 |
|
| |
Return of Capital to GB Holdings, Inc.
|
|
|
— |
|
|
|
— |
|
|
|
(4,773,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4,773,000 |
) |
| |
Net Loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,414,000 |
) |
|
|
(6,414,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2004
|
|
|
2,882,938 |
|
|
$ |
29,000 |
|
|
$ |
86,401,000 |
|
|
$ |
43,587,000 |
|
|
$ |
(6,414,000 |
) |
|
$ |
123,603,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
31
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
From the Date | |
| |
|
|
|
of Inception | |
| |
|
|
|
(October 30, 2003) | |
| |
|
Year Ended | |
|
through | |
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
| |
|
| |
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
| |
Net loss
|
|
$ |
(6,414,000 |
) |
|
$ |
— |
|
| |
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and amortization
|
|
|
6,844,000 |
|
|
|
— |
|
| |
|
Provision for obligatory investments
|
|
|
508,000 |
|
|
|
— |
|
| |
|
Loss on disposal of assets
|
|
|
187,000 |
|
|
|
— |
|
| |
|
Provision for doubtful accounts
|
|
|
62,000 |
|
|
|
— |
|
| |
|
Increase in accounts receivable
|
|
|
(393,000 |
) |
|
|
— |
|
| |
|
Decrease in deferred financing costs
|
|
|
821,000 |
|
|
|
— |
|
| |
|
Decrease in accounts payable and accrued liabilities
|
|
|
(1,529,000 |
) |
|
|
— |
|
| |
|
Increase in other current assets
|
|
|
(518,000 |
) |
|
|
— |
|
| |
|
Increase in noncurrent assets
|
|
|
(538,000 |
) |
|
|
— |
|
| |
|
Increase in noncurrent liabilities
|
|
|
1,014,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
Net cash provided by operating activities
|
|
|
44,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
| |
Purchase of obligatory investments
|
|
|
(932,000 |
) |
|
|
— |
|
| |
Purchase of property and equipment
|
|
|
(10,269,000 |
) |
|
|
— |
|
| |
Proceeds from disposition of assets
|
|
|
163,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Net cash used in investing activities
|
|
|
(11,038,000 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
| |
Proceeds from capital leases
|
|
|
758,000 |
|
|
|
— |
|
| |
Repayment of capital leases
|
|
|
(78,000 |
) |
|
|
— |
|
| |
Proceeds from capital contributions from GB Holdings, Inc.
|
|
|
34,468,000 |
|
|
|
1,000 |
|
| |
Cost of issuing long-term debt
|
|
|
(6,626,000 |
) |
|
|
— |
|
| |
Return of capital of GB Holdings, Inc.
|
|
|
(4,773,000 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Net cash provided by financing activities
|
|
|
23,749,000 |
|
|
|
1,000 |
|
| |
|
|
|
|
|
|
| |
|
Net increase in cash and cash equivalents
|
|
|
12,755,000 |
|
|
|
1,000 |
|
| |
|
|
Cash and cash equivalents at beginning of period
|
|
|
1,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
Cash and cash equivalents at end of period
|
|
$ |
12,756,000 |
|
|
$ |
1,000 |
|
| |
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
| |
Cash paid for income taxes
|
|
$ |
355,000 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
| |
Transfer of net assets from GB Holdings, Inc.
|
|
$ |
98,033,000 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
| |
Interest capitalized
|
|
$ |
15,000 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
| |
Dividends to common shareholders in the form of Warrants in
Atlantic Coast Entertainment Holdings, Inc.
|
|
$ |
43,587,000 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
See notes to consolidated financial statements.
32
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| (1) |
Organization, Business and Basis of Presentation |
Atlantic Coast Entertainment Holdings, Inc. (“Atlantic
Holdings” or the “Company”) is a Delaware
corporation, formed in October 2003, and was a wholly-owned
subsidiary of Greate Bay Hotel and Casino, Inc.
(“GBHC”), which was a wholly-owned subsidiary of
GB Holdings, Inc. (“GB Holdings). Until
July 22, 2004, GBHC was the owner and operator of The Sands
Hotel and Casino in Atlantic City (“The Sands”).
ACE Gaming, LLC (“ACE”) a New Jersey limited
liability company and was a wholly-owned subsidiary of Atlantic
Holdings was formed in November 2003. ACE is a single member LLC
with Atlantic Holdings as it’s sole member. There was
limited activity in 2003. The consolidated financial statements
include the accounts of Atlantic Holdings and ACE. Atlantic
Holdings and ACE were formed in connection with a transaction
(the “Transaction”), which included a Consent
Solicitation and Offer to Exchange in which holders of
$110 million of 11% Notes due 2005 (the “GB
Holdings 11% Notes”), issued by GB Property Funding
Corp. (“Property”), a wholly-owned subsidiary of
GB Holdings, were given the opportunity to exchange such
notes on a dollar for dollar basis for $110 million of
3% Notes due 2008 (the “3% Notes”), issued
by Atlantic Holdings and guaranteed by ACE. The Transaction was
consummated on July 22, 2004, and holders of approximately
$66.3 million of GB Holdings 11% Notes exchanged
such notes for approximately $66.3 million of
3% Notes. In connection with the Consent Solicitation and
Offer to Exchange, the indenture governing the GB Holdings
11% Notes was amended to eliminate certain covenants and to
release the liens on the collateral securing such notes. The
Transaction included, among other things, the transfer of
substantially all of the assets of GB Holdings to Atlantic
Holdings. The transfer of assets has been accounted for as an
exchange of net assets between entities under common control,
whereby the entity receiving the assets shall initially
recognize the assets and liabilities transferred at their
historical carrying amount in the accounts of the transferring
entity at the date of transfer. No gain or loss was recorded
relating to the transfer. The 3% Notes, in connection with
the closing of the transaction, are guaranteed by ACE. Atlantic
Holdings and its subsidiary had limited operating activities
prior to July 22, 2004. Also on July 22, 2004, in
connection with the consummation of the Transaction and the
Consent Solicitation and Offer to Exchange, Property and GBHC,
merged into GB Holdings, with GB Holdings as the
surviving entity. In connection with the transfer of the assets
and certain liabilities of GB Holdings, including the
assets and certain liabilities of GBHC, Atlantic Holdings issued
2,882,937 shares of common stock, par value $.01 per
share (the “Atlantic Holdings Common Stock”) of
Atlantic Holdings to GBHC which following the merger of GBHC
became the sole asset of GB Holdings. Substantially all of
the assets and liabilities of GB Holdings and GBHC (with
the exception of the remaining GB Holdings 11% Notes
and accrued interest thereon, the Atlantic Holdings Common
Stock, and the related pro rata share of deferred financing
costs) were transferred to Atlantic Holdings or ACE. As part of
the Transaction an aggregate of 10,000,000 warrants, issued
by Atlantic Holdings, were distributed on a pro rata basis to
the stockholders of GB Holdings upon the consummation of
the Transaction. Such Warrants allow the holders to purchase
from Atlantic Holdings, at an exercise price of $.01 per
share, an aggregate of 2,750,000 shares of Atlantic
Holdings Common Stock and are only exercisable following the
earlier of (a) either the 3% Notes being paid in cash
or upon conversion, in whole or in part, into Atlantic Holdings
Common Stock, (b) payment in full of the outstanding
principal of the GB Holdings 11% Notes exchanged, or
(c) a determination by a majority of the board of directors
of Atlantic Holdings (including at least one independent
director of Atlantic Holdings) that the Warrants may be
exercised. The Sands New Jersey gaming license was transferred
to ACE in accordance with the approval of the CCC.
In connection with the Consent Solicitation and Offer to
Exchange described above, holders of $66,258,970 of
GB Holdings 11% Notes exchanged such notes for an
equal principal amount of 3% Notes.
In accordance with the Contribution Agreement pursuant to which
GB Holdings contributed substantially all of its assets to
Atlantic Holdings, GB Holdings normal, ordinary course
operating expenses (including
33
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
legal and accounting costs, directors’ and officers’
insurance premiums, and fees for SEC filings) not to exceed
in the aggregate $250,000 in any twelve month period are to be
paid by Atlantic Holdings subject to a number of conditions.
Currently, affiliates of Mr. Icahn own approximately 96% of
the 3% Notes and have the ability, which they may exercise
at any time in their sole discretion, to determine when and
whether the 3% Notes will be paid in or convertible into
Atlantic Holdings Common Stock at, or prior to, maturity thereby
making the Warrants exercisable. If the 3% Notes are
converted into Atlantic Holdings Common Stock and if the
Warrants are exercised, GB Holdings will own 28.8% of the
Atlantic Holdings Common Stock and affiliates of Carl Icahn will
beneficially own approximately 63.4% of the Atlantic Holdings
Common Stock (without giving effect to the affiliates of Mr.
Icahn’s interest in Atlantic Holdings Common Stock which is
owned by GB Holdings). Affiliates of Carl Icahn currently
own approximately 77.5% of GB Holdings’ common stock.
All significant intercompany transactions and balances have been
eliminated in consolidation.
|
|
| (2) |
Summary of Significant Accounting Policies |
The significant accounting policies followed in the preparation
of the accompanying consolidated financial statements are
discussed below. The consolidated financial statements have been
prepared in conformity with US generally accepted
accounting principles. The preparation of financial statements
in conformity with US 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 balance sheets, and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
|
|
|
Casino revenues, promotional allowances and departmental
expenses — |
The Company recognizes revenues in accordance with industry
practice. Casino revenue is recorded as net win from gaming
activities (the difference between gaming wins and losses) as
casino revenues. Casino revenues are net of accruals for
anticipated payouts of progressive and certain other slot
machine jackpots. Such anticipated jackpots and payouts are
included in gaming liabilities on the accompanying consolidated
balance sheets.
Cash and coin incentives are provided to attract new customers
as well as reward loyal customers, through the use of loyalty
programs, with points based on amounts wagered, that can be
redeemed for a specified period of time for cash. We deduct the
cash and coin incentive amounts from casino revenue.
The retail value of rooms, food and beverage and other items
that were provided to customers without charge has been included
in revenues and a corresponding amount has been deducted as
promotional allowances. The costs of such complimentaries have
been included in Casino and Selling, General and Administrative
expenses on the accompanying consolidated statements of
operations. Costs of complimenta-
34
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
ries allocated from the Rooms, Food and Beverage and Other
Operating departments to the Casino and Selling, General and
Administrative departments were as follows:
| |
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
2004 | |
| |
|
| |
|
Allocation From:
|
|
|
|
|
|
Rooms
|
|
$ |
2,623,000 |
|
|
Food and Beverage
|
|
|
7,163,000 |
|
|
Other Operating
|
|
|
1,027,000 |
|
| |
|
|
|
| |
|
$ |
10,813,000 |
|
| |
|
|
|
|
Allocation To:
|
|
|
|
|
|
Casino
|
|
$ |
1,720,000 |
|
|
Selling, General and Administrative
|
|
|
9,093,000 |
|
| |
|
|
|
| |
|
$ |
10,813,000 |
|
| |
|
|
|
|
|
|
Cash and cash equivalents — |
Cash and cash equivalents are generally comprised of cash and
investments with original maturities of three months or less,
such as commercial paper, certificates of deposit and fixed
repurchase agreements.
|
|
|
Allowance for doubtful accounts — |
In its normal course of business the Company incurs receivables
arising from credit provided to casino and hotel customers. The
allowance for doubtful accounts adjusts these gross receivables
to Management’s estimate of their net realizable value. The
provision for doubtful accounts charged to expense is determined
by Management based on a periodic review of the receivable
portfolio. This provision is based on estimates, and actual
losses may vary from these estimates. The allowance for doubtful
accounts is maintained at a level that Management considers
adequate to provide for possible future losses. Provisions for
doubtful accounts amounting to $62,000 for the year ended
December 31, 2004, were recorded in expenses on the
accompanying consolidated statement of operations.
Inventories are stated at the lower of cost (on a first-in,
first-out basis) or market.
Property and equipment have been recorded at cost and are being
depreciated utilizing the straight-line method over their
estimated useful lives as follows:
| |
|
|
|
Buildings and improvements
|
|
25-40 years |
|
Operating equipment
|
|
3-7 years |
Interest costs related to property and equipment acquisitions
are capitalized during the acquisition period and are being
amortized over the useful lives of the related assets.
|
|
|
Deferred financing costs — |
The costs of issuing long-term debt, including all related
underwriting, legal, directors and accounting fees, were
capitalized and are being amortized over the term of the related
debt issue. In July 2004, holders of
35
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
the GB Holdings 11% Notes that tendered in the Consent
Solicitation and Offer to Exchange also received their pro rata
share of the aggregate consent fees ($6.6 million) at the
rate of $100 per $1,000 of principal amount of the
GB Holdings 11% Notes tendered. The pro rata share of
the unamortized deferred financing costs associated with the
11% notes tendered ($399,000) were included with the
consent fees and recorded in Deferred Financing Costs
($1.9 million) and Other Assets ($4.5 million) on the
accompanying Consolidated Balance Sheets (“Deferred
3% Note Fees”). The Deferred
3% Note Fees are being amortized over the term of the
3% Notes using the effective yield method. All external
costs associated with the issuance of the 3% Notes have
been expensed. For the year ended December 31, 2004,
amortization of deferred financing costs were $475,000, and are
included in Interest Expense on the accompanying Consolidated
Statements of Operations.
The Company accounts for long-lived assets in accordance with
FASB Statement No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets”
(“FAS No. 144”), which excludes from the
definition of long-lived assets goodwill and other intangibles
that are not amortized in accordance with FASB Statement
No. 142 “Goodwill and Other Intangible Assets.”
FAS No. 144 requires that long-lived assets to be
disposed of by sale be measured at the lower of carrying amount
or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. FAS No. 144
also expands the reporting of discontinued operations to include
components of an entity that have been or will be disposed of
rather than limiting such discontinuance to a segment of a
business.
The 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.
Impairments are recognized when the expected future undiscounted
cash flows derived from such assets are less than their carrying
value. For such cases, losses are recognized for the difference
between the fair value and the carrying amount. Assets to be
disposed of by sale or abandonment, and where management has the
current ability to remove such assets from operations, are
recorded at the lower of carrying amount or fair value less cost
of disposition. Depreciation for these assets is suspended
during the disposal period, which is generally less than one
year. 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 consolidated
financial statements. Management does not believe that any
impairment currently exists related to its long-lived assets.
The Company is self insured for a portion of its general
liability, workers compensation, certain health care and other
liability exposures. A third party insures losses over
prescribed levels. Accrued insurance includes estimates of such
accrued liabilities based on an evaluation of the merits of
individual claims and historical claims experience. Accordingly,
the Company’s ultimate liability may differ from the
amounts accrued.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted rates expected to
apply to taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in the tax
rates is recognized in income in the period of the enactment
date.
36
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
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. The capital structure of the Company includes
potentially dilutive securities in the form of 10,000,000
warrants convertible to 2,750,000 shares of Atlantic
Holdings and the 3% Notes Convertible to
65.909 shares per $1,000 of principal amount or
4,367,062 shares. Since the Company had a net loss for the
year and including the fully diluted shares in calculating loss
per share would be anti-dilutive, basic and diluted loss per
share are the same. Basic and diluted loss per share is computed
by dividing net loss by the weighted average number of common
shares outstanding.
Long-term debt is comprised of $66,259,000 of 3% Notes due
July 22, 2008.
On July 22, 2004, Atlantic Holdings consummated the Consent
Solicitation and Offer to Exchange which it commenced and in
which Atlantic Holdings offered to exchange its 3% Notes
due on July 22, 2008 for GB Holdings 11% Notes
due on September 29, 2005, issued by GB Property Funding
Corp. (“Property”). Pursuant to the Consent
Solicitation and Offer to Exchange, an aggregate principal
amount of $66,258,970 of GB Holdings 11% Notes were
tendered to Atlantic Holdings, on a dollar for dollar basis, in
exchange for an aggregate principal amount of $66,258,970 of
3% Notes. At the election of the holders of a majority in
principal amount of the outstanding 3% Notes, each
$1,000 principal amount of 3% Notes is payable in or
convertible into 65.909 shares of common stock, par value
$.01 per share (“Atlantic Holdings Common Stock”)
of Atlantic Holdings, subject to adjustments for stock
dividends, stock splits, recapitalizations and the like. Holders
of the GB Holdings 11% Notes that tendered in the
Consent Solicitation and Offer to Exchange also received their
pro rata share of the aggregate consent fees ($6.6 million)
at the rate of $100 per $1,000 principal amount of the
GB Holdings 11% Notes tendered, plus accrued interest
($2.3 million) on the GB Holdings 11% Notes
tendered, which amounts were paid at the consummation of the
Transaction. The exchange is being accounted for as a
modification of debt. The consent fees paid are being amortized
over the term of the 3% Notes using the effective yield
method. All external costs associated with the issuance of the
3% Notes have been expensed. As indicated in the Consent
Solicitation and Offer to Exchange, an aggregate of
10,000,000 warrants, issued by Atlantic Holdings, were
distributed on a pro rata basis to the shareholders of
GB Holdings upon the consummation of the Transaction. Such
Warrants allow the holders to purchase from Atlantic Holdings,
at an exercise price of $.01 per share, an aggregate of
2,750,000 shares of Atlantic Holdings Common Stock and are
only exercisable following the earlier of (a) either the
3% Notes being paid in cash or upon conversion, in whole or
in part, into Atlantic Holdings Common Stock, (b) payment
in full of the outstanding principal of the GB Holdings
11% Notes which have not been exchanged, or (c) a
determination by a majority of the board of directors of
Atlantic Holdings (including at least one independent director
of Atlantic Holdings) that the Warrants may be exercised. The
fair value of the warrants as of July 22, 2004 (date of
issuance) was $43,587,000 (as determined by a third party
valuation).
In accordance with positions established by the Securities and
Exchange Commission, separate information with respect to the
parent, co-issuer, guarantor subsidiaries and non-guarantor
subsidiaries is not required as the parent and co-issuer have no
independent assets or operations, the guarantees are full and
unconditional, and the total assets, stockholders’ equity,
revenues, income from operations before income taxes and cash
flows from operating activities of the non-guarantor subsidiary
is less than 3% of Atlantic Holdings’ consolidated amounts.
On November 12, 2004, Atlantic Holdings and ACE entered
into a Loan and Security Agreement (the “Loan
Agreement”), by and among Atlantic Holdings, as borrower,
ACE, as guarantor, and Fortress Credit Corp.
(“Fortress”), as lender, and certain related ancillary
documents, pursuant to which, Fortress agreed to make available
to Atlantic Holdings a senior secured revolving credit line
providing for working capital loans
37
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
of up to $10 million (the “Loans”), to be used
for working capital purposes in the operation of The Sands,
located in Atlantic City, New Jersey. The Loan Agreement and the
Loans thereunder have been designated by the Board of Directors
of Atlantic Holdings and Atlantic Holdings, as manager of ACE,
as Working Capital Indebtedness (as that term is defined in the
Indenture) (the “Indenture”), dated as of
July 22, 2004, among Atlantic Holdings, as issuer, ACE, as
guarantor, and Wells Fargo Bank, National Association, as
trustee (the “Trustee”).
The aggregate amount of the Loans shall not exceed
$10 million plus interest. All Loans under the Loan
Agreement are payable in full by no later than the day
immediately prior to the one-year anniversary of the Loan
Agreement, or any earlier date on which the Loans are required
to be paid in full, by acceleration or otherwise, pursuant to
the Loan Agreement.
The outstanding principal balance of the Loan Agreement will
accrue interest at a fixed rate to be set monthly which is equal
to one month LIBOR (but not less than 1.5%), plus 8% per annum.
In addition to interest payable on the principal balance
outstanding from time to time under the Loan Agreement, Atlantic
Holdings is required to pay to Fortress an unused line fee for
each preceding three-month period during the term of the Loan
Agreement in an amount equal to .35% of the excess of the
available commitment over the average outstanding monthly
balance during such preceding three-month period.
The Loans are secured by a first lien and security interest on
all of Atlantic Holdings’ and ACE’s personal property
and a first mortgage on The Sands Hotel & Casino.
Fortress entered into an Intercreditor Agreement, dated as of
November 12, 2004, with the Trustee pursuant to the Loan
Agreement. The Liens (as that term defined in the Indenture) of
the Trustee on the Collateral (as that term is defined in the
Indenture), are subject and inferior to Liens which secure
Working Capital Indebtedness such as the Loans.
Fortress may terminate its obligation to advance and declare the
unpaid balance of the Loans, or any part thereof, immediately
due and payable upon the occurrence and during the continuance
of customary defaults which include payment default, covenant
defaults, bankruptcy type defaults, attachments, judgments, the
occurrence of certain material adverse events, criminal
proceedings, and defaults by Atlantic Holdings or ACE under
certain other agreements. As of December 31, 2004 there had
been no borrowings related to the Loans.
The Borrower and Guarantor on the Loan Agreement are required to
maintain the following financial covenants; (1) a minimum
EBITDA (as defined in the Loan Agreement) of $12.5 million,
which shall be measured and confirmed as of the twelve month
period ended, each respective January 1, April 1,
July 1 and October 1 of each year until the full and
final satisfaction of the loan and (2) a Minimum Leverage
Ratio of which the Borrower shall not permit its ratio of
defined Total Debt to EBITDA, as measured and confirmed annually
on a trailing twelve month basis to exceed 6.25:1. As of
December 31, 2004, The Company is in compliance with these
covenants.
Accrued interest on the 3% Notes was $883,000 at
December 31, 2004 and is included in Other Non-Current
Liabilities. Interest is payable at maturity of the
3% Notes on July 22, 2008.
38
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The components of the provision for income taxes are as follows:
| |
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
2004 | |
| |
|
| |
|
Federal income tax provision:
|
|
|
|
|
| |
Current
|
|
$ |
— |
|
| |
Deferred
|
|
|
— |
|
|
State income tax provision:
|
|
|
|
|
| |
Current
|
|
|
(474,000 |
) |
| |
Deferred
|
|
|
— |
|
| |
|
|
|
| |
|
$ |
(474,000 |
) |
| |
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes, and the amounts
used for income tax purposes. The major components of deferred
tax liabilities and assets as of December 31, 2004 were as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
| |
|
| |
|
Deferred tax assets:
|
|
|
|
|
| |
Bad debt reserve
|
|
$ |
1,578,000 |
|
| |
Deferred financing costs
|
|
|
2,265,000 |
|
| |
Group insurance
|
|
|
904,000 |
|
| |
Accrued vacation
|
|
|
603,000 |
|
| |
Action cash awards accrual
|
|
|
191,000 |
|
| |
Jackpot accrual
|
|
|
407,000 |
|
| |
Medical reserve
|
|
|
534,000 |
|
| |
Casino Reinvestment Development Authority
|
|
|
6,293,000 |
|
| |
Federal and state net operating loss carryforward
|
|
|
26,192,000 |
|
| |
Workers Compensation
|
|
|
462,000 |
|
| |
Grantors trust income
|
|
|
3,713,000 |
|
| |
Credit carryforwards
|
|
|
1,497,000 |
|
| |
Other
|
|
|
770,000 |
|
| |
|
|
|
| |
|
|
Total deferred tax assets
|
|
|
45,409,000 |
|
| |
|
|
Less valuation allowance
|
|
|
(28,937,000 |
) |
| |
|
|
|
| |
|
|
Total deferred tax assets after valuation allowance
|
|
|
16,472,000 |
|
| |
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
| |
Non-current:
|
|
|
|
|
| |
|
Depreciation of plant and equipment
|
|
|
(16,336,000 |
) |
| |
|
Other
|
|
|
(11,000 |
) |
| |
|
Chips and tokens
|
|
|
(125,000 |
) |
| |
|
|
|
| |
|
|
Total deferred tax liabilities
|
|
|
(16,472,000 |
) |
| |
|
|
|
| |
|
|
|
Net deferred tax assets (liabilities)
|
|
$ |
— |
|
| |
|
|
|
39
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Federal net operating loss carryforwards totaled approximately
$70.2 million as of December 31, 2004 and will begin
expiring in the year 2022 and forward. New Jersey net operating
loss carryforwards totaled approximately $28.0 million as
of December 31, 2004. The Company also has general business
credit carryforwards of approximately $1.1 million which
expire in 2005 through 2024. Additionally, as of December 2004,
the Company has a federal alternative minimum tax (AMT) credit
carryforward of about $72,000 and a New Jersey alternative
minimum assessment (AMA) credit carryforward of approximately
$.3 million, both of which can be carried forward
indefinitely.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Management
believes that it is more likely than not that the tax benefits
of certain future deductible temporary differences will be
realized based on the reversal of existing temporary
differences, and therefore, a valuation allowance has not been
provided for these deferred tax assets. Additionally, management
has determined that the realization of certain of the
Company’s deferred tax assets is not more likely than not
and, thus, has provided a valuation allowance against those
deferred tax assets at December 31, 2004.
The provision for income taxes differs from the amount computed
at the federal statutory rate as a result of the following:
| |
|
|
|
|
| |
|
Years Ended | |
| |
|
December 31, | |
| |
|
2004 | |
| |
|
| |
|
Expected federal benefit
|
|
|
(35.0 |
)% |
|
State taxes net of federal benefit
|
|
|
(0.6 |
)% |
|
Permanent differences
|
|
|
0.4 |
% |
|
Tax credits
|
|
|
(5.7 |
)% |
|
Deferred tax valuation allowance
|
|
|
48.9 |
% |
| |
|
|
|
| |
|
|
8.0 |
% |
| |
|
|
|
|
|
| (5) |
Transactions with Related Parties |
The Company’s rights to the trade name “The
Sands” (the “Trade Name”) were derived from a
license agreement with an unaffiliated third party. Amounts
payable by the Company for these rights were equal to the
amounts paid to the unaffiliated third party. On
September 29, 2000, High River Limited Partnership
(“High River”) assigned the Company 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 was made directly to the owner of the
Trade Name. On or about July 14, 2004, the Company entered
into a license agreement with Las Vegas Sands, Inc., for the use
of the trade name “Sands” through May 19, 2086,
subject to termination rights for a fee after a certain minimum
term. This new license agreement superseded and replaced the
above-mentioned trade name rights assigned to the Company by
High River. In connection with the Transaction discussed above,
the July 14, 2004 license agreement was assigned to ACE as
of July 22, 2004. The payments made to the licensor in
connection with the trade name amounted to $122,000, for the
year ended December 31, 2004.
The Company has entered into an intercompany services
arrangement with American Casino & Entertainment
Properties LLC (“ACEP”), which is controlled by
affiliates of Mr. Icahn, whereby ACEP provides management
and consulting services. The Company is billed based upon an
allocation of salaries plus
40
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
an overhead charge of 15% of the salary allocation plus
reimbursement of reasonable out-of-pocket expenses. During 2004
we were billed approximately $259,000.
On February 28, 2003, the Company entered into a two year
agreement with XO Communications, Inc. a long-distance
phone carrier affiliated with Mr. Icahn. The agreement can
be extended beyond the minimum two year term on a month-to-month
basis. Payments for such charges incurred for the year ended
December 31, 2004 amounted to $47,000. The agreement is
currently continuing on a monthly basis.
As of December 31, 2004 and 2003, the Company owed
approximately $371,000 and $0, respectively, for reimbursable
expenses to related parties.
Pursuant to the Contribution Agreement, Atlantic Holdings paid
$4.8 million to GB Holdings in 2004. Additionally, the
Company agreed to pay GB Holdings normal, ordinary course
operating expenses (including legal and accounting costs,
directors’ and officers’ insurance premiums, and fees
for SEC filings) not to exceed in the aggregate $250,000 in any
twelve month period, subject to a number of conditions. The
Company paid $2.4 million, which is accounted for as a
return of capital to GB Holdings on March 29, 2005.
|
|
| (6) |
New Jersey Regulations and Obligatory Investments |
The Company conducts gaming operations in Atlantic City, New
Jersey and operates a hotel and several restaurants, as well as
related support facilities. The operation of an Atlantic City
casino/ hotel is subject to significant regulatory control.
Under the New Jersey Casino Control Act (“NJCCA”), ACE
was required to obtain and is required to periodically renew its
operating license. A casino license is not transferable and,
after the initial licensing and two one-year renewal periods, is
issued for a term of up to four years. The plenary license
issued to The Sands was renewed by the Commission on
September 29, 2004 and extended through September 2008. The
Commission may reopen licensing hearings at any time. If it were
determined that gaming laws were violated by a licensee, the
gaming license could be conditioned, suspended or revoked. In
addition, the licensee and other persons involved could be
subject to substantial fines.
In order to renew the casino license for The Sands, the
Commission determined that Atlantic Holdings and ACE are
financially stable. In order to be found “financially
stable” under the NJCCA, Atlantic Holdings and ACE must
demonstrate, among other things, their ability to pay, exchange,
or refinance debts that mature or otherwise become due and
payable during the license term, or to otherwise manage such
debts. During July 2004, a timely renewal application of the
casino license for a four year term was filed. The CCC approved
the casino license renewal application for a four year term on
September 29, 2004 with certain conditions, including
monthly written reports on the status of the GB Holdings
11% Notes, and a definitive plan by GB Holdings to
address the maturity of the GB Holdings 11% Notes to be
submitted no later than August 1, 2005 as well as other
standard industry reporting requirements.
The NJCCA requires casino licensees to pay an investment
alternative tax of 2.5% of Gross Revenue (the “2.5%
Tax”) or, in lieu thereof, to make quarterly deposits of
1.25% of quarterly Gross Revenue with the Casino Reinvestment
Development Authority (the “Deposits”). The Deposits
are then used to purchase bonds at below-market interest rates
from the Casino Reinvestment Development Authority (the
“CRDA”) or to make qualified investments approved by
the CRDA. The CRDA administers the statutorily mandated
investments made by casino licensees and is required to expend
the monies received by it for eligible projects as defined in
the NJCCA. The Company has elected to make the Deposits with the
CRDA rather than pay the 2.5% Tax.
As of December 31, 2004, the Company had purchased bonds
totaling $6,717,000. In addition, the Company had remaining
funds on deposit and held in escrow by the CRDA at
December 31, 2004 of $17,430,000. The bonds purchased and
the amounts on deposit and held in escrow are collectively
referred to as “obligatory investments” on the
accompanying consolidated financial statements.
41
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Obligatory investments at December 31, 2004 are net of
accumulated valuation allowances of $12,500,000 based upon the
estimated realizable values of the investments. Provisions for
valuation allowances for the year ended December 31, 2004,
amounted to $508,000.
The Company has, from time to time, contributed certain amounts
held in escrow by the CRDA to fund CRDA sponsored projects.
During 2004, the Company donated $11,000 of its escrowed funds
to CRDA sponsored projects. No specific refund or future credit
has been associated with the 2004 contributions. Other assets
aggregating $414,000 have been recognized at December 31,
2004 and is being amortized over a period of ten years
commencing with the completion of the projects. Amortization of
other assets totaled $105,000 for the year ended
December 31, 2004 and is included in provision for
obligatory investments.
The Company has agreed to contribute certain of its future
investment obligations to the CRDA in connection with the
renovation related to the Atlantic City Boardwalk Convention
Center. The projected total contribution will amount to
$6.9 million, which will be paid through 2011 based on an
estimate of certain of the Company’s future CRDA deposit
obligations. As of December 31, 2004, the Company had
satisfied $2.2 million of this obligation.
In April 2004, the casino industry, the CRDA and the New Jersey
Sports and Exposition Authority agreed to a plan regarding New
Jersey video lottery terminals (“VLTs”). Under the
plan, casinos will pay a total of $96 million over a period
of four years, of which $10 million will fund, through
project grants, North Jersey CRDA projects and $86 million
will be paid to the New Jersey Sports and Exposition Authority
which will then subsidize certain New Jersey horse tracks to
increase purses and attract higher-quality races that would
allow them to compete with horse tracks in neighboring states.
In return, the race tracks and New Jersey have committed to
postpone any attempts to install VLTs for at least four years.
$52 million of the $86 million would be donated by the
CRDA from the casinos’ North Jersey obligations and
$34 million would be paid by the casinos directly. It is
currently estimated that the Company’s current CRDA
deposits for North Jersey projects are sufficient to fund the
Company’s proportionate obligations with respect to the
$10 million and $52 million commitments. The
Company’s proportionate obligation with respect to the
$34 million commitment is estimated to be approximately
$1.3 million payable over a four year period in annual
installments due October 15th ranging from $278,000 to
$398,000 per year. The Company’s proportionate
obligation with respect to the combined $10 million and
$52 million commitment is estimated to be approximately
$2.5 million payable over a four year period. The amounts
will be charged to operations, on a straight-line basis, through
January 1, 2009. The Company made its initial cash payment
of $278,000 in satisfaction of this obligation during October
2004.
|
|
| (7) |
Commitments and Contingencies |
We are, from time to time, parties to various legal proceedings
arising out of our businesses. We believe, however, that other
than the proceedings discussed below, there are no proceedings
pending or threatened against us, which, if determined
adversely, would have a material adverse effect upon our
business financial conditions, results of operations or
liquidity.
Tax appeals on behalf of ACE and the City of Atlantic City
challenging the amount of ACE’s real property assessments
for tax years 1996 through 2003 are pending before the NJ Tax
Court.
By letter dated January 23, 2004, Sheffield Enterprises,
Inc. asserted potential claims against the Company under the
Lanham Act for permitting a show entitled The Main Event, to run
at The Sands during 2001. Sheffield also asserts certain
copyright infringement claims growing out of the Main Event
performances. This matter was concluded by a confidential
settlement entered in to by the parties in January 2005. Under
the settlement, the Company was fully indemnified by Main
Event’s insurer for the amount of the stipulated damages.
The Company was responsible for payment of its own legal fees,
which were not material.
42
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The Company has collective bargaining agreements with three
unions that represent approximately 804 employees, most of whom
are represented by the Hotel, Restaurant Employees and
Bartenders International Union, AFL-CIO, Local 54. The
collective bargaining agreement with Local 54 was renewed for a
five year term in 2004. The collective bargaining agreements
with the Carpenters, Local 623 (4.6% of union employees)
and Entertainment Workers, Locals 68 and 917 (10.0% of
union employees) expire in April and July 2006, respectively.
Management considers its labor relations to be good.
|
|
| (8) |
Employee Retirement Savings Plan |
ACE administers and participates in The Sands Retirement Plan, a
qualified defined contribution plan for the benefit of all of
ACE employees, who satisfy certain eligibility requirements.
The Sands Retirement Plan is designed and operated to meet the
qualification requirements under section 401(a) of the
Internal Revenue Code of 1986, as amended (the “Code”)
and contains a qualified cash-or-deferred arrangement meeting
the requirements of section 401(k) of the Code. All
employees of ACE, who have completed one year of service, as
defined, and who have attained the age of 21, are eligible
to participate in the Savings Plan.
The Sands Retirement Plan provides for an employer matching
contribution based upon certain criteria, including levels of
participation by The Sands’ employees. The Company incurred
matching contributions totaling $220,000, for the year ended
December 31, 2004.
The Company also contributes to multi-employer pension, health
and welfare plans for its union employees. For the year ended
December 31, 2004, The Company contributed $2,548,000.
|
|
| (9) |
Disclosures about Fair Value of Financial Instruments |
Disclosure of the estimated fair value of financial instruments
is required under FAS No 107, “Disclosure About
Fair Value of Financial Instruments.” The fair value
estimates are made at discrete points in time based on relevant
market information and information about the financial
instruments. These estimates may be subjective in nature and
involve uncertainties and significant judgment and therefore
cannot be determined with precision.
Cash and cash equivalents are valued at the carrying amount.
Such amount approximates the fair value of cash equivalents
because of the short maturity of these instruments.
Obligatory investments are valued at a carrying amount which
includes an allowance reflecting the below market interest rate
associated with such investments.
The 3% Notes are valued at the amount paid by American Real
Estate Partnerships, L.P. (“AREP”) to purchase the
Notes held by Icahn affiliates in January 2005.
43
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The estimated carrying amounts and fair values of Atlantic
Holdings’ financial instruments are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, 2004 | |
| |
|
| |
| |
|
Carrying | |
|
|
| |
|
Amount | |
|
Fair Value | |
| |
|
| |
|
| |
|
Financial Assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
12,756,000 |
|
|
$ |
12,756,000 |
|
| |
Obligatory investments, net
|
|
|
11,647,000 |
|
|
|
11,647,000 |
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
| |
Interest payable
|
|
|
883,000 |
|
|
|
883,000 |
|
| |
3% Notes
|
|
|
66,259,000 |
|
|
|
64,452,000 |
|
The Company leases certain equipment and property under
operating leases. Total lease expense was $881,000 for the year
ended December 31, 2004. The following table sets forth the
future minimum commitments for operating leases and capital
leases having remaining non-cancelable lease terms in excess of
one year:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Operating Leases | |
|
Capital Leases | |
| |
|
| |
|
| |
|
2005
|
|
$ |
1,967,000 |
|
|
$ |
286,000 |
|
|
2006
|
|
|
1,998,000 |
|
|
|
286,000 |
|
|
2007
|
|
|
1,998,000 |
|
|
|
188,000 |
|
|
2008
|
|
|
1,998,000 |
|
|
|
— |
|
|
2009
|
|
|
1,998,000 |
|
|
|
— |
|
| |
Thereafter
|
|
|
6,434,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Total Minimum Lease Payments
|
|
$ |
16,393,000 |
|
|
|
760,000 |
|
| |
|
|
|
|
|
|
| |
Less imputed interest costs
|
|
|
|
|
|
|
(80,000 |
) |
| |
|
|
|
|
|
|
| |
|
Present value of Net Minimum Capital Lease Payments
|
|
|
|
|
|
$ |
680,000 |
|
| |
|
|
|
|
|
|
On January 21, 2005, American Real Estate Partners, L.P.
(“AREP”) and Cyprus LLC (“Cyprus”), an
affiliate of Mr. Icahn, entered into a Purchase Agreement,
pursuant to which AREP agreed to purchase from Cyprus
4,121,033 shares of GB Holdings and warrants to
purchase 1,133,284 shares of common stock of Atlantic
Holdings. The warrants were distributed to Cyprus by GB Holdings
in connection with the Transaction and will become exercisable
upon certain conditions at an exercise price of $.01 per
share.
44
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
| Item 9A. |
Controls and Procedures |
The Company’s senior management is responsible for
establishing and maintaining a system of disclosure controls and
procedures (as defined in Rule 13a-14 and 15d-14 under the
Securities Exchange Act of 1934 (the “Exchange Act”))
designed 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. Disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the
issuer’s management, including its principal executive
officer or officers and principal financial officer or officers,
or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
In accordance with Exchange Act Rules 13a-15 and 15d-15,
the Company carried out an evaluation, with the participation of
the Chief Executive Officer and Chief Financial Officer, as well
as other key members of the Company’s management, of the
effectiveness of the Company’s disclosure and procedures as
of the end of the period covered by this report. Based on that
evaluation, the Company’s Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure
controls and procedures were effective, as of the end of the
period covered by this report, to provide reasonable assurance
that information required to be disclosed in the Company’s
reports filed or submitted 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.
|
|
| Item 9B. |
Other Information |
Not applicable.
45
PART III
|
|
| Item 10. |
Directors and Executive Officers of the Registrants |
The Boards of Directors of Atlantic Holdings and ACE consist of:
Carl C. Icahn, Michael L. Ashner, Martin Hirsch,
Harold First, Auguste E. Rimpel, Jr. and John P.
Saldarelli. Messrs. Ashner, First and Rimpel, Jr. were
elected to the Boards of Directors of Atlantic Holdings and ACE,
as independent members, and to the Audit Committee of Atlantic
Holdings.
No family relationships exist between any directors or executive
officers of Atlantic Holdings and ACE.
Directors and Officers
Certain information is set forth below concerning the directors
and executive officers of each of Atlantic Holdings and ACE.
| |
|
|
|
|
|
|
| Name |
|
Age | |
|
Position |
| |
|
| |
|
|
|
Carl C. Icahn(1)
|
|
|
69 |
|
|
Chairman of the Board of Directors |
|
Martin Hirsch(2)
|
|
|
50 |
|
|
Director |
|
John P. Saldarelli(3)
|
|
|
63 |
|
|
Director |
|
Michael L. Ashner(4)
|
|
|
52 |
|
|
Director |
|
Harold First(5)
|
|
|
68 |
|
|
Director |
|
Auguste E. Rimpel, Jr.(6)
|
|
|
65 |
|
|
Director |
|
Richard P. Brown(7)
|
|
|
57 |
|
|
Chief Executive Officer |
|
Denise Barton(8)
|
|
|
47 |
|
|
Chief Financial Officer and Principal Accounting Officer |
|
Thomas Davis(9)
|
|
|
55 |
|
|
Former President |
|
George Toth(10)
|
|
|
58 |
|
|
President, ACE Gaming, LLC |
|
Patricia M. Wild(11)
|
|
|
53 |
|
|
Vice President, General Counsel and Secretary |
|
|
|
| |
(1) |
Carl C. Icahn has served as Chairman of the Board and a director
of Starfire Holding Corporation (“Starfire”) (formerly
Icahn Holding Corporation), a privately-held holding company,
and Chairman of the Board and a director of various subsidiaries
of Starfire, since 1984. Mr. Icahn is and has been since
1994 a majority shareholder, the Chairman of the Board and a
Director of American Railcar Industries, Inc. (“ARI”),
a Missouri corporation. ARI is primarily engaged in the business
of manufacturing, managing, leasing and selling of railroad
freight and tank cars. Mr. Icahn has also been Chairman of
the Board and President of Icahn & Co., Inc., a
registered broker-dealer and a member of the National
Association of Securities Dealers, since 1968. Since November
1990, Mr. Icahn has been Chairman of the Board of American
Property Investors, Inc., the general partner of American Real
Estate Partners, L.P., a public limited partnership that invests
in real estate and holds various other interests, including the
interests in its subsidiaries that are engaged, among other
things, in the oil and gas business and casino entertainment
business. Mr. Icahn has been a director of Cadus
Pharmaceutical Corporation, a firm that holds various
biotechnology patents, since 1993. From August 1998 to August
2002, Mr. Icahn served as Chairman of the Board of
Maupintour Holding LLC (f/k/a/ Lowestfare.com, LLC), an internet
travel reservations company. From October 1998 through May,
2004, Mr. Icahn was the President and a director of
Stratosphere Corporation, which operates the Stratosphere Hotel
and Casino. Since September 29, 2000, Mr. Icahn has
served as the Chairman of the Board of GB Holdings which owns
all of the outstanding stock of Atlantic Holdings, which through
its wholly-owned subsidiary owns and operates The Sands.
Mr. Icahn also serves in the same capacity with Atlantic
Holdings. In January 2003, Mr. Icahn became Chairman of the
Board and a director of XO Communications, Inc., a
telecommunications company. Mr. Icahn received his B.A.
from Princeton University in 1957. |
| |
| |
(2) |
Martin Hirsch has served as a Vice President of API since 1991
and AREP since inception. Mr. Hirsch focuses on investment,
management and disposition of real estate properties and other
assets. On |
46
|
|
|
| |
|
March 23, 2000, Mr. Hirsch was elected to serve as
Executive Vice President and Director of Acquisitions and
Development of API. From January 1986 to January 1991,
Mr. Hirsch was a Vice President of Integrated Resources,
Inc. where he was involved in the acquisition of commercial real
estate properties and asset management. In 1985 and 1986,
Mr. Hirsch was a Vice President of Hall Financial Group
where he was involved in acquiring and financing commercial and
residential properties. Mr. Hirsch has been a director of
National Energy Group, Inc. since 1998. Since September 29,
2000 Mr. Hirsch served as a director of GB Property Funding
Inc. from September 29, 2000 until July 22, 2004 and
of Greate Bay Hotel and Casino, Inc. from February 28, 2001
until July 22, 2004. Mr. Hirsch has served as a
Director of GB Holdings, Inc. which owns all of the outstanding
stock of Atlantic Coast Entertainment Holdings, Inc., which
through its wholly-owned subsidiary owns and operates The Sands
Hotel and Casino in Atlantic City, New Jersey and GB Property
Funding, Inc. Since July 22, 2004, Mr. Hirsch also
serves in the same capacity with Atlantic Coast Entertainment
Holdings, Inc. |
| |
| |
(3) |
John P. Saldarelli has served as Vice President, Secretary and
Treasurer of API since March 18, 1991 and as Chief
Financial Officer since June 2000 and of AREP Finance since
inception. Mr. Saldarelli was President of Bayswater Realty
Brokerage Corp. from June 1987 until November 19, 1993, and
Vice President of Bayswater Realty & Capital Corp. from
September 1979 until April 15, 1993. Mr. Saldarelli
served as a director of Stratosphere from October, 1998 until
May 2004. Mr. Saldarelli has served as a director of GB
Property Funding, Inc. and Greate Bay Hotel and Casino, Inc.
from February 28, 2001 until July 22, 2004. Since
February 28, 2001, Mr. Saldarelli has served as a
Director of GB Holdings, Inc. which owns all of the outstanding
stock of Atlantic Coast Entertainment Holdings, Inc., which
through its wholly-owned subsidiary owns and operates The Sands
Hotel and Casino in Atlantic City, New Jersey. Since
July 22, 2004, Mr. Saldarelli also serves in the same
capacity with Atlantic Coast Entertainment Holdings, Inc. |
| |
| |
(4) |
Michael L. Ashner serves as the Chief Executive Officer of
Newkirk MLP Corp., a position he has held since January 2002 as
well as the Chief Executive Officer of Winthrop Financial
Associates, a Limited Partnership and its affiliates, a position
he has held since January 1996. Mr. Ashner has been the
Chief Executive Officer of First Union Real Estate Equity and
Mortgage Investments, a publicly traded real estate investment
trust which we refer to as First Union, since December 31,
2003 and Chairman since April 2004. Mr. Ashner has also
served as the Chief Executive Officer of Shelbourne
Properties I, Inc., Shelbourne Properties II, Inc. and
Shelbourne Properties III, Inc., three separate publicly
traded real estate investment trusts listed on the American
Stock Exchange that were recently liquidated. Since 1981,
Mr. Ashner has been Chairman of Exeter Capital Corporation,
a firm that has organized and administered real estate limited
partnerships. Mr. Ashner also currently serves on the Board
of Directors of NBTY Inc., a publicly traded company that
is a manufacturer, marketer and retailer of nutritional
supplements. Mr. Ashner has been a member of the Audit
Committee of GB Holdings since October 3, 2000. Since
October 31, 2003, Mr. Ashner has served as a member of
Atlantic Holdings’ Board of Directors. |
| |
| |
(5) |
Harold First has been a self-employed independent financial
consultant since 1993. He is a certified public accountant.
Within the past five years, Mr. First served as a director
and chairman of the Audit Committee of Philip Services
Corporation, a leading integrated provider of industrial and
metals services that at the time was a public company in which
Carl C. Icahn held an interest through ownership of securities
and debt, and as a director of Panaco Inc., an oil and gas
drilling company that at the time was a public company in which
Mr. Icahn held an interest through securities or debt. |
|
|
| |
Mr. First serves as a director and chairman of the Audit
Committee of GB Holdings, which owns all of the outstanding
stock of Atlantic Coast Entertainment Holdings, Inc., which
through its wholly-owned subsidiary owns and operates The Sands.
Mr. First is also a director and chairman of the Audit
Committee of Atlantic Holdings. |
| |
| |
Mr. First holds a B.S. from Brooklyn College. |
|
|
|
| |
(6) |
Auguste E. Rimpel, Jr. has been a retired partner of
PricewaterhouseCoopers LLP (“PwC”) since 2000. He was
with PwC and its predecessor firm, Price Waterhouse, since 1983,
most recently as |
47
|
|
|
| |
|
Managing Partner of International Consulting services for the
Washington Consulting Practice of the firm. Prior to his tenure
at PwC, Dr. Rimpel served as a Partner with Booz
Allen & Hamilton, Inc., a management consulting firm
and as a Vice President of Arthur D. Little International, Inc.,
a management consulting firm. |
|
|
| |
Dr. Rimpel currently serves as Chairman of the Board of
Trustees of the University of the Virgin Islands. Since
April 25, 2001, he has served as a member of the Audit
Committee and Board of Directors of GB Holdings, which owns all
of the outstanding stock of Atlantic Holdings, which through its
wholly-owned subsidiary owns and operates The Sands.
Dr. Rimpel also serves as a member of the Board of
Directors and the Audit Committee of Atlantic Holdings. |
| |
| |
Dr. Rimpel received a Ph.D. in chemical engineering from
Carnegie Institute of Technology and was an International Fellow
at Columbia University Graduate School of Business. |
|
|
|
| |
(7) |
Richard P. Brown serves as President and Chief Executive Officer
of GB Holdings, Inc. and Atlantic Coast Entertainment Holdings,
Inc., and also serves as the President and Chief Executive
Officer of American Entertainment Properties Corp., American
Casino & Entertainment Properties Finance Corp. and
American Casino & Entertainment Properties LLC
(“ACEP”); and President, Chief Executive Officer and a
director of American Entertainment Properties Corp. and ACEP
Finance since inception. Mr. Brown has over 12 years
experience in the gaming industry. Mr. Brown has been the
President and Chief Executive Officer of each of the
Stratosphere, Arizona Charlie’s Decatur and Arizona
Charlie’s Boulder since June 2002. From January 2001 to
June 2002, he served as Chief Operating Officer for all three
properties. Prior to joining Stratosphere Gaming Corp. in March
2000 as Executive Vice President of Marketing, Mr. Brown
held executive positions with Harrah’s Entertainment and
Hilton Hotels Corporation. |
| |
| |
(8) |
Denise Barton serves as Vice President, Chief Financial Officer
and Principal Accounting Officer of GB Holdings, Inc. and
Atlantic Coast Entertainment Holdings, Inc., and also serves as
the Senior Vice President, Chief Financial Officer, Treasurer
and Secretary of American Entertainment Properties Corp.,
American Casino & Entertainment Properties Finance
Corp. and American Casino & Entertainment Properties
LLC since inception. Ms. Barton has been Senior Vice
President and Chief Financial Officer of each of the
Stratosphere, Arizona Charlie’s Decatur and Arizona
Charlie’s Boulder since February 2003. Ms. Barton
joined the Stratosphere as Vice President of Finance and Chief
Financial Officer in August 2002. From February 1999 to June
2002, she served as Chief Financial Officer for Lowestfare.com,
a travel company controlled by affiliates of Mr. Icahn.
Ms. Barton was employed by KPMG LLP, certified public
accountants, from January 1990 to February 1999. Ms. Barton
is a certified public accountant. |
| |
| |
(9) |
Thomas Davis, served as President of GB Holdings, Property, GBHC
and Atlantic Holdings from February 2003 until February 2004.
Previously, Mr. Davis served as Vice President of Business
Development at Stratosphere Corporation from November 2002 until
February 2003. Prior to joining the Stratosphere Corporation,
Mr. Davis served as General Manager of Little River Casino
Resort from 1999, General Manager at Chinook Winds Resort-Casino
from 1998 to 1999 and General Manager of Pioneer Gambling
Hall & Hotel from 1996 to 1998. |
|
|
| (10) |
George Toth was appointed Interim President of the GBHC in
February 2004 and appointed President of ACE in June 2004. Prior
to that, Mr. Toth was Vice President of Hotel Operations
and Security for GBHC and has held various positions in the
company since 1994, including Vice President of Construction and
Operations and Executive Director of Support Services. |
| |
| (11) |
Patricia M. Wild has served as Vice President, General Counsel
and Secretary of GB Holdings, Atlantic Holdings and ACE Gaming
since June 2004. Prior to her appointment, Ms. Wild served
as Vice President, Corporate Counsel and Vice President of
Claims Administration for Park Place Entertainment Corporation
from 1998 to 2003. From 1989 to 1998, Ms. Wild served in
various legal capacities for the Trump casino hotel properties
in Atlantic City, including Vice President of Legal Affairs for
Trump’s Castle Associates and Vice President, General
Counsel and Secretary for Trump Plaza Associates. From 1986 to
1989, Ms. Wild served as a Deputy Attorney General with the
Environmental |
48
|
|
|
Prosecutions Task Force of the NJ Division of Criminal Justice.
Ms. Wild was a Deputy Attorney General with the New Jersey
Division of Gaming Enforcement from 1983 to 1986. |
The Board of Directors has determined that Harold First
qualifies as an “audit committee financial expert” as
defined in ITEM 401(h) of Regulation S-K of the Exchange
Act, and that Mr. First is independent of management as
that term is used in Item 7(d)(3)(iv) of Schedule 14A
under the Exchange Act.
Each director shall hold office until the next annual meeting
and until his successor is elected and qualified or until his
earlier death, disqualification, resignation or removal. Each
executive officer shall hold office until his successor is
chosen and qualified or until his earlier resignation or removal.
Code of Ethics
The Company has adopted a code of ethics that applies to its
chief executive officer and senior financial officers.
Section 16(a) Beneficial Ownership Reporting
Compliance
Atlantic Holdings does not have a class of equity securities
registered pursuant to Section 12 of the Securities
Exchange Act of 1934, therefore neither its directors, officers,
nor beneficial owners of more than 10 percent of any class
of equity securities is required to file Forms 3, 4,
or 5.
|
|
| Item 11. |
Executive Compensation |
Summary of Cash and Certain Other Compensation
The following table provides certain summary information
concerning compensation paid or accrued by GBHC or ACE, to or on
behalf of (i) Atlantic Holding’s Chief Executive
Officer; (ii) each of the other executive officers of ACE
determined as of the end of the last fiscal year; and
(iii) additional individuals who would have qualified as
among the executive officers of ACE but for the fact that the
individual was not serving as an executive officer at the end of
the last year (hereafter referred to as the named executive
officers), for the years ended December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Annual Compensation | |
|
|
| |
|
| |
|
All Other | |
| Name and Principal Position |
|
Year | |
|
Salary | |
|
Bonus | |
|
Compensation(1) | |
| |
|
| |
|
| |
|
| |
|
| |
|
Richard P. Brown(2)
|
|
|
2004 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Chief Executive Officer |
|
|
2003 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
2002 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
George Toth
|
|
|
2004 |
|
|
|
218,529 |
|
|
|
— |
|
|
|
3,267 |
|
| |
President, ACE |
|
|
2003 |
|
|
|
144,685 |
|
|
|
— |
|
|
|
3,477 |
|
| |
|
|
|
2002 |
|
|
|
109,756 |
|
|
|
— |
|
|
|
2,639 |
|
|
Thomas Davis
|
|
|
2004 |
|
|
|
64,211 |
(5) |
|
|
— |
|
|
|
— |
|
| |
Former President, GBH |
|
|
2003 |
|
|
|
247,067 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
2002 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
William Cooney(3)
|
|
|
2004 |
|
|
|
214,538 |
|
|
|
10,000 |
|
|
|
4,604 |
|
| |
Senior Vice President |
|
|
2003 |
|
|
|
159,374 |
|
|
|
2,000 |
|
|
|
2,721 |
|
| |
Customer Development |
|
|
2002 |
|
|
|
180,654 |
(5) |
|
|
— |
|
|
|
— |
|
|
Stephanie Wheeler(4)
|
|
|
2004 |
|
|
|
149,203 |
|
|
|
— |
|
|
|
3,792 |
|
| |
Vice President Human Resources |
|
|
2003 |
|
|
|
145,999 |
|
|
|
— |
|
|
|
901 |
|
| |
|
|
|
2002 |
|
|
|
88,038 |
|
|
|
— |
|
|
|
— |
|
|
|
| (1) |
Includes matching contributions by ACE to The Sands Retirement
Savings Plan on behalf of the named executive officer. |
| |
| (2) |
Mr. Brown has been our Chief Executive Officer since July
2004 and he served in the same capacity at GBHC from February
2003 through July 2004. He also serves as President and Chief
Executive Officer |
49
|
|
|
of ACEP, which provides services to us and receives fees for
those services from us. Mr. Brown does not receive any
compensation from us. He is compensated by ACEP. See
“Related Party Transactions.” |
| |
| (3) |
William Cooney has served ACE as Senior Vice President, Customer
Development since July 2004 and he served in the same capacity
at GBHC from February 2003 through July 2004. Prior to that,
Mr. Cooney was Vice President, Player Development at
Tropicana Casino from May 2002 until February 2003.
Mr. Cooney had previously served GBHC as Executive Vice
President, Marketing Operations from February 2001 until May
2002 and Vice President Marketing from March 2000 until February
2001 and Vice President, Player Development from September 1999
until March 2000. Prior to that, Mr. Cooney served as
Executive Director of Player Development. |
| |
| (4) |
Stephanie Wheeler has served ACE as Vice President, Human
Resources & Hotel Services since March 2005. Prior to
that, Ms. Wheeler served GBHC as Vice President, Human
Resources from May 2002 until March 2005. Prior to that,
Ms. Wheeler was Program Director, Human Capital Strategies
at William J. Hughes Technical Center/ Federal Aviation
Administration from March 2002 to May 2002. Prior to that,
Ms. Wheeler was Vice President, Human Resources at
Harrah’s Atlantic City Casino Hotel from January 2000
through August 2001. |
| |
| (5) |
Includes severance compensation. |
Option Grants in Last Fiscal Year
The Company does not have a stock option plan.
Employment Contracts
The Company currently has no executive officers under employment
contracts.
Equity Compensation Plan Information
The Company does not maintain any equity compensation plans, nor
does it issue any options, warrants or rights to directors,
officers or employees. No securities are reserved for future
issuance in connection with our equity compensation plan.
Employee Retirement Savings Plan
ACE administers and participates in The Sands Retirement Plan, a
qualified defined contribution plan for the benefit of all of
ACE employees, who satisfy certain eligibility requirements.
The Sands Retirement Plan is designed and operated to meet the
qualification requirements under section 401(a) of the
Internal Revenue Code of 1986, as amended (the “Code”)
and contains a qualified cash-or-deferred arrangement meeting
the requirements of section 401(k) of the Code. All
employees of ACE, who have completed one year of service, as
defined, and who have attained the age of 21, are eligible
to participate in the Savings Plan.
The Sands Retirement Plan provides for an employer matching
contribution based upon certain criteria, including levels of
participation by The Sands’ employees. The Sands incurred
matching contributions totaling $220,000, for the year ended
December 31, 2004.
The Sands also contributes to multi-employer pension, health and
welfare plans for its union employees. For the year ended
December 31, 2004, The Sands contributed $2,548,000.
Compensation of Directors
Independent directors of the Board of Directors of Atlantic
Holdings are entitled to receive an annual fee of $22,500. The
Board of Directors of Atlantic Holdings held 9 meetings either
in person or by unanimous consent during the year ended
December 31, 2004. All directors attended at least 75% of
all meetings of the Board of Directors and committees thereof
for which they were eligible to serve.
50
The Board of Directors of Atlantic Holdings also has an Audit
Committee. Compensation for members of the Audit Committee is
included in the compensation described above.
Compensation Committee Interlocks and Insider
Participation
Atlantic Holdings has a Compensation Committee consisting of
Messrs. Hirsch and Ashner. No Compensation Committee
meeting was held during 2004.
Affiliates of Mr. Icahn are actively involved in the gaming
industry. Furthermore, affiliates of Mr. Icahn currently
own approximately 77.5% of GB Holdings’ Common Stock of
which AREP currently owns approximately 36.3% of GB Holdings
Common Stock. AREP has entered into an agreement to acquire the
remaining approximately 41.2% of GB Holdings’ Common Stock
owned by affiliates of Mr. Icahn and warrants to purchase,
upon the occurrence of certain events, an additional
approximately 11.3% of the fully diluted common stock of
Atlantic Holdings.(see Item 12). Casinos owned or managed
by Mr. Icahn may directly or indirectly compete with the
Company. In addition, the potential for conflicts of interest
exists among the Company and Mr. Icahn for future business
opportunities. Mr. Icahn may pursue other business
opportunities and there is no agreement requiring that such
additional business opportunities be presented to GB Holdings.
Audit Committee
The Audit Committee has the duty to (i) review the
engagement and performance of the independent auditors,
including the remuneration to be paid; (ii) recommend
annually to the Board of Directors the independent public
accountants to be engaged to audit the books, records and
accounts of the Company for the ensuing year; (iii) review
with the Company’s independent auditors, as well as the
Company’s management, the Company’s system of internal
control including the programs and policies of the Company
designed to ensure compliance with applicable laws and
regulations as well as monitoring results of these compliance
efforts; (iv) review with financial management and the
independent auditors the Company’s annual financial
statements and any financial reports or other financial
information submitted to any governmental body or the public by
either the Company or its independent auditors and the review of
the Forms 10-Q and 10-K prepared by the financial
management and the independent auditors of the Company prior to
their filing and release; discuss any significant changes to the
Company’s accounting principles; (v) review of any
significant disagreement among management of the Company and the
independent auditors in connection with the preparation of the
financial reports of the companies and prior to releasing the
year-end earnings, discuss with the independent auditors matters
required to be communicated to audit committees in accordance
with SAS 61 and (vi) make such reports and recommendations
to the Board of Directors in connection with the foregoing as it
shall deem appropriate or as the Board of Directors may request,
and take such action thereon as the Board of Directors may
direct it to take. The Audit Committee is comprised of
Messrs. Ashner, First and Rimpel, Jr.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management |
GB Holdings was the only holder of record of Atlantic Holdings.
Atlantic Holdings is the sole member of ACE.
51
The following table sets forth as of March 21, 2005,
certain information regarding the beneficial ownership of shares
of GB Holdings Common Stock by each director of the Company,
each of the executive officers listed in the Summary
Compensation Table, each person known to the Company to be the
beneficial owner of more than 5% of the outstanding shares and
all directors and executive officers as a group.
| |
|
|
|
|
|
|
|
|
| |
|
Number | |
|
|
| Name |
|
of Shares | |
|
Percent | |
| |
|
| |
|
| |
|
GB Holdings(1)
|
|
|
2,882,938 |
|
|
|
100 |
% |
|
Carl C. Icahn(2)
|
|
|
— |
|
|
|
— |
|
|
Martin Hirsch
|
|
|
— |
|
|
|
— |
|
|
John P. Saldarelli
|
|
|
— |
|
|
|
— |
|
|
Michael L. Ashner
|
|
|
— |
|
|
|
— |
|
|
Harold First
|
|
|
— |
|
|
|
— |
|
|
Auguste E. Rimpel, Jr.
|
|
|
— |
|
|
|
— |
|
|
Richard P. Brown
|
|
|
— |
|
|
|
— |
|
|
George Toth
|
|
|
— |
|
|
|
— |
|
|
Denise Barton
|
|
|
— |
|
|
|
— |
|
|
William Cooney
|
|
|
— |
|
|
|
— |
|
|
Stephanie Wheeler
|
|
|
— |
|
|
|
— |
|
|
All Directors and officers
|
|
|
— |
|
|
|
— |
|
|
|
| (1) |
On a non-diluted basis, GB Holdings owns 100% of the outstanding
Atlantic Holdings Common Stock. Following the conversion of the
3% Notes and the exercise of the warrants, GB Holdings will
hold approximately 28% of the outstanding Atlantic Holdings
Common Stock. |
| |
| (2) |
Pursuant to a Schedule 13D, dated January 21, 2005,
filed by Carl C. Icahn and certain of his affiliates,
Mr. Icahn and affiliates beneficially own
7,748,744 shares of GB Holdings’ Common Stock. The
Schedule 13D provides that on January 21, 2005,
American Real Estate Partners, L.P., or AREP, and Cyprus, LLC
entered into a purchase agreement, pursuant to which
(1) Cyprus agreed to sell to AREP 4,121,033 shares of
GB Holdings’ Common Stock and warrants to
purchase 1,133,284 shares of common stock of Atlantic
Holdings, in consideration for which (2) AREP agreed to
issue 413,793 Depositary Units to Cyprus. In addition, following
the end of fiscal year 2006 of AREP, provided that certain
conditions are met, Cyprus will have the right to receive up to
an additional 206,897 Depositary Units. In connection with the
transactions contemplated by the purchase agreement:
(1) AREP will contribute to American Real Estate Holdings
Limited partnership or AREH, of which AREP owns a 99% limited
partnership interest, the purchased shares and the purchased
warrants; and (2) AREH will contribute to AREP Sands
Holding LLC, a wholly-owned subsidiary of AREH,
(a) 7,748,744 shares of GB Holdings’ Common Stock
(including the purchased shares), (b) warrants to
purchase 2,130,904 shares of common stock of Atlantic
Holdings (including the purchased warrants), and
(c) $26,914,500 principal amount of 3% promissory notes of
Atlantic Holdings (which are convertible into an aggregate of
1,773,907 shares of common stock of Atlantic Holdings).
AREP Sands currently owns approximately $37.0 million
principal amount of 3% promissory notes of Atlantic Holdings
(which are convertible into an aggregate of approximately
2.4 million shares of common stock of Atlantic Holdings).
Affiliates of Mr. Icahn own approximately 96% of the
3% Notes and have the ability, which they may exercise at
any time in their sole discretion, to determine when and whether
the 3% Notes will be paid in or convertible into Atlantic
Holdings Common Stock at, or prior to, maturity, thereby making
the warrants exercisable. If the 3% Notes are converted
into Atlantic Holdings Common Stock and if the Warrants are
exercised, GB Holdings will own 28.8% (2,882,938 shares) of
the Atlantic Holdings Common Stock and affiliates of Carl Icahn
will beneficially own approximately 63.4%
(6,344,077 shares) of the Atlantic Holdings Common Stock
(without giving effect to the affiliates of
Mr. Icahn’s interest in Atlantic Holdings Common Stock
which is owned by GB Holdings). Affiliates of Carl Icahn
currently own approximately 77.5% of GB Holdings’ Common
Stock. |
52
|
|
| Item 13. |
Certain Relationships and Related Transactions |
Affiliates of Mr. Icahn are actively involved in the gaming
industry. Furthermore, affiliates of Mr. Icahn currently
own approximately 77.5% of GB Holdings’ Common Stock of
which AREP currently owns approximately 36.3% of GB Holdings
Common Stock. AREP has entered into an agreement to acquire the
remaining approximately 41.2% of GB Holdings’ Common Stock
owned by affiliates of Mr. Icahn and warrants to purchase,
upon the occurrence of certain events, an additional
approximately 11.3% of the fully diluted common stock of
Atlantic Holdings (see Item 12). Casinos owned or managed
by Mr. Icahn may directly or indirectly compete with the
Company. In addition, the potential for conflicts of interest
exists among the Company and Mr. Icahn for future business
opportunities. Mr. Icahn may pursue other business
opportunities and there is no agreement requiring that such
additional business opportunities be presented to GB Holdings.
The Company’s rights to the trade name “The
Sands” (the “Trade Name”) were derived from a
license agreement with an unaffiliated third party. Amounts
payable by the Company for these rights were equal to the
amounts paid to the unaffiliated third party. On
September 29, 2000, High River Limited Partnership
(“High River”) assigned the Company 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. On or about July 14, 2004, the Company entered into a
license agreement with the Las Vegas Sands, Inc., for the use of
the trade name “Sands” through May 19, 2086,
subject to termination rights for a fee after a certain minimum
term. This new license agreement superseded and replaced the
above-mentioned trade name rights assigned to the Company by
High River. In connection with the Transaction discussed above,
the July 14, 2004 license agreement was assigned to ACE as
of July 22, 2004. The Sands made payments to the licensor
in connection with the trade name amounts to $259,000, $263,000
and $272,000, respectively, for the years ended
December 31, 2004, 2003 and 2002.
On July 22, 2004, as a result of, and pursuant to the terms
of, the Consent Solicitation and Offer to Exchange, dated
June 1, 2004 to holders of the Existing Notes, holders that
consented were paid $100 for each $1,000 of principal amount of
notes tendered for exchange, thus affiliates of Mr. Icahn
were paid approximately $6,380,000 because they tendered for
exchange thereby consenting to certain amendments to the Amended
and Restated Indenture, dated as of October 12, 2001, among
GB Property, as issuer, GB Holdings and Greate Bay Hotel, as
guarantors, and Wells Fargo Bank Minnesota, National
Association, as Trustee.
The Company has entered into an intercompany services
arrangement with American Casino & Entertainment
Properties LLC (“ACEP”), which is controlled by
affiliates of Mr. Icahn, whereby ACEP provides management
and consulting services. The Company is billed based upon an
allocation of salaries plus an overhead charge of 15% of the
salary allocation plus reimbursement of reasonable out-of-pocket
expenses. During 2004, we were billed approximately $259,000.
On February 28, 2003, GBHC entered into a two year
agreement with XO Communications, Inc. (“XO”), an
entity affiliated with Carl C. Icahn. The agreement, pursuant to
which XO provides long-distance telephone service to
GB Holdings and its subsidiaries, can be extended beyond
the minimum two year term on a month-to-month basis. Pursuant to
the Transaction, this agreement was assigned to Atlantic
Holdings on
53
July 22, 2004. Payments for such charges incurred for the
year ended December 31, 2004 amounted to $47,000.
As of December 31, 2004 and 2003, the Company owed
approximately $371,000 and $0, respectively, for reimbursable
expenses to related parties.
Pursuant to the Contribution Agreement, under which GB Holdings
contributed substantially all of its assets to Atlantic
Holdings, Atlantic Holdings paid $2.4 million to
GB Holdings in 2004 and agreed to pay GB Holdings normal,
ordinary course operating expenses (including legal and
accounting costs, directors’ and officers’ insurance
premiums, and fees for SEC filings) not to exceed in the
aggregate $250,000 in any twelve month period, subject to a
number of conditions.
|
|
| Item 14. |
Principal Accountant Fees and Services |
Summary of KPMG LLP Fees For Professional Services
Rendered
| |
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
2004 | |
| |
|
| |
|
Audit fees(1)
|
|
$ |
50,000 |
|
|
Audit related fees
|
|
|
— |
|
|
Tax fees
|
|
|
— |
|
|
All other fees
|
|
|
— |
|
| |
|
|
|
| |
Total fees
|
|
$ |
50,000 |
|
| |
|
|
|
|
|
| (1) |
Services relating to audit of the annual consolidated financial
statements, review of quarterly financial statements and Casino
Control Commission audit. |
All non-audit services must be pre-approved by the Audit
committee prior to their commencement.
PART IV
|
|
| Item 15. |
Exhibits, Financial Statement Schedules and Reports on
Form 8-K |
(a) The following documents are filed as a part of
this report:
1. Financial Statements
The financial statements filed as part of this report are listed
on the Index to Financial Statements on page 27.
2. Financial Statement Schedule
— Schedule II; Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions and
are inapplicable and therefore have been omitted.
3. Exhibits
| |
|
|
|
|
|
|
| |
+3 |
.1 |
|
— |
|
Certificate of Incorporation of Atlantic Holdings |
| |
+3 |
.2 |
|
— |
|
Certificate of Formation of ACE |
| |
+3 |
.3 |
|
— |
|
By-laws of Atlantic Holdings |
| |
+3 |
.4 |
|
— |
|
Operating Agreement of ACE, as amended, by Atlantic Holdings |
| |
+4 |
.1 |
|
— |
|
Indenture, dated as of July 22, 2004, among Atlantic
Holdings, as issuer, ACE, as guarantor, and Wells Fargo Bank,
National Association, as trustee |
54
| |
|
|
|
|
|
|
| |
+4 |
.2 |
|
— |
|
Warrant Agreement, dated as of July 22, 2004, between
Atlantic Holdings and American Stock Transfer and Trust Company |
| |
+4 |
.3 |
|
— |
|
Registration Rights Agreement, dated as of July 22, 2004,
between Atlantic Holdings and the Signatories listed therein |
| |
+10 |
.1 |
|
— |
|
Contribution Agreement, dated as of July 22, 2004, among GB
Holdings, GBHC, Atlantic Holdings and ACE |
| |
+10 |
.2 |
|
— |
|
Pledge and Security Agreement, dated as of July 22, 2004,
among Atlantic Holdings, ACE and certain subsidiaries of
Atlantic Holdings, as Guarantor, and Wells Fargo Bank, National
Association, as trustee |
| |
+10 |
.3 |
|
— |
|
Assignment of Leases, dated as of July 22, 2004, between
ACE and Wells Fargo Bank, National Association |
| |
+10 |
.4 |
|
— |
|
Mortgage, Fixture Filing and Security Agreement, dated as of
July 22, 2004, between ACE and Wells Fargo Bank, National
Association |
| |
++10 |
.5 |
|
— |
|
Loan and Security Agreement, dated November 12, 2004, by
and among Atlantic, as borrower, ACE, as guarantor, and
Fortress, as lender |
| |
++10 |
.6 |
|
— |
|
Guaranty to Fortress Credit Corp, dated as of November 12,
2004, among ACE, as guarantor, and Fortress as lender |
| |
++10 |
.7 |
|
— |
|
First Mortgage and Security Agreement, dated November 12,
2004, by and among ACE, as mortgagor, and Fortress, as mortgagee |
| |
12 |
|
|
|
|
Ratio of Earnings to Fixed Charges |
| |
14 |
.1 |
|
|
|
Code of Ethics |
| |
+21 |
.1 |
|
— |
|
List of Subsidiaries of Atlantic Holdings |
| |
31 |
.1 |
|
— |
|
Certification of Principal Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
31 |
.2 |
|
— |
|
Certification of Principal Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
32 |
.1 |
|
— |
|
Certification of Principal Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
32 |
.2 |
|
— |
|
Certification of Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
| |
+ |
Filed as an exhibit to Atlantic Holdings Registration Statement
on Form S-4 filed with the SEC on August 3, 2004, and
incorporated herein by reference. |
|
|
| ++ |
Filed as an exhibit to Atlantic Holdings’ Current Report on
Form 8-K filed with the SEC on November 11, 2004 and
incorporated herein by reference. |
(b) Reports on Form 8-K
During the quarter ended December 31, 2004, the Registrants
filed one Current Report on Form 8-K (Items 2.03, 8.01
and 9.01) on November 18, 2004.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrants have duly
caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized.
| |
|
|
|
|
| |
| |
|
|
|
ATLANTIC COAST ENTERTAINMENT
HOLDINGS, INC. |
| |
April 14, 2005
Date |
|
|
|
By: /s/ Denise Barton
Denise
Barton
Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the Registrants in the capacities and on the dates
indicated:
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ Carl C. Icahn
Carl
C. Icahn |
|
Chairman of the Board of Atlantic Coast Entertainment Holdings,
Inc. |
|
April 14,
2005 |
| |
/s/ Martin Hirsch
Martin
Hirsch |
|
Director of Atlantic Coast Entertainment Holdings, Inc. |
|
April 14,
2005 |
| |
/s/ John P. Saldarelli
John
P. Saldarelli |
|
Director of Atlantic Coast Entertainment Holdings, Inc. |
|
April 14,
2005 |
| |
Michael
L. Ashner |
|
Director of Atlantic Coast Entertainment Holdings, Inc. |
|
April 14,
2005 |
| |
/s/ Harold First
Harold
First |
|
Director of Atlantic Coast Entertainment Holdings, Inc. |
|
April 14,
2005 |
| |
/s/ Auguste E. Rimpel, Jr.
Auguste
E. Rimpel, Jr. |
|
Director of Atlantic Coast Entertainment Holdings, Inc. |
|
April 14,
2005 |
| |
/s/ Richard P. Brown
Richard
P. Brown |
|
Chief Executive Officer of Atlantic Coast Entertainment
Holdings, Inc. |
|
April 14,
2005 |
| |
/s/ Denise Barton
Denise
Barton |
|
Chief Financial Officer of Atlantic Coast Entertainment
Holdings, Inc. |
|
April 14,
2005 |
56
INDEX TO FINANCIAL STATEMENT SCHEDULE
Atlantic Coast Entertainment Holdings, Inc. And Subsidiary
— Schedule II; Valuation and Qualifying Accounts
57
SCHEDULE II
ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Additions | |
|
|
|
|
| |
|
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
|
Amounts | |
|
|
|
|
| |
|
Balance of |
|
|
|
Charged to | |
|
|
|
|
| |
|
Beginning of |
|
|
|
Costs and | |
|
|
|
Balance at | |
| |
|
Period |
|
Transfer In | |
|
Expenses | |
|
Deductions | |
|
End of Period | |
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
Year Ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
|
|
$ |
— |
|
|
$ |
4,587,000 |
|
|
$ |
62,000 |
|
|
$ |
(787,000 |
)(1) |
|
$ |
3,862,000 |
|
|
Allowance for obligatory
|
|
|
— |
|
|
|
11,992,000 |
|
|
|
508,000 |
|
|
|
— |
(2) |
|
|
12,500,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
— |
|
|
$ |
16,579,000 |
|
|
$ |
570,000 |
|
|
$ |
(787,000 |
) |
|
$ |
16,362,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Represents net write-offs of uncollectible accounts. |
| |
| (2) |
Represents write-offs of obligatory investments in connection
with the contribution of certain obligatory investments to CRDA
approved projects. |
58