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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
---------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission file number 33-69716
------------------------------------------------
GB PROPERTY FUNDING CORP.
GB HOLDINGS, INC.
GREATE BAY HOTEL AND CASINO, INC.
- --------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2502290
DELAWARE 75-2502293
NEW JERSEY 22-2242014
- ------------------------------------------ -------------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
c/o Sands Hotel & Casino
Indiana Avenue & Brighton Park
Atlantic City, New Jersey 08401
- ------------------------------------------ --------------------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (609) 441-4633
--------------------------
(Not Applicable)
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether each of the Registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
------ ------
Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
------ ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes No X
------ ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
Registrant Class Outstanding at November 7, 2003
- --------------------------------- ----------------------------- --------------------------------------
GB Property Funding Corp. Common stock, $1.00 par value 100 shares
GB Holdings, Inc. Common stock, $.01 par value 10,000,000 shares
Greate Bay Hotel and Casino, Inc. Common stock, no par value 100 shares
1
GB HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
September December 31,
2003 2002
----------------- ------------------
Current Assets:
Cash and cash equivalents $ 37,955,000 $ 50,645,000
Accounts receivable, net of allowances
of $6,598,000 and $11,301,000, respectively 4,361,000 4,976,000
Inventories 2,028,000 1,857,000
Income tax deposits 1,359,000 1,359,000
Prepaid expenses and other current assets 3,655,000 3,067,000
----------------- ------------------
Total current assets 49,358,000 61,904,000
----------------- ------------------
Property and Equipment:
Land 54,344,000 54,344,000
Buildings and improvements 92,747,000 91,657,000
Equipment 57,789,000 46,119,000
Construction in progress 1,318,000 3,597,000
----------------- ------------------
206,198,000 195,717,000
Less - accumulated depreciation and
amortization (36,319,000) (26,095,000)
----------------- ------------------
Property and equipment, net 169,879,00 169,622,000
----------------- ------------------
Other Assets:
Obligatory investments, net of allowances of
$10,802,000 and $10,028,000, respectively 10,903,000 10,069,000
Other assets 2,557,000 3,117,000
----------------- ------------------
Total other assets 13,460,000 13,186,000
----------------- ------------------
$ 232,697,000 $ 244,712,000
================= ==================
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.
2
GB HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
September 30, December 31,
2003 2002
------------------ -----------------
Current Liabilities
Accounts payable $ 4,591,000 $ 5,598,000
Accrued liabilities -
Salaries and wages 3,739,000 3,717,000
Interest 67,000 3,092,000
Gaming obligations 2,845,000 3,752,000
Self-insurance 2,117,000 1,805,000
Other 4,698,000 3,955,000
------------------ -----------------
Total current liabilities 18,057,000 21,919,000
------------------ -----------------
Long-Term Debt, net of current maturities 110,000,000 110,000,000
------------------ -----------------
Other Noncurrent Liabilities 3,656,000 3,445,000
------------------ -----------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value per share;
5,000,000 shares authorized; 0 shares outstanding - -
Common Stock, $.01 par value per share;
20,000,000 shares authorized;
10,000,000 shares issued and outstanding 100,000 100,000
Additional paid-in capital 124,900,000 124,900,000
Accumulated deficit (24,016,000) (15,652,000)
------------------ -----------------
Total shareholders' equity 100,984,000 109,348,000
------------------ -----------------
$ 232,697,000 $ 244,712,000
================== =================
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.
3
GB HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
--------------------------------
2003 2002
--------------- ---------------
Revenues:
Casino $ 48,907,000 $ 53,921,000
Rooms 3,115,000 2,870,000
Food and beverage 6,627,000 6,083,000
Other 1,047,000 897,000
--------------- ---------------
59,696,000 63,771,000
Less - promotional allowances (13,655,000) (13,974,000)
--------------- ---------------
Net revenues 46,041,000 49,797,000
--------------- ---------------
Expenses:
Casino 35,291,000 36,859,000
Rooms 605,000 377,000
Food and beverage 2,833,000 3,184,000
Other 992,000 651,000
General and administrative 2,630,000 2,988,000
Depreciation and amortization, including provision
for obligatory investments 4,114,000 3,776,000
(Gain) loss on disposal of assets (107,000) 24,000
--------------- ---------------
Total expenses 46,358,000 47,859,000
--------------- ---------------
Income (loss) from operations (317,000) 1,938,000
--------------- ---------------
Non-operating income (expense):
Interest income 136,000 308,000
Interest expense (3,003,000) (2,959,000)
--------------- ---------------
Total non-operating expense, net (2,867,000) (2,651,000)
--------------- ---------------
Loss before income taxes (3,184,000) (713,000)
Income tax provision (272,000) (193,000)
--------------- ---------------
Net loss $ (3,456,000) $ (906,000)
=============== ===============
Basic/diluted loss per common share $ (0.35) $ (0.09)
=============== ===============
Basic/diluted weighted average common shares outstanding 10,000,000 10,000,000
=============== ===============
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.
4
GB HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
September 30,
------------------------------------------
2003 2002
------------------ -----------------
Revenues:
Casino $ 142,193,000 $ 161,445,000
Rooms 8,530,000 8,665,000
Food and beverage 16,802,000 18,300,000
Other 3,010,000 2,875,000
------------------ -----------------
170,535,000 191,285,000
Less - promotional allowances (38,663,000) (38,662,000)
------------------ -----------------
Net revenues 131,872,000 152,623,000
------------------ -----------------
Expenses:
Casino 100,249,000 108,982,000
Rooms 1,635,000 2,497,000
Food and beverage 7,314,000 8,496,000
Other 2,380,000 2,059,000
General and administrative 7,891,000 9,932,000
Depreciation and amortization, including provision
for obligatory investments 11,792,000 10,641,000
Loss on impairment of fixed assets - 1,282,000
Gain on disposal of assets (104,000) (28,000)
------------------ -----------------
Total expenses 131,157,000 143,861,000
------------------ -----------------
Income from operations 715,000 8,762,000
------------------ -----------------
Non-operating income (expense):
Interest income 497,000 838,000
Interest expense (8,961,000) (8,641,000)
------------------ -----------------
Total non-operating expense, net (8,464,000) (7,803,000)
------------------ -----------------
Income (loss) before income taxes (7,749,000) 959,000
Income tax provision (615,000) (825,000)
------------------ -----------------
Net income (loss) $ (8,364,000) $ 134,000
================== =================
Basic/diluted income (loss) per common share $ (0.84) $ 0.01
================== =================
Weighted average common shares outstanding 10,000,000 10,000,000
================== =================
The accompanying notes to condensed consolidated financial statements are an
integral part of these consolidated financial statements.
5
GB HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
------------ ------------
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ (8,364,000) $ 134,000
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization, including provision
for obligatory investments 11,792,000 10,641,000
Loss on impairment of fixed assets -- 1,282,000
Gain on disposal of assets (104,000) (28,000)
Provision for doubtful accounts 858,000 1,253,000
Increase in income tax deposits -- (385,000)
(Decrease) increase in accounts receivable (243,000) 2,287,000
Decrease in accounts payable
and accrued liabilities (3,914,000) (6,172,000)
Increase in other current assets (765,000) (2,328,000)
Decrease in other noncurrent assets and liabilities 268,000 429,000
------------ ------------
Net cash (used in) provided by operating activities (472,000) 7,113,000
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (10,614,000) (12,729,000)
Proceeds from disposition of assets 110,000 79,000
Proceeds from sale of investments -- 213,000
Purchase of obligatory investments (1,714,000) (1,995,000)
------------ ------------
Net cash used in investing activities (12,218,000) (14,432,000)
------------ ------------
FINANCING ACTIVITIES:
Repayments of long-term debt -- (13,000)
------------ ------------
Net cash used in financing activities -- (13,000)
------------ ------------
Net decrease in cash and cash equivalents (12,690,000) (7,332,000)
Cash and cash equivalents at beginning of period 50,645,000 57,369,000
------------ ------------
Cash and cash equivalents at end of period $ 37,955,000 $ 50,037,000
============ ============
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated financial statements.
6
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization, Business and Basis of Presentation
The condensed consolidated financial statements include the accounts of
GB Holdings, Inc. and subsidiaries ("Holdings" or the "Company"). All
significant intercompany transactions and balances have been eliminated in
consolidation. In management's opinion, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the condensed
consolidated financial position as of September 30, 2003 and the condensed
consolidated results of operations for the three and nine months ended September
30, 2003 and 2002 have been made. The results set forth in the condensed
consolidated statement of operations for the nine months ended September 30,
2003 are not necessarily indicative of the results to be expected for the full
year.
The condensed consolidated financial statements were prepared following
the requirements of the Securities and Exchange Commission ("SEC") for interim
reporting. As permitted under those rules, certain footnotes or other financial
information that are normally required by accounting principles generally
accepted in the United States of America ("US GAAP") can be condensed or
omitted.
The Company is responsible for the unaudited financial statements
included in this document. As these are condensed financial statements, they
should be read in conjunction with the consolidated financial statements and
notes included in the Company's latest Form 10-K.
(2) Income Taxes
The components of the provision for income taxes are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ----------
Federal income tax provision:
Current $ -- $ 417,000 $ -- $(215,000)
Deferred -- -- -- --
State income tax provision:
Current (272,000) (610,000) (615,000) (610,000)
Deferred -- -- -- --
--------- --------- --------- ---------
$(272,000) $(193,000) $(615,000) $(825,000)
========= ========= ========= =========
Federal and State income tax benefits or provisions are based upon the
results of operations for the current period and the estimated adjustments for
income tax purposes of certain nondeductible expenses.
7
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Due to recurring losses, the Company has not recorded a Federal income
tax benefit for the nine months ended September 30, 2003. Management is unable
to determine that realization of the Company's deferred tax assets are more
likely than not, and thus has provided a valuation allowance for the entire
amount.
On July 1, 2003, the State of New Jersey enacted certain legislation
that established a 7.5% tax on a casino's calendar year 2002 adjusted net
income, as defined in the legislation (the "Casino Income Tax"). The Casino
Income Tax is payable annually at a minimum of $350,000 per casino from July
2003 through and including June 2006. Since Greate Bay Hotel and Casino, Inc.
("Operating") operated at an adjusted net loss in 2002, it is subject to the
minimum annual Casino Income Tax. This tax is payable in equal quarterly
installments of $87,500. Casinos can receive a portion of this amount in the
form of a distribution from the Casino Reinvestment Development Authority
("CRDA") for approved capital construction projects. Eligible projects include
expansions that "increase the square footage of retail space, parking spaces, or
hotel rooms or to create a significant physical amenity or improvement."
The State income tax provision of $272,000 and $615,000 for the three
and nine months ended September 30, 2003, respectively, is a combination of
applying the statutory Alternative Minimum Assessment rate of 0.4% to gross
receipts, as defined in the Business Tax Reform Act ($127,500 and $610,000 for
the three months ended September 30, 2003 and 2002, respectively and $527,000
and $610,000 for the nine months ended September 30, 2003 and 2002,
resepctively) and one-quarter of the minimum Casino Income Tax ($87,500).
(3) Transactions with Related Parties
Operating's rights to the trade name "Sands" (the "Trade Name") are
derived from an agreement between Cyprus LLC and Larch LLC (collectively, "High
River") and an unaffiliated third party. High River is controlled by Carl C.
Icahn. Operating was assigned by High River the rights under a certain agreement
with the owner of the Trade Name to use the Trade Name as of September 29, 2000
through May 19, 2086 subject to termination rights for a fee after a certain
minimum term. High River received no payments for its assignment of these
rights. Amounts payable by Operating for these rights were equal to the amounts
paid to the unaffiliated third party. Payment is made directly to the owner of
the Trade Name. Such charges amounted to $203,000 and $212,000, respectively,
for the nine months ended September 30, 2003 and 2002 and $71,000 and $75,000,
respectively for the three months ended September 30, 2003 and 2002.
The Stratosphere Casino Hotel & Tower (the "Stratosphere"), an entity
controlled by Carl C. Icahn, allocates a portion of certain executive salaries,
including the salary of Richard P. Brown, as well as other charges for tax
preparation, legal fees, travel and entertainment to Operating. Payments for
such charges incurred from the Stratosphere for the three and nine months ended
September 30, 2003 amounted to $35,000 and $143,000, respectively. There were no
similar charges for the nine months ended September 30, 2002.
On February 28, 2003, Operating entered into a two year agreement with
XO New Jersey, Inc. a long-distance phone carrier controlled by Carl C. Icahn.
The agreement can be extended beyond the minimum two year term on a
month-to-month basis. Payments for such charges incurred for the three and nine
months ended September 30, 2003 amounted to $43,000 and $48,000, respectively.
8
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(4) Legal Proceedings
Tax appeals on behalf of the Company and the City of Atlantic City
challenging the amount of the Company's real property assessments for tax years
1996 through 2003 are pending before the NJ Tax Court.
In 2001, the Company discovered certain failures relating to currency
transaction reporting and self-reported the situation to the applicable
regulatory agencies. The Company conducted an internal examination of the matter
and the New Jersey Division of Gaming Enforcement conducted a separate review.
The Company has revised internal control processes and taken other measures to
address the situation. In May 2003, the Company was advised by the Department of
the Treasury that it will not pursue a civil penalty.
On February 26, 2003, the Company received a letter from counsel for
Mr. Frederick H. Kraus, Executive Vice President, General Counsel and Secretary,
indicating that he had been retained to represent Mr. Kraus "in regards to a
constructive discharge, breach of contract, severance pay" and other claims.
This matter was amicably resolved in July 2003.
The Company is a party in various legal proceedings with respect to the
conduct of casino and hotel operations and has received employment related
claims. Although a possible range of losses cannot be estimated, in the opinion
of management, based upon the advice of counsel, the Company does not expect
settlement or resolution of these proceedings or claims to have a material
adverse impact upon the consolidated financial position or results of operations
of the Company, but the outcome of litigation and the resolution of claims is
subject to uncertainties and no assurances can be given. The accompanying
condensed consolidated financial statements do not include any adjustments that
might result from these uncertainties.
(5) Income (Loss) Per Share
Statement of Financial Accounting Standards No. 128: "Earnings Per
Share", requires, among other things, the disclosure of basic and diluted
earnings per share for public companies. Since the capital structure of the
Company is simple, in that no potentially dilutive securities were outstanding
during the periods presented, basic and diluted income (loss) per share are the
same. Basic and diluted income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding.
9
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(6) Supplemental Cash Flow Information
Cash paid for interest and income taxes during the nine months ended
September 30, 2003 and 2002 are set forth below:
Nine Months Ended
September 30,
-------------------------------
2003 2002
----------- -----------
Interest paid $12,100,000 $12,127,000
----------- -----------
Interest capitalized $ 287,000 $ 676,000
----------- -----------
Income taxes paid $ 463,000 $ 1,566,000
----------- -----------
(7) New Accounting Pronouncement
On January 1, 2003, the Company adopted FAS No. 143, "Asset Retirement
Obligations" ("FAS No. 143"), which provides the accounting requirements for
retirement obligations associated with tangible long-lived assets. This
statement requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. The adoption of FAS
No. 143 did not have any impact on the Company's condensed consolidated
financial statements.
(8) Subsequent Events
On July 14, 2003, a Form 8-K was filed with the SEC reporting that a
committee of the independent directors of the Company approved a proposed
restructuring of the Company's $110 million notes due September 29, 2005 that
bear interest at 11% (the "Existing Notes") together with various other
corporate changes to be accomplished in connection with the proposed
restructuring.
In connection with the foregoing, on November 13, 2003, Atlantic Coast
Entertainment Holdings, Inc. ("Atlantic"), a newly formed wholly owned
subsidiary of Operating, filed with the SEC, a Registration Statement on Form
S-4 (which contains a preliminary prospectus), under the Securities Act of 1933,
as amended (the "Securities Act"), to transfer substantially all of the assets
of the Company to Atlantic and the registration of certain securities to be
issued to the stockholders of the Company; and, also on such date, Atlantic and
ACE Gaming, LLC, a newly formed wholly owned subsidiary of Atlantic, filed with
the SEC, a Registration Statement on Form S-4 under the Securities Act, with
respect to a consent solicitation and exchange offer with respect to the
Existing Notes. Neither of such Registration Statements have been declared
effective. The Company and Atlantic also filed with the SEC a schedule 13e-3,
under the Securities and Exchange Act of 1934, with respect to such
transactions.
10
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On November 12, 2003, the Company, GB Property Funding Corp.
("Funding"), a wholly owned subsidiary of the Company, and Operating announced
that they have filed an application to voluntarily delist the Existing Notes
from trading on the American Stock Exchange ("Amex") and have asked Amex to
suspend trading of the Notes if and at the time that the SEC grants the
application to withdraw the Existing Notes from listing. At this time, the
Company, Funding, and Operating do not know whether the SEC will grant the
application and if it does, when that will occur.
11
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
about the business, financial condition and prospects of the Company. The actual
results could differ materially from those indicated by the forward-looking
statements because of various risks and uncertainties. Such risks and
uncertainties are beyond management's ability to control and, in many cases,
cannot be predicted by management. When used in this Quarterly Report on Form
10-Q, the words "believes", "estimates", "anticipates", "expects", "intends" and
similar expressions as they relate to the Company or its management are intended
to identify forward-looking statements (see "Private Securities Litigation
Reform Act" below).
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
At September 30, 2003, GB Holdings, Inc. and Subsidiaries (the
"Company") had cash and cash equivalents of $38.0 million. The Company used
$472,000 of net cash from operations during the nine months ended September 30,
2003 compared to generating $7.1 million during the same prior year period.
On July 1, 2003, the State of New Jersey enacted certain legislation
that established a 7.5% tax on a casino's calendar year 2002 adjusted net
income, as defined in the legislation (the "Casino Income Tax"). The Casino
Income Tax is payable annually at a minimum of $350,000 per casino from July
2003 through and including June 2006. Since the Greate Bay Hotel and Casino,
Inc. ("Operating") operated at an adjusted net loss in 2002, it is subject to
the minimum annual Casino Income Tax. This tax is payable in equal quarterly
installments of $87,500. Casinos can receive a portion of this amount in the
form of a distribution from the Casino Reinvestment Development Authority
("CRDA") for approved capital construction projects. Eligible projects include
expansions that "increase the square footage of retail space, parking spaces, or
hotel rooms or to create a significant physical amenity or improvement."
Also enacted on July 1, 2003, was legislation to tax complimentaries at
a rate of 4.25% of their retail value, as defined. The minimum complimentary tax
each casino will have to pay is equivalent to the tax it would have paid in
calendar year 2002 if this tax were already in existence. In addition, parking
fees payable to the State of New Jersey increased from $1.50 per vehicle to
$3.00 per vehicle. The legislation also disallows deduction of uncollectible
gaming receivables in calculating the gross revenue tax on gambling winnings.
Management estimates the impact of these new taxes, fees and calculations to be
approximately $725,000 over the four quarters beginning July 1, 2003. The
incremental cost of the new taxes, fees and calculations includes $350,000 for
the Casino Income tax, approximately $260,000 for taxes on complimentaries and
increased parking fees and approximately $115,000 attributable to the
disallowance of deducting uncollectible gaming receivables for gross revenue tax
purposes.
Investing Activities
Capital expenditures at the Sands Hotel and Casino ("The Sands") for the
nine months ended September 30, 2003 amounted to approximately $10.6 million.
These capital expenditures included, but were not limited to, the new 'Swingers'
Lounge, Pacific Avenue bus center, and lobby and the Platinum Club
players lounge. In order to enhance its competitive position in the market
place, the Sands may determine to incur additional substantial costs and
expenses to maintain, improve and expand its facilities and operations. The
Company may require additional financing in connection with those activities.
12
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The Sands is required by the Casino Act to make certain quarterly
deposits based on gross revenue with the CRDA in lieu of a certain investment
alternative tax. Deposits for the nine months ended September 30, 2003 amounted
to $1.7 million.
Financing Activities
There were no financing activities during the nine months ended
September 30, 2003. As of September 30, 2003, the only scheduled payment of
long-term debt is the Existing Notes.
On July 14, 2003, a Form 8-K was filed with the SEC reporting that a
committee of the independent directors of the Company approved a proposed
restructuring of the Company's $110 million notes due September 29, 2005 that
bear interest at 11% (the "Existing Notes"), together with various other
corporate changes to be accomplished in connection with the proposed
restructuring.
In connection with the foregoing, on November 13, 2003, Atlantic Coast
Entertainment Holdings, Inc. ("Atlantic"), a newly formed wholly owned
subsidiary of Operating, filed with the SEC, a Registration Statement on Form
S-4 (which contains a preliminary prospectus), under the Securities Act of 1933,
as amended (the "Securities Act"), to transfer substantially all of the assets
of the Company to Atlantic and the registration of certain securities to be
issued to the stockholders of the Company; and, also on such date, Atlantic and
ACE Gaming, LLC, a newly formed wholly owned subsidiary of Atlantic, filed with
the SEC, a Registration Statement on Form S-4 under the Securities Act, with
respect to a consent solicitation and exchange offer with respect to the
Existing Notes. Neither of such Registration Statements have been declared
effective. The Company and Atlantic also filed with the SEC a schedule 13e-3,
under the Securities and Exchange Act of 1934, with respect to such
transactions.
13
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
On November 12, 2003, the Company, GB Property Funding Corp.
("Funding"), a wholly owned subsidiary of the Company, and Operating announced
that they have filed an application to voluntarily delist the Existing Notes
from trading on the American Stock Exchange ("Amex") and have asked Amex to
suspend trading of the Notes if and at the time that the Securities and Exchange
Commission ("SEC") grants the application to withdraw the Existing Notes from
listing. At this time, the Company, Funding, and Operating do not know whether
the SEC will grant the application and if it does, when that will occur.
Summary
Management believes that cash flows to be generated from operations
during 2003, as well as available cash reserves, will be sufficient to meet its
operating plan and provide for scheduled capital expenditures of approximately
$3.8 million for the remaining three months of 2003 and for the next twelve
months. However, any significant other capital expenditures may require
additional financing.
14
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its results of operations and
financial condition are based upon its condensed consolidated financial
statements that have been prepared in accordance with generally accepted
accounting principles in the United States of America ("US GAAP"). The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities. Estimates and assumptions are evaluated on an ongoing
basis and are based on historical and other factors believed to be reasonable
under the circumstances. The results of these estimates may form the basis of
the carrying value of certain assets and liabilities and may not be readily
apparent from other sources. Actual results, under conditions and circumstances
different from those assumed, may differ from estimates. The impact and any
associated risks related to estimates, assumptions, and accounting policies are
discussed within Management's Discussion and Analysis of Results of Operations
and Financial Condition, as well as in the Notes to the Condensed Consolidated
Financial Statements, if applicable, where such estimates, assumptions, and
accounting policies affect the Company's reported and expected financial
results.
The Company believes the following accounting policies are critical to
its business operations and the understanding of results of operations and
affect the more significant judgments and estimates used in the preparation of
its condensed consolidated financial statements:
Allowance for Doubtful Accounts - The Company maintains accounts
receivable allowances for estimated losses resulting from the inability of its
customers to make required payments. Additional allowances may be required if
the financial condition of the Company's customers deteriorates.
Commitments and Contingencies - Litigation - On an ongoing basis, the
Company assesses the potential liabilities related to any lawsuits or claims
brought against the Company. While it is typically very difficult to determine
the timing and ultimate outcome of such actions, the Company uses its best
judgment to determine if it is probable that it will incur an expense related to
the settlement or final adjudication of such matters and whether a reasonable
estimation of such probable loss, if any, can be made. In assessing probable
losses, the Company makes estimates of the amount of insurance recoveries, if
any. The Company accrues a liability when it believes a loss is probable and the
amount of loss can be reasonably estimated. Due to the inherent uncertainties
related to the eventual outcome of litigation and potential insurance recovery,
it is possible that certain matters may be resolved for amounts materially
different from any provisions or disclosures that the Company has previously
made.
Impairment of Long-Lived Assets - The Company periodically reviews
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Assumptions and estimates used in the determination of impairment losses, such
as future cash flows and disposition costs, may affect the carrying value of
long-lived assets and possible impairment expense in the Company's condensed
consolidated financial statements.
Self-Insurance - The Company retains the obligation for certain losses
related to customer's claims of personal injuries incurred while on the Company
property as well as workers compensation claims beginning in 2002 and
major-medical claims for non-union employees in 2003. The Company accrues for
outstanding reported claims, claims that have been incurred but not reported and
projected claims based upon management's estimates of the aggregate liability
for uninsured claims using historical experience, an adjusting company's
estimates and the estimated trends in claim values. Although management believes
it has the ability to adequately project and record estimated claim payments, it
is possible that actual results could differ significantly from the recorded
liabilities.
15
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Allowance for Obligatory Investments - The Company maintains obligatory
investment allowances for its investments made in satisfaction of its CRDA
obligation. The obligatory investments may ultimately take the form of CRDA
issued bonds, which bear a below market rate of interest, direct investments or
donations. Management bases its reserves on the type of investments the
obligation has taken or is expected to take. CRDA bonds bear interest at
approximately one-third below market rates. Donations of The Sands' quarterly
deposits to the CRDA have historically yielded a 51% future credit or refund of
obligations. Therefore, management has reserved the predominant balance of its
obligatory investments at between 33% and 49%.
RESULTS OF OPERATIONS
Gaming Operations
Information contained herein, regarding Atlantic City casinos other than
The Sands, was obtained from reports filed with the Casino Control Commission.
16
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table sets forth certain unaudited financial and operating
data relating to The Sands' and all other Atlantic City casinos' capacities,
volumes of play, hold percentages and revenues:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------- ------------- ------------
(Dollars in Thousands) (Dollars in Thousands)
Units: (at end of period)
Table Games - Sands 71 26 71 26
- Atlantic City 1,304 1,062 1,304 1,062
(ex. Sands)
Slot Machines - Sands 2,205 2,434 2,205 2,434
- Atlantic City 40,185 35,810 40,185 35,810
(ex. Sands)
Gross Wagering (1)
Table Games - Sands $ 63,826 $ 43,826 $ 162,141 $ 203,175
- Atlantic City 1,981,991 1,863,754 5,115,909 5,087,418
(ex. Sands)
Slot Machines - Sands 517,397 588,045 1,511,277 1,728,627
- Atlantic City 11,136,772 10,738,490 29,670,141 29,403,374
(ex. Sands)
Hold Percentages (2)
Table Games - Sands 13.7% 14.3% 14.3% 14.9%
- Atlantic City 15.3% 15.6% 16.1% 15.9%
(ex. Sands)
Slot Machines - Sands 7.7% 8.1% 7.8% 7.5%
- Atlantic City 8.2% 8.0% 8.1% 8.1%
(ex. Sands)
Revenues (2)
Table Games - Sands $ 8,725 $ 6,287 $ 23,129 $ 30,212
- Atlantic City 302,590 289,817 822,834 807,234
(ex. Sands)
Slot Machines - Sands 39,857 47,441 118,278 133,029
- Atlantic City 916,919 862,679 2,416,733 2,379,205
(ex. Sands)
Other (3) - Sands 325 193 786 1,204
- Atlantic City N/A N/A N/A N/A
(ex. Sands)
- ---------------------------
(1) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (the "Drop") and coins wagered
in slot machines (the "Handle").
(2) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the
"hold percentage." The Sands' hold percentages and revenues are
reflected on an accrual basis. Comparable accrual basis data for the
remainder of the Atlantic City gaming industry as a whole is not
available; consequently, industry hold percentages and revenues are
based on information available from the Commission.
(3) Consists of revenues from poker and simulcast horse racing wagering.
Comparable information for the remainder of the Atlantic City gaming
industry is not available.
17
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Patron Gaming Volume
Information contained herein, regarding Atlantic City casinos other than
The Sands, was obtained from reports filed with the Commission.
For the three and nine months ended September 30, 2003, the table game
drop increased $20.0 million (45.6%) and decreased $41.0 million (20.2%)
compared to the comparable periods in 2002. These results are compared to the
Atlantic City Industry table drop results of an increase of $118.2 million
(6.3%) and $28.4 million (0.6%) for the three months and nine months ended
September 30, 2003, respectively, compared to the same periods in 2002. By the
third quarter of 2003, the Company reestablished its non-poker table games to 61
units compared to 26 units in the prior year. It was during May of 2002 that the
Company reduced its table games and related business for the purpose of focusing
entirely on the mass slot customer business. The Company changed its business
strategy in late 2002 to refocus on the mid to high-end slot customer along with
a balanced table game business. By the third quarter of 2003, the Company's
focus on table games increased with its emphasis toward mid to high-end patrons
as well. This increased emphasis resulted in the sharp increase in table game
wagering during the third quarter of 2003 and helped mitigate the decrease for
the nine month period ended September 30, 2003 compared to the comparable period
in 2002, despite the opening of a new competitor in July 2003. Table game hold
percentage for the Company decreased by 0.6 percentage points to 13.7% and
decreased by 0.5 percentage points to 14.3% for the three and nine month periods
ended September 30, 2003, respectively, compared to the same periods in 2002.
Slot machine handle for the Company decreased $70.6 million (12.0%) and
$217.4 million (12.6%) for the three and nine month periods ended September 30,
2003, respectively, compared to the same periods in 2002. By comparison, the
percentage increase in slot machine handle for all other Atlantic City casinos
for the three and nine month periods in 2003 compared to the same periods in
2002 was 3.7% and 1.0%, respectively. The Company's 2003 decrease in handle is
attributed to (i) reduced hotel room occupancy from the tour and travel groups
during mid-week, a carryover effect from the focus on mass slot play, during the
first three months of 2003; (ii) the heavy weighting of lower denomination slot
machines remaining from the 2002 mass customer strategy, during the first 6
months of 2003, (iii) the change in strategy from early 2002 of a "Lowest Slot
Hold Percentage" to a more competitive hold percentage in 2003, and (iv)
increased competition from the opening of a new casino, the Borgata, in the
beginning of the third quarter of 2003. During June 2003, the Company shifted
its weighting of denomination of slot machine units back toward the mid to
high-end levels. The decrease in hold percentage from 8.2% to 7.7% during the
third quarter of 2003 compared to the same period in 2002 is a result of the
reduction in the mass business due to the increased competition from the
Borgata. The mass business generates a higher hold percentage due to their
preference of the lower denomination games. Typically the third quarter
generates a high amount of mass business from non-loyal customers. This customer
level decreased during the third quarter 2003 compared to the same period in
2002. The increase in the slot hold percentage from 7.7% to 7.8% for the nine
month period ended September 30, 2003 compared to the same period in 2002 is
primarily the result of The Sands strategy in 2002 of a "Loosest Slot Hold
Percentage." This strategy ended in the second quarter of 2002.
18
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table sets forth the changes in operating revenues and
expenses (unaudited) for the three month and nine month periods ended September
30, 2003 and 2002:
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- ---------------------------------------------
Increase (Decrease) Increase (Decrease)
2003 2002 $ % 2003 2002 $ %
--------- --------- --------- ------- --------- --------- --------- ----------
(Dollars In Thousands)
Revenues:
Casino $ 48,907 $ 53,921 $ (5,014) $ (9.30) $ 142,193 $ 161,445 $ (19,252) $ (11.92)
Rooms 3,115 2,870 245 8.54 8,530 8,665 (135) (1.56)
Food and Beverage 6,627 6,083 544 8.94 16,802 18,300 (1,498) (8.19)
Other 1,047 897 150 16.72 3,010 2,875 135 4.70
Promotional Allowances 13,655 13,974 (319) (2.28) 38,663 38,662 1 0.00
Expenses:
Casino 35,291 36,859 (1,568) (4.25) 100,249 108,982 (8,733) (8.01)
Rooms 605 377 228 60.48 1,635 2,497 (862) (34.52)
Food and Beverage 2,833 3,184 (351) (11.02) 7,314 8,496 (1,182) (13.91)
Other 992 651 341 52.38 2,380 2,059 321 15.59
General and Administrative 2,630 2,988 (358) (11.98) 7,891 9,932 (2,041) (20.55)
Depreciation and Amortization 4,114 3,776 338 9.00 11,792 10,641 1,151 10.82
Loss on impairment of fixed assets -- -- -- -- -- 1,282 (1,282) (100.00)
Loss (gain) on disposal of assets (107) 24 (131) (545.83) (104) (28) (76) (271.43)
Income from Operations (317) 1,938 (2,255) (116.36) 715 8,762 (8,047) (91.84)
Non-operating expense, net 2,867 2,651 216 8.15 8,464 7,803 661 8.47
Income Tax Provision (272) (193) 79 40.93 (615) (825) (210) (25.45)
Net income (loss) $ (3,456) $ (906) $ (2,550) $(281.46) $ (8,364) $ 134 $ (8,498) $(6,341.79)
Revenues
Overall casino revenues decreased $5.0 million (9.3%) and $19.3 million
(11.9%) for the three and nine-month periods ended September 30, 2003,
respectively, compared to the same periods in 2002. The decreases in casino
revenues are attributable to the changes in table game drop and slot machine
handle as described above, along with the related changes in hold percentage.
The decrease in rooms revenue for the nine months ended September 30,
2003 compared to the same period in 2002 is directly attributable to a decrease
in the average room rate for the period. The average rate reduction is a direct
result of the tour and travel rooms sold being below the prior year period. In
2002, the Company had eliminated the tour and travel business. This segment was
targeted beginning in 2003; however, the benefits of this targeting did not
generate more rooms to this segment until the third quarter of 2003. The
increase in room revenue for the three months ended September 30, 2003 over the
prior 2002 period is attributable to an increase in average room rate driven by
an increase in the cash sales rooms from transient and tour and travel activity
during this period. In the 2002 period, the Company had eliminated the tour and
travel segment, however, this segment focus was reinstituted in 2003.
19
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Food and beverage revenues increased $544,000 (8.9%) and decreased $1.5
million (8.2%) for the three and nine-month periods ended September 30, 2003,
respectively, compared to the same periods in 2002. These variances are
attributable to the level of general casino volume and emphasis on the mid to
high-end gaming segment. As the Company has moved more to the mid to high-end
gaming segment in 2003, the food and beverage product has been employed more to
service this customer.
Other revenues increased $150,000 (16.7%) and $135,000 (4.7%) for the
three and nine-month periods ended September 30, 2003, respectively, compared to
the same periods in 2002. These increases are primarily attributable to more
entertainment shows in the Copa Room. The increase in entertainment shows is a
direct result of the Company's focus on the mid to high level gaming patron.
Promotional Allowances
Promotional allowances are comprised of (i) the estimated retail value
of goods and services provided free of charge to casino customers under various
marketing programs, (ii) the cash value of redeemable points earned under a
customer loyalty program based on the amount of slot play, and (iii) coin and
cash coupons and discounts. The dollar amount of promotional allowances
decreased $319,000 (2.3%) and remained flat for the three and nine-month periods
ended September 30, 2003, respectively, compared to the same periods in 2002. As
a percentage of casino revenues, promotional allowances increased to 27.9% from
25.9% and to 27.2 % from 23.9% for the three and nine-month periods ended
September 30, 2003, respectively, compared to the same periods in 2002. The
increase in this ratio is directly attributable to the Company's focus on
recapture of lost market share related to its table game enhancement and refocus
on the mid to high end slots.
Departmental Expenses
Casino expenses at The Sands decreased by $1.6 million and $8.7 million,
respectively, for the three and nine months ended September 30, 2003 compared to
the same prior year period. The decrease in casino expenses for the nine months
ended September 30, 2003 is primarily due to the reduction of payroll expense
($2.6 million) as a result of fewer table games in operation in 2003 compared to
the same prior year period. For the three months ended September 30, 2003
compared to the same prior year period, payroll expense remained flat at $7.2
million as savings in casino salary and wages were offset by increases in
marketing payroll and overall benefits. Lower complimentary costs associated
with amenities provided free of charge also contributed to the favorable
variance ($1.4 million and $2.7 million for the three and nine months ended
September 30, 2003, respectively). Expenses allocated to the casino department
were lower by $42,000 and $1.8 million for the three and nine months ended
September 30, 2003, respectively, as a result of overall cost reductions in
other operating departments. Gaming revenue tax was reduced by $396,000 and $1.5
million for the three and nine months ended September 30, 2003, respectively, as
a result of lower casino revenues. Radio advertising increased by $334,000 and
$761,000 for the three and nine months ended September 30, 2003, respectively,
due to a marketing campaign aimed at establishing the new Sands "All The Way"
image in key markets.
20
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Rooms expenses increased $228,000 and decreased $862,000 for the three
and nine months ended September 30, 2003 compared to the same prior year period.
Rooms payroll and benefits decreased $286,000 and $832,000 for the three and
nine months ended September 30, 2003, respectively, due to a reorganization of
management. Also contributing to the favorable variance were reduced costs for
linen usage ($21,000 and $85,000 for the three and nine months ended September
30, 2003, respectively) and outside laundry expense ($25,000 and $61,000 for the
three and nine months ended September 30, 2003, respectively). The third quarter
increases were due to a smaller share of costs allocated to casino expenses
($614,000) as a result of decreased room costs associated with complimentaries
generated by casino operations.
Food and beverage expenses decreased $351,000 and $1.2 million,
respectively, for the three and nine months ended September 30, 2003 compared to
the same prior year period. The decreases were due to reductions in payroll and
benefits ($174,000 and $2.7 million for the three and nine months ended
September 30, 2003, respectively), which were a result of a reorganization of
management and a reduction in unproductive operating hours in certain outlets.
Year to date food cost of sales were down $1.0 million due to a reengineering of
menus in gourmet and buffet outlets to reduce food costs. The year to date
favorable variances were offset negatively by lower allocable costs to the
casino department as a result of both lower volume and increased cost
containment.
Other expenses increased $341,000 and $321,000 for the three months and
nine months ended September 30, 2003, respectively, compared to the same prior
year period. The increase is primarily due to higher entertainment costs
($702,000 and $896,000, respectively) for the three and nine months ended
September 30, 2003 compared to the same prior year periods, due to more shows
with increased costs for headliners. These costs were offset by favorable
variances in payroll ($171,000 and $385,000) for the three and nine months ended
September 30, 2003, respectively, compared to the same prior year period due to
reduction in staffing.
General and Administrative Expenses
General and administrative expenses decreased $358,000 and $2.0 million,
respectively, for the three and nine months ended September 30, 2003, compared
to the same prior year periods. The decreases were due to lower payroll and
benefits as a result of a reduction in workforce at the beginning of 2003
($482,000 and $1.9 million for the three and nine months ended September 30,
2003, respectively) and the cost of a 2002 severance package ($268,000 and $1.3
million, for the three and nine months ended September 30, 2002, respectively)
that had no comparable cost in 2003. The year to date favorable variance was
offset by a reduction of allocable costs to operating departments ($1.5 million)
for the nine months ended September 30, 2003 compared to the same prior year
period. This was due to a lower allocable base as a result of cost reductions.
21
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Depreciation and Amortization, including Provision for Obligatory
Investments
Depreciation and amortization expense increased $1.2 million for the
nine month period ended September 30, 2003, compared to the same prior year
period due to an increase in depreciation expense ($1.3 million) as a result of
the continued investment in infrastructure and equipment during the current and
preceding year. These were offset by lower amortization of CRDA losses
($197,000) as a result of reduced casino revenues.
Interest Income and Expense
Interest income decreased by $172,000 and $341,000, respectively, during
the three and nine month periods ended September 30, 2003, compared to the same
prior year periods. The decrease was due to reduced earnings on decreased cash
reserves and lower interest rates.
Interest expense increased $44,000 and $320,000, respectively, during
the three and nine month periods ended September 30, 2003, compared to the same
periods in 2002. The increase is due to a lower accrual of capitalized interest
in 2003 ($288,000) compared to 2002 ($676,000). This was due to lower amounts of
construction in progress during 2003 than in 2002. Slightly reducing the
increases to interest expense were the discontinuation of interest expense as a
result of the donation of the Texas Avenue property in October 2002, coupled
with the satisfaction of debt in July 2003 associated with the Claridge
Administration building.
Income Tax (Provision) Benefit
Federal and State income tax benefits or provisions are based upon the
results of operations for the current period and the estimated adjustments for
income tax purposes of certain nondeductible expenses.
Due to recurring losses, the Company has not recorded a Federal income
tax benefit for the nine months ended September 30, 2003 and 2002. Management is
unable to determine that realization of the Company's deferred tax assets are
more likely than not, and thus has provided a valuation allowance for the entire
amount.
On July 1, 2003, the State of New Jersey enacted certain legislation
that established a 7.5% tax on a casino's calendar year 2002 adjusted net
income, as defined in the legislation (the "Casino Income Tax"). The Casino
Income Tax is payable annually at a minimum of $350,000 per casino from July
2003 through and including June 2006. Since the Operating operated at an
adjusted net loss in 2002, it is subject to the minimum annual Casino Income
Tax. This tax is payable in equal quarterly installments of $87,500. Casinos can
receive a portion of this amount in the form of a distribution from the CRDA for
approved capital construction projects. Eligible projects include expansions
that "increase the square footage of retail space, parking spaces, or hotel
rooms or to create a significant physical amenity or improvement."
The State income tax provision of $615,000 for the nine months ended
September 30, 2003 is a combination of applying the statutory Alternative
Minimum Assessment rate of 0.4% to gross receipts, as defined in the Business
Tax Reform Act ($527,000) and one-quarter of the minimum Casino Income Tax
($87,500).
22
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Inflation
Management believes that, in the near term, modest inflation and
increased competition within the gaming industry for qualified and experienced
personnel will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
Seasonality
Historically, The Sands' operations have been highly seasonal in nature,
with the peak activity occurring from May to September. Consequently, the
results of operations for the first and fourth quarters are traditionally less
profitable than the other quarters of the fiscal year. In addition, The Sands'
operations may fluctuate significantly due to a number of factors, including
chance. Such seasonality and fluctuations may materially affect casino revenues
and profitability.
Private Securities Litigation Reform Act
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q and other materials filed or to be filed by Holdings, Funding or
Operating with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made by such companies)
contains statements that are forward-looking, such as statements relating to
future expansion plans, future construction costs and other business development
activities including other capital spending, economic conditions, financing
sources, competition and the effects of tax regulation and state regulations
applicable to the gaming industry in general or Holdings, Funding and Operating
in particular. Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results in the future
and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of Holdings, Funding or
Operating. 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).
23
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Risk Factors Related to the Business of The Company
The Company's quarterly operating results are subject to fluctuations and
seasonality, and if the Company fails to meet the expectations of securities
analysts or investors, the Company's share price may decrease significantly.
The Company's quarterly operating results are highly volatile and
subject to unpredictable fluctuations due to unexpectedly high or low losses,
changing customer tastes and trends, unpredictable patron gaming volume, the
proportion of table game revenues to slot game revenues, weather and
discretionary decisions by The Sands' patrons regarding frequency of visits and
spending amounts. The Company's operating results for any given quarter may not
meet analyst expectations or conform to the operating results of the Company's
local, regional or national competitors. If the Company's operating results do
not conform to such expectations our share price will be adversely affected.
Conversely, favorable operating results in any given quarter may be followed by
an unexpected downturn in subsequent quarters.
The Company will 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 Sands. 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 the Company is unable to borrow funds
for such purposes. In addition, the indentures governing the Existing Notes
limit the Company's ability to make capital expenditures.
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
carryforwards 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 nine month period ended September 30, 2003, there was a charge
to operations of $527,000 million related to the impact of the New Jersey
Business Tax Reform Act.
24
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
On July 1, 2003, the State of New Jersey amended the New Jersey Casino
Control Act (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
complementaries, 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 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 transferred to the CRDA; (v) an increase of the minimum casino
hotel parking charge from $2 to $3, 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.
Future changes in state taxation of casino gaming companies in
jurisdictions in which the Company operates cannot be predicted and any such
changes could adversely affect The Company's profitability.
The Company's former use of Arthur Andersen LLP as its independent public
accountants may pose risks to Parent and the Company and will limit your ability
to seek potential recoveries from Arthur Andersen LLP related to their work.
Arthur Andersen LLP, independent certified public accountants, were
engaged as the principal accountants to audit the Company's consolidated
financial statements until the Parent Company dismissed them on May 16, 2002 and
engaged KPMG LLP. In May 2002, Arthur Andersen was convicted on a federal
obstruction of justice charge. Some investors, including institutional
investors, may choose not to invest in or hold securities of a company whose
prior financial statements (or those of its predecessor entity) were audited by
Arthur Andersen, which may serve to, among other things, suppress the price of
the Company's securities. In addition, rules promulgated by the SEC require the
Company to present its audited financial statements in various SEC filings,
along with Arthur Andersen's consent to inclusion of its audit report in those
filings. The SEC has provided temporary regulatory relief designed to allow
companies that file reports with them to dispense with the requirement to file a
consent of Arthur Andersen in certain circumstances. Notwithstanding the SEC's
temporary regulatory relief, the inability of Arthur Andersen to provide its
consent or to provide assurance services to the Company with regard to future
SEC filings could negatively affect the Company's ability to, among other
things, access capital markets. Any delay or inability to access capital markets
as a result of this situation could have a material adverse impact on the
business of the Company.
25
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company cannot assure you that it will be able to continue to rely
on the temporary relief granted by the SEC. If the SEC no longer accepts
financial statements audited by Arthur Andersen, requires audits of other
financial statements or financial information or requires changes to financial
statements previously audited by Arthur Andersen, this may affect ability to
access the public capital markets in the future, unless the Company's current
independent auditors or another independent accounting firm is able to audit the
consolidated financial statements originally audited by Arthur Andersen in a
timely manner. Any delay or inability to access the capital markets may have an
adverse impact on the business of the Company.
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 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.
26
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 terrorist attacks of September 11, 2001 had an immediate impact on
hotel and casino volume. The Sands hotel occupancy was down approximately ten
percentage points during the week that followed the attacks. Bus passenger
volume for The Sands was lower than normal, especially from those bus tours
originating from the New York metropolitan area. There were approximately 22.5%
less bus passengers at The Sands during September 2001 than during the same
month in the prior year. These events, 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 New Indenture governing the New
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. Consequently, 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 Existing Notes.
There are risks related to the creditworthiness of patrons of the casinos.
The Sands is exposed to certain risks related to the creditworthiness
of their patrons. Historically, The Sands has extended credit on a discretionary
basis to certain qualified patrons. For the nine months ended September 30,
2003, The Sands' slot credit play as a percentage of total slot wagering was
approximately 1.2%. For the nine month period ended September 30, 2003, The
Sands' table credit play as a percentage of total table game wagering was
approximately 19.2%. Slot game wagering and table game wagering accounted for
approximately 89.5% and 10.5%, respectively, of overall casino wagering during
the nine month period. 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.
27
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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, a recently opened
casino located in the marina district of the Company 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 or Operating'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 conduct 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 face competition from all
other types of entertainment.
On July 3, 2003, The Borgata, owned by 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 in capacity in that 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, Tropicana Atlantic City has started plans to construct 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. Tropicana intends to complete the project in the
second quarter of 2004. Resorts is currently constructing a hotel room addition
of approximately 400 - 500 rooms and is set to open in the second quarter of
2004. 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 Connecticut).
28
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Gaming is a regulated industry and changes in the law could have a material
adverse effect on the Company's ability to conduct gaming.
Gaming in New Jersey is regulated extensively by federal and state
regulatory bodies, including the CCC and state and federal taxing, law
enforcement and liquor control agencies. The ownership and operation of The
Sands is subject to strict state regulation under the NJCCA. The Company and
their affiliates have received the licenses, permits and authorizations required
to operate The Sands. Failure to maintain or obtain the requisite casino
licenses would have a material adverse effect on the Company.
Pending and enacted gaming legislation from New York and New Jersey may harm The
Sands.
In the summer of 2003, the State of New Jersey considered approving
video lottery terminals ("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.
The Sands also competes with legalized gaming from casinos located on
Native American tribal lands. In October 2001, the New York State Legislature
enacted a bill, which the governor signed, authorizing a total of six Indian
casinos in the State of New York--three in Western New York and three in the
Catskill Region--and approved the use of video lottery terminals at racetracks
and authorized the participation of New York State in a multi-state lottery. On
January 29, 2002, a lawsuit was commenced contesting the above legislation
package on the grounds that certain of its provisions were adopted in violation
of the State's constitution. The likely outcome of this lawsuit cannot be
ascertained at this time. The implementation of VLT'S and the outcome of this
lawsuit could adversely affect visitation of The Sands from New York.
Pennsylvania and Maryland are among the other states currently
contemplating some form of gaming legislation. Legislative proposals introduced
in Pennsylvania would potentially allow for a wide range of gaming activities,
including riverboat gaming, slot machines at racetracks, video lottery terminals
at liquor stores and the formation of a gaming commission. Maryland's proposed
legislation would authorize video lottery terminals at some of Maryland's racing
facilities. The results of the gubernatorial elections in Pennsylvania and
Maryland in 2002 have also increased the likelihood of gaming legislation in
such states. Since The Sands' market is primarily a drive-to-market, legalized
gambling in Pennsylvania or one or more states neighboring or within close
proximity to New Jersey could have a material adverse effect on the Atlantic
City gaming industry overall, including The Sands.
Holders of the Company's securities are subject to the CCC and the NJCCA.
The holders of the Company's common stock, par value $.01 per share
("Common Stock") and Existing Notes are subject to certain regulatory
restrictions on ownership. While holders of publicly traded obligations such as
the New 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 the Company 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 the Company's Common Stock or
Existing Notes, as applicable.
29
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from changes in market rates and
prices, such as interest rates and foreign currency exchange rates. The Company
does not have securities subject to interest rate fluctuations and has not
invested in derivative-based financial instruments.
Item 4. CONTROLS AND PROCEDURES
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 controls 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.
No change occurred in the Company's internal controls concerning
financial reporting during the fiscal quarter ended September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
30
PART II: OTHER INFORMATION
Item 6. (a) Exhibits
31.1 Certification of Chief Executive Officer Pursuant to 13a-14 of
the Securities Exchange Act of 1934, as amended
31.2 Certification of Chief Financial Officer Pursuant to 13a-14 of
the Securities Exchange Act of 1934, as amended
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
Item 6. (b) Reports on Form 8-K
During the quarter ended September 30, 2003 the Registrants filed the
following reports on Form 8-K.
Items Listed Date Filed
------------ ----------
5, 7 July 14, 2003
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Atlantic City, State of New Jersey on November 14, 2003.
GB HOLDINGS, INC.
GB PROPERTY FUNDING CORP.
GREATE BAY HOTEL AND CASINO, INC.
--------------------------------
Registrants
Date: November 14, 2003 By: /s/ Timothy A. Ebling
------------------------- -----------------------------------------
Timothy A. Ebling
Chief Financial Officer
31