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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 March 31, 2004
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)
(Registrant's 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 issuers
classes of common stock, as of the last practicable date.
Registrant Class Outstanding at April 30, 2004
- --------------------------------------------------------------------------------------------------------
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
GB HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
March 31, December 31,
2004 2003
------------- ------------
Current Assets:
Cash and cash equivalents $ 28,061,000 $ 33,454,000
Accounts receivable, net of allowances
of $5,220,000 and $5,918,000, respectively 5,172,000 5,247,000
Inventories 2,114,000 2,222,000
Income tax deposits 1,364,000 1,365,000
Prepaid expenses and other current assets 2,639,000 3,343,000
------------ ------------
Total current assets 39,350,000 45,631,000
------------ ------------
Property and Equipment:
Land 54,344,000 54,344,000
Buildings and improvements 88,262,000 88,249,000
Equipment 65,798,000 64,722,000
Construction in progress 3,141,000 2,111,000
------------ ------------
211,545,000 209,426,000
Less - accumulated depreciation and
amortization (43,528,000) (40,013,000)
------------ ------------
Property and equipment, net 168,017,000 169,413,000
------------ ------------
Other Assets:
Obligatory investments, net of allowances of
$11,702,000 and $11,340,000, respectively 10,875,000 10,705,000
Other assets 1,623,000 1,814,000
------------ ------------
Total other assets 12,498,000 12,519,000
------------ ------------
$219,865,000 $227,563,000
============ ============
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)
March 31, December 31,
2004 2003
------------ ------------
Current Liabilities
Accounts payable $ 4,300,000 $ 6,815,000
Accrued liabilities -
Salaries and wages 4,027,000 3,570,000
Interest 67,000 3,092,000
Gaming obligations 2,885,000 2,744,000
Insurance 3,136,000 2,505,000
Other 3,156,000 3,473,000
------------ ------------
Total current liabilities 17,571,000 22,199,000
------------ ------------
Long-Term Debt, net of current maturities 110,000,000 110,000,000
------------ ------------
Other Noncurrent Liabilities 3,799,000 3,729,000
------------ ------------
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 (36,505,000) (33,365,000)
-------------- ------------
Total shareholders' equity 88,495,000 91,635,000
-------------- ------------
$ 219,865,000 $227,563,000
============== ============
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
March 31,
--------------------------------
2004 2003
------------- --------------
Revenues:
Casino $ 44,500,000 $ 43,639,000
Rooms 2,285,000 2,459,000
Food and beverage 4,988,000 4,664,000
Other 930,000 883,000
------------ -------------
52,703,000 51,645,000
Less - promotional allowances (11,254,000) (11,844,000)
------------- -------------
Net revenues 41,449,000 39,801,000
------------- -------------
Expenses:
Casino 30,331,000 31,886,000
Rooms 608,000 434,000
Food and beverage 2,090,000 2,056,000
Other 697,000 604,000
General and administrative 2,873,000 2,522,000
Depreciation and amortization,
including provision for obligatory investments 4,073,000 3,731,000
Loss on disposal of assets - 4,000
------------ -------------
Total expenses 40,672,000 41,237,000
------------ -------------
Income (loss) from operations 777,000 (1,436,000)
------------ -------------
Non-operating income (expense):
Interest income 111,000 189,000
Interest expense (3,051,000) (2,995,000)
Debt restructuring costs (710,000) -
------------ -------------
Total non-operating expense, net (3,650,000) (2,806,000)
------------ -------------
Loss before income taxes (2,873,000) (4,242,000)
Income tax provision (267,000) (159,000)
------------ -------------
Net loss $ (3,140,000) $ (4,401,000)
============ =============
Basic/diluted loss per common share $ (0.31) $ (0.44)
============ =============
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 CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-------------------------------
2004 2003
------------- -------------
OPERATING ACTIVITIES:
Net loss $ (3,140,000) $ (4,401,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,073,000 3,731,000
Loss on disposal of assets - 4,000
Provision for doubtful accounts 146,000 331,000
Increase in accounts receivable (71,000) (70,000)
Decrease in accounts payable
and accrued liabilities (4,679,000) (2,534,000)
Decrease in other current assets 813,000 1,282,000
Net change in other noncurrent assets and liabilities 91,000 92,000
------------ -------------
Net cash used in operating activities (2,767,000) (1,565,000)
------------ -------------
INVESTING ACTIVITIES:
Purchase of property and equipment (2,118,000) (1,903,000)
Proceeds from disposition of assets 9,000 2,000
Purchase of obligatory investments (517,000) (568,000)
------------ -------------
Net cash used in investing activities (2,626,000) (2,469,000)
------------ -------------
FINANCING ACTIVITIES:
Repayments of long-term debt - -
------------ -------------
Net cash used in financing activities - -
------------ -------------
Net decrease in cash and cash equivalents (5,393,000) (4,034,000)
Cash and cash equivalents at beginning of period 33,454,000 50,645,000
------------ -------------
Cash and cash equivalents at end of period $ 28,061,000 $ 46,611,000
============ =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 6,050,000 $ 6,050,000
============ =============
Interest capitalized $ 28,000 $ 91,000
============ =============
Income taxes paid $ 88,000 $ 31,000
============ =============
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.
5
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 March 31, 2004 and the condensed
consolidated results of operations for the three months ended March 31, 2004 and
2003 have been made. The results set forth in the condensed consolidated
statement of operations for the three months ended March 31, 2004 are not
necessarily indicative of the results to be expected for the full year.
The condensed consolidated financial statements were prepared following
the requirements of the Securities and Exchange Commission (SEC) for interim
reporting. As permitted under those rules, certain footnotes or other financial
information that are normally required by GAAP (accounting principles generally
accepted in the United States of America) can be condensed or omitted.
The Company is responsible for the unaudited financial statements
included in this document. As these are condensed financial statements, they
should be read in conjunction with the consolidated financial statements and
notes included in the Company's latest Form 10-K/A.
(2) Income Taxes
The components of the provision for income taxes are as follows:
Three Months Ending March 31,
-------------------------------
2004 2003
-------------- ------------
Federal income tax provision:
Current $ - $ -
Deferred - -
State income tax provision:
Current (267,000) (159,000)
Deferred - -
-------------- ------------
$ (267,000) $ (159,000)
============== ============
Federal and State income tax provisions are based upon the results of
operations for the current period and the estimated adjustments for income tax
purposes of certain nondeductible expenses.
Due to recurring losses, the Company has not recorded Federal income
tax benefits or provisions for the three months ended March 31, 2004.
6
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For the three months ended March 31, 2004 and 2003, there was a charge
to income tax provision of $179,000 and $159,000, respectively, related to the
impact of the New Jersey Business Tax Reform Act. 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 provision: the
greater of a $350,000 minimum tax or 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. For the three
months ended March 31, 2004, $87,500 was charged to the income tax provision
related to the minimum Casino Net Income Tax, which is payable in quarterly
installments of $87,500 each.
(3) Transactions with Related Parties
Greate Bay Hotel and Casino, Inc.'s ("GBHC") rights to the trade name
"Sands" (the "Trade Name") were derived from a license agreement with an
unaffiliated third party. Amounts payable by GBHC for these rights were equal to
the amounts paid to the unaffiliated third party. GBHC was assigned by High
River Limited Partnership ("High River") the rights under a certain agreement
with the owner of the Trade Name to use the Trade Name as of September 29, 2000
through May 19, 2086 subject to termination rights for a fee after a certain
minimum term. High River is an entity controlled by Carl C. Icahn. High River
received no payments for its assignment of these rights. Payment is made
directly to the owner of the Trade Name. Such charges amounted to $53,000 and
$59,000, respectively, for the three months ended March 31, 2004 and 2003.
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, CEO of Holdings, as well as other
charges for tax preparation and travel to GBHC. Payments for such charges
incurred from the Stratosphere for the three months ended March 31, 2004 and
2003 amounted to $106,000 and $42,000, respectively.
On February 28, 2003, GBHC entered into a two year agreement with XO New
Jersey, Inc. a long-distance phone carrier controlled by Carl C. Icahn. The
agreement can be extended beyond the minimum two year term on a month-to-month
basis. Payments for such charges incurred for the three months ended March 31,
2004 amounted to $41,000. No payments were made during the three months ended
March 31, 2003 related to this agreement.
(4) Legal Proceedings
Tax appeals on behalf of GBHC and the City of Atlantic City challenging
the amount of GBHC'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 Sands 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. It has not yet been determined whether or not the claims made by
Sheffield would, if adversely determined, materially impact the financial
position or results of operations of the Company.
7
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
GBHC is a party in various legal proceedings with respect to the
conduct of casino and hotel operations and has receiving employed related
claims. Although a possible range of losses cannot be estimated, in the opinion
or management, based upon the advice of counsel, GBHC does not expect settlement
or resolution of these proceedings or claims to have a material adverse impact
upon their consolidated financial position or results of operations, but the
outcome of litigation and the resolution of claims is subject to uncertainties
and no assurances can be given. The consolidated financial statements do not
include any adjustments that might result from these uncertainties.
(5) 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 loss per share are the same.
Basic loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding.
(6) Subsequent Events
On April 12, 2004, the Securities and Exchange Commission granted GB
Holdings application to delist the Existing Notes from trading on the American
Stock Exchange. On April 19, 2004, the American Stock Exchange delisted the
Existing Notes.
Recently, the casino industry, the CRDA and the New Jersey Sports and
Exposition Authority have agreed to a plan regarding New Jersey video lottery
terminals ("VLTs"). Although not final, 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 proportionate obligation with respect to the $34
million commitment is estimated to be approximately $1.4 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
$2.6 million payable over a four year period.
8
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 Holdings, GB Property
Funding and GBHC. 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 Holdings, GB
Property Funding and GBHC or its management are intended to identify
forward-looking statements (see "Private Securities Litigation Reform Act"
below).
OVERVIEW
The Company faces a number of competitive challenges during fiscal 2004,
including increased competition from the newly opened Borgata, increased
competition from existing casinos that invested in capital improvements, and a
corresponding increase in competition for both table game and slot machine
players.
Management is currently focused on restructuring its debt to
significantly reduce the cash requirements for debt service and defer the
payment of principal, which is presently due in September 2005, for three years.
These funds would then be available for operational and capital investment,
including opportunities that arise to expand The Sands' casino, rooms, parking,
entertainment and retail facilities.
Pursuant to New Jersey law, GBHC is required to maintain a casino
license in order to operate The Sands. The gaming licenses required to own and
operate The Sands must be renewed in 2004, which requires that the CCC determine
that GBHC and Holdings are financially stable. In order to be found "financially
stable" under NJCCA, GBHC and Holdings 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. If the CCC determines that Holdings may be unable to make the required
payments pursuant to the Existing Notes or pay the principal when it becomes due
in 2005, GBHC may be unable to obtain renewal of the casino license required to
own and operate The Sands. Currently, the CCC is and will continue to monitor
the effect of GBHC and Holdings to manage and refinance the Existing Notes.
There has been no precedent of non-renewal of a casino license in this
situation.
The Sands primarily generates revenues from gaming operations in its
Atlantic City facility. Although The Sands' other business segments including
rooms, entertainment, retail store, food and beverage operations also generate
some cash sales, these revenues 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 (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Promotional Allowances"). The Company competes in a capital
intensive industry that requires continual reinvestment in its facility and
technology.
9
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Summary
During 2004, management anticipates making tax payments of approximately
$1.1 million to the State of New Jersey. Management believes that cash flows
generated from operations during 2004, as well as available cash reserves, will
be sufficient to meet its operating plan. In the first quarter of 2004, the
Board approved a capital expenditures program for 2004 under which Holdings and
its subsidiaries anticipate making capital expenditures of up to $23.6 million
to invest in and upgrade The Sands. 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. At the request of the
Company, Ealing Corp., a Nevada corporation and an affiliate of Mr. Icahn,
agreed to provide a revolving credit facility, secured by a first lien on all of
the assets of the Company, under which the Company may borrow up to an aggregate
amount of $10 million for general working capital purposes. Ealing's obligation
to provide the financing pursuant to the commitment letter is subject to the
negotiation and execution of definitive loan and security agreements and related
documents as well as certain customary conditions by July 1, 2004. However,
there can be no assurance that the loan agreement with Ealing will be
consummated, that if the loan agreement with Ealing is not consummated, the
Company will be able to obtain financing from another lender on terms as or more
favorable than the terms of the commitment letter, or whether the Company will
need to borrow funds for working capital. Ealing and GB Holdings have agreed to
extend the commitment until July 1, 2004.
Operating Activities
At March 31, 2004, the Company had cash and cash equivalents of $28.1
million. The Company used $2.8 million of net cash from operations during the
three months ended March 31, 2004 compared to using $1.6 million during the same
prior year period. The 2004 decrease in net cash from operations was primarily
due to a reduction in accounts payable and accrued liabilities for the period.
Investing Activities
Capital expenditures at The Sands for the three months ended March 31,
2004 amounted to approximately $2.1 million compared to $1.9 million in 2003. 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. Management has approval from
its Board of Directors for a 2004 capital expenditure plan of up to $23.6
million, which includes a renovation of one floor of standard hotel rooms to
suites, new slot machines, casino and hotel renovations as well as replacement
and upgrades to infrastructure and technology. However, in order to avoid
disruption of its operations during the peak summer season and based upon
operating results and available cash, management may defer some slot machine
replacements and casino renovations to the latter half of 2004 or beyond,
thereby reducing capital expenditures for 2004. Accordingly, additional
financing requirements could be reduced significantly.
10
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The Sands is required by the Casino Act to make certain quarterly
deposits based on gross revenue with the Casino Reinvestment Development
Authority ("CRDA") in lieu of a certain investment alternative tax. Deposits for
the three months ended March 31, 2004 and 2003 amounted to $517,000 and
$568,000, respectively.
Financing Activities
There were no financing activities during the three months ended March
31, 2004. As of March 31, 2004, the only scheduled payment of long-term debt is
the Existing Notes, which mature on September 29, 2005.
On July 14, 2003, a Form 8-K was filed with the SEC reporting that a
committee of the independent directors of the Company (the "Special Committee")
approved a proposed restructuring of 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
Holdings 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 and
liabilities of Holdings, GBHC, and GB Property, to Atlantic Holdings, in
exchange for Atlantic Holdings issuance of 3% Notes due 2008 in exchange for the
Existing Notes and the cancellation of such Notes) and the registration of
certain securities to be issued to the stockholders of the Company; and, also on
such date, Atlantic Holdings and ACE Gaming 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 and each was amended
by filing Amendments No. 1, 2 and 3 to Form S-4/A on February 13, 2004, March
22, 2004 and April 22, 2004, respectively. The Company and Atlantic Holdings
also filed with the SEC a Schedule 13E-3, under the Securities and Exchange Act
of 1934, with respect to such transactions, which was also amended by the
filings of a Schedule 13E-3/A on November 17, 2003 and February 13, 2004.
During 2004, Management anticipates making its next scheduled interest
payment on the Existing Notes of $6.1 million on September 29, 2004; interest on
such notes accrue at a rate of up to $1.0 million per month for each month, and
if the anticipated exchange is consummated prior to September 29, 2004, holders
that exchange will be entitled to payments for accrued interest at the time of
the exchange. The Board adopted the Special Committee's belief that, based on a
review of the business, financial condition, and prospects of GB Holdings and
its subsidiaries, it is reasonably likely that GB Holdings would not have
sufficient funds to pay the $110 million principal, plus accrued interest, on
the Existing Notes at maturity in 2005 and that refinancing the Existing Notes
now was in the best interest of GB Holdings and its subsidiaries. Also, the
Board adopted the Special Committees' determination that it is reasonably likely
that prior to maturity in 2005, GB Holdings would not be able to refinance the
Existing Notes on favorable terms or at all and that such inability could result
in a default on the Existing Notes and the possibility of GB Holdings being
forced to seek bankruptcy protection.
Management estimates that consent fees associated with the exchange of
Existing Notes will be between $6.4 million and $11.0 million.
11
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Pursuant to New Jersey law, GBHC is required to maintain a casino
license in order to operate The Sands. The gaming licenses required to own and
operate The Sands must be renewed in September 2004, and for each renewal the
CCC must determine that GBHC and Holdings are financially stable. In order to be
found "financially stable" under the NJCCA, GBHC and Holdings 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. If the CCC determines that Holdings may be unable
to make the required payments pursuant to the Existing Notes or pay the
principal when it becomes due in 2005, GBHC may be unable to obtain renewal of
the casino license required to own and operate The Sands. GBHC's inability to
obtain renewal of is casino license will have a material adverse effect on
Holdings.
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 accounting principles
generally accepted 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.
12
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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. The Company accrues for outstanding reported claims, claims that have
been incurred but not reported and projected claims based upon management's
estimates of the aggregate liability for uninsured claims using historical
experience, an adjusting company's estimates and the estimated trends in claim
values. Although management believes it has the ability to adequately project
and record estimated claim payments, it is possible that actual results could
differ significantly from the recorded liabilities.
Allowance for Obligatory Investments - The Company maintains obligatory
investment allowances for its investments made in satisfaction of its CRDA
obligation. The obligatory investments may ultimately take the form of CRDA
issued bonds, which bear a below market rate of interest, direct investments or
donations. Management bases its reserves on the type of investments the
obligation has taken or is expected to take. CRDA bonds bear interest at
approximately one-third below market rates. Donations of The Sands' quarterly
deposits to the CRDA have historically yielded a 51% future credit or refund of
obligations. Therefore, management has reserved the predominant balance of its
obligatory investments at between 33% and 49%.
13
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
Gaming Operations
Information contained herein, regarding Atlantic City casinos other than
The Sands, was obtained from reports filed with the Casino Control Commission.
The following table sets forth certain unaudited financial and operating
data relating to The Sands' and all other Atlantic City casinos' capacities,
volumes of play, hold percentages and revenues:
Three Months Ended
March 31,
------------------------------
2004 2003
--------------- ------------
(Dollars in Thousands)
Units: (at end of period)
Table Games - Sands 61 40
- Atlantic City (ex. Sands) 1,128 1,039
Slot Machines - Sands 2,201 2,295
- Atlantic City (ex. Sands) 39,720 36,131
Gross Wagering (1)
Table Games - Sands $ 59,897 $ 45,171
- Atlantic City (ex. Sands) 1,782,104 1,519,996
Slot Machines - Sands 431,548 479,250
- Atlantic City (ex. Sands) 9,813,809 8,715,722
Hold Percentages (2)
Table Games - Sands 15.41% 13.99%
- Atlantic City (ex. Sands) 16.34% 16.65%
Slot Machines - Sands (accrual basis) 8.09% 7.75%
- Sands (cash basis) 8.34% 7.96%
- Atlantic City (ex. Sands) (accrual basis) N/A N/A
- Atlantic City (ex. Sands) (cash basis) 8.09% 8.02%
Revenues (2)
Table Games - Sands $ 9,233 $ 6,319
- Atlantic City (ex. Sands) 291,216 253,145
Slot Machines - Sands (accrual basis) 34,926 37,162
- Sands (cash basis) 36,010 38,132
- Atlantic City (ex. Sands) (accrual basis) N/A N/A
- Atlantic City (ex. Sands) (cash basis) 793,840 699,039
Other - Sands 341 158
- Atlantic City (ex. Sands) 13,721 9,831
14
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
(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.
Patron Gaming Volume
Information contained herein, regarding Atlantic City casinos other than
The Sands, was obtained from reports filed with the Commission.
Table game drop increased by $14.7 million (32.6%) during the three
months ended March 31, 2004 compared with the same prior year period. By
comparison, according to Commission reports, table game drop at all other
Atlantic City casinos during the same period increased 17.2%. The Company's
increase in table game drop is a direct result of an increase in the number of
table games from 40 during the 2003 period to 61 during the 2004 period. The
increase in the number of table games was the result of a change in business
strategy, to balance the gaming experience between table games and slot
machines. Table game hold percentage increased 1.4 percentage points to 15.4%
for the three months ended March 31, 2004 compared to the same period last year.
The 2004 table game hold percentage is slightly higher than expected. However,
the increase over the prior year is primarily attributable to one high end
patron winning approximately $1 million in March 2003. Aggregate gaming space at
all other Atlantic City casinos increased by approximately 135,000 square feet
(10.7%) at March 31, 2004 compared to March 31, 2003 primarily due to the
Borgata opening in July 2003. The amount of gaming space at The Sands remained
the same at approximately 78,000 square feet.
Slot machine handle decreased $47.7 million (10.0%) during the three
months ended March 31, 2004, compared with the same period of 2003. By
comparison, the percentage increase in slot machine handle for all other
Atlantic City casinos in the first three months of 2004 vs. the same period in
2003 was 12.6%. The Company's 2004 decrease in handle is primarily attributed to
the effect of a new competitor that entered the Atlantic City marketplace in
July 2003. This decrease in slot machine handle is offset slightly by an
increase in hold percentage to 8.1% from 7.8% in the 2004 period compared to the
2003 period. The number of slot machines decreased 4.1% at The Sands to 2,201 at
March 31, 2004 compared to March 31, 2003. On an industry-wide basis, excluding
The Sands, the number of slot machines increased 9.9% in the first quarter of
2004 compared to the first quarter of 2003.
15
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 period ended March 31, 2004 and 2003:
Three Months Ended March 31,
-----------------------------------------------
Increase (Decrease)
2004 2003 $ %
----------- ---------- ---------- ----------
(Dollars In Thousands)
Revenues:
Casino $ 44,500 $ 43,639 $ 861 1.97
Rooms 2,285 2,459 (174) (7.08)
Food and Beverage 4,988 4,664 324 6.95
Other 930 883 47 5.32
Promotional Allowances 11,254 11,844 (590) (4.98)
Expenses:
Casino 30,331 31,886 (1,555) (4.88)
Rooms 608 434 174 40.09
Food and Beverage 2,090 2,056 34 1.65
Other 697 604 93 15.40
General and Administrative 2,873 2,522 351 13.92
Depreciation and Amortization 4,073 3,731 342 9.17
Loss on disposal of assets - 4 (4) (100.00)
Income/(loss) from Operations 777 (1,436) 2,213 154.00
Non-operating expense, net 3,650 2,806 844 30.08
Income Tax Provision 267 159 108 67.92
Revenues
Overall casino revenues increased $861,000 for the three months ended
March 31, 2004 compared to the same prior year period. The increase in casino
revenue is a result of increased table game win of $3,100,000 offset by reduced
slot win of $2,239,000.
Room's revenue decreased $174,000 for the three months ended March 31,
2004 compared to the same prior year period as a result of decreased occupancy.
The decrease in occupancy was primarily attributable to a reduction in
promotional room nights.
Food and beverage revenues increased $324,000 for the three months ended
March 31, 2004 compared to the same prior year period. This increase is a direct
result of a new casino bar ("Swingers") ($309,000), which opened in July 2003.
16
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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. As a percentage of casino revenues, promotional
allowances decreased to 25.3% during the three months ended March 31, 2004 from
27.1% during the same period of 2003. The decrease in this ratio is directly
attributable to the Company's strategy to continue to monitor the reinvestment
in the casino customer based upon the competitiveness within the Atlantic City
market.
Departmental Expenses
Casino expenses at The Sands decreased by $1.6 million for the three
months ended March 1, 2004 compared to the same prior year period. The decrease
in casino expenses is primarily due to the reduction of allocable expenses
($865,000) from other departments due to the reduction in complimentaries and
other cost reductions. Inspection and licensing fees decreased $292,000 for the
three months ended March 31, 2004 compared to the same prior year period. The
decrease is due to a credit received from surplus NJCCC funds, caused by initial
licensing and registration fees related to a newly opened Atlantic City Casino.
Gaming revenue tax increased $119,000 as a result of increased casino revenues.
Rooms expenses increased $174,000 for the three months ended March 31,
2004 compared to the same prior year period. The increases were due to a larger
share of costs allocated to casino expenses ($292,000) as a result of decreased
room complimentaries generated by casino promotions. Total complimentary room
nights decreased by 5,906 or 15.3% over the same prior year period. Rooms
payroll and benefits decreased $91,000 year to year due to a decrease in the
number of rooms sold.
Food and beverage expenses increased $34,000 for the three months ended
March 31, 2004 compared to the same prior year period. The increases were due to
increases in food and beverage cost of sales ($136,000) as a result of increased
revenue.
Other expenses increased $93,000 for the three months ended March 31,
2004, compared to the same prior year period as a result of an increase to
entertainment expenses ($158,000) and a decrease in the allocation of
entertainment complimentaries by casino operations ($106,000).
General and Administrative Expenses
General and administrative expenses increased $351,000 for the three
months ended March 31, 2004, compared to the same period last year. The
increases were due to lower allocable costs from general and administrative
expenses to operating departments ($563,000). These were offset by decreases in
payroll and benefits ($251,000) and property taxes ($95,000).
17
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 $342,000 for the three
month period ended March 31, 2004, compared to the same prior year period due to
an increase in depreciation expense ($259,000) as a result of the continued
investment in infrastructure and equipment during the current and preceding
year. Also increased amortization of CRDA losses ($82,000) as a result of
increased casino revenues contributed to the overall increase.
Interest Income and Expense
Interest income decreased by $77,000 during the three month period ended
March 31, 2004, compared to the same prior year period. The decrease was due to
smaller earnings on decreased cash reserves.
Interest expense increased $56,000 during the three month period ended
March 31, 2004, compared to the same period in 2003. The increase is due to a
lower accrual of capitalized interest in 2004 ($28,000) compared to 2003
($91,000). It is the Company's policy to capitalize interest on construction
projects in excess of $250,000.
Income Tax Provision
Federal and State income tax benefits or provisions are based upon the
results of operations for the current period and the estimated adjustments for
income tax purposes of certain nondeductible expenses.
Due to recurring losses, the Company has not recorded Federal income tax
benefit or provision for the three months ended March 31, 2004.
The State income tax provision increased $108,000 (67.9%) during the
three months ended March 31, 2004 compared to the same prior year period. The
increase is primarily due to the newly enacted Casino Net Income tax ($88,000)
which did not effect the 2003 period. Increased revenues resulted in a $20,000
increase in the Alternative Minimum Assessment for 2004 compared to 2003.
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.
18
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Private Securities Litigation Reform Act
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q and other materials filed or to be filed by Holdings, GB Property
Funding or GBHC with the Securities and Exchange Commission (as well as
information included in oral statements or other written statements made by such
companies) contains statements that are forward-looking, such as statements
relating to future expansion plans, future construction costs and other business
development activities including other capital spending, economic conditions,
financing sources, competition and the effects of tax regulation and state
regulations applicable to the gaming industry in general or Holdings, GB
Property Funding and GBHC in particular. Such forward-looking information
involves important risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results may differ from
those expressed in any forward-looking statements made by or on behalf of
Holdings, GB Property Funding or GBHC. These risks and uncertainties include,
but are not limited to, those relating to development and construction
activities, dependence on existing management, leverage and debt service
(including sensitivity to fluctuations in interest rates), domestic or global
economic conditions, activities of competitors and the presence of new or
additional competition, fluctuations and changes in customer preference and
attitudes, changes in federal or state tax laws or the administration of such
laws and changes in gaming laws or regulations (including the legalization of
gaming in certain jurisdictions).
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 may be adversely affected.
Conversely, favorable operating results in any given quarter may be followed by
an unexpected downturn in subsequent quarters.
GBHC may be unable to obtain renewal from the CCC of the casino license that is
necessary to operate The Sands due to the outstanding debt of GB Holdings.
Pursuant to New Jersey law, GBHC is required to maintain a casino
license in order to operate The Sands. The gaming licenses required to own and
operate The Sands must be renewed in September 2004, which requires that the CCC
determine that GBHC and GB Holdings are financially stable. In order to be found
"financially stable" under NJCCA, GBHC and GB Holdings 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. If the CCC determines during its license renewal process that GB
Holdings is unable to make the required payments pursuant to the Existing Notes,
or pay the principal when it becomes due in 2005, or refinance its debt, GBHC
may be unable to obtain renewal of the casino license required to own and
operate The Sands. GBHC's inability to obtain renewal of is casino license will
have a material adverse effect on GB Holdings.
19
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
The Company may need to obtain financing for working capital purposes.
A capital expenditure plan was recently approved by the Board of
Directors of the Company, and management believes that cash generated from
operations and cash reserves will be sufficient to meet the requirements of the
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. At the request of the Company, Ealing agreed to
provide a revolving credit facility, secured by a first lien on all of the
assets of the Company, under which the Company may borrow up to an aggregate
amount of $10 million for general working capital purposes. Ealing's obligation
to provide the financing pursuant to the commitment letter is subject to the
negotiation and execution of a definitive loan and security agreements and
related documents as well as certain customary conditions. However, there can be
no assurance that the loan agreement with Ealing will be consummated, that if
the loan agreement with Ealing is not consummated, the Company will be able to
obtain financing from another lender on terms as or more favorable than the
terms of the commitment letter, or whether the Company will need to borrow funds
for working capital.
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.
20
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 three months ended March 31, 2004 and 2003, there was a charge
to income tax provision of $179,000 and $159,000, respectively, related to the
impact of the New Jersey Business Tax Reform Act.
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
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 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 New Jersey state taxation of casino gaming companies
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.
21
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
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 the Company's
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' property 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' property, 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.
22
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
its patrons. Historically The Sands has extended credit on a discretionary basis
to certain qualified patrons. For the three months ended March 31, 2004, gaming
credit extended to Sands' table game patrons accounted for approximately 25.6%
of overall table game wagering, and table game wagering accounted for
approximately 12.2% of overall casino wagering during the period. At March 31,
2004, gaming receivables amounted to $8.5 million before an allowance for
uncollectible gaming receivables of $4.9 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.
23
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 jurisdiction and nationwide. The Borgata, a recently opened casino
located in the marina district of Atlantic City has aggravated this problem. 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 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.
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, Tropicana Atlantic City is constructing 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
third quarter of 2004. Resorts is currently constructing a hotel room addition
of approximately 400 rooms and is scheduled to open in the third 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, Maryland, New York and Connecticut).
24
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 has
received the licenses, permits and authorizations required to operate The Sands.
If the exchange of Existing Notes is not consummated and, as a result, the CCC
determines during its license renewal process that Holdings is unable to make
the required payments pursuant to the Existing Notes or pay the principal when
it becomes due in 2005. GBHC may be unable to obtain renewal of the casino
license required to own and operate The Sands. GBHC's inability to obtain
renewal of its casino license would have a material adverse effect on the
Company.
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
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.
Recently, the casino industry, the CRDA and the New Jersey Sports and
Exposition Authority have agreed to a plan regarding New Jersey video lottery
terminals ("VLTs"). Although not final, 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 proportionate obligation with respect to the $34
million commitment is estimated to be approximately $1.4 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
$2.6 million payable over a four year period.
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 VLTs and the outcome of this
lawsuit could adversely affect visitation of The Sands from New York.
25
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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. Neither Pennsylvania nor Maryland enacted any legalized gaming
legislation in their respective legislative sessions during the three months
ended March 31, 2004. 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 Company's Common Stock or
Existing Notes, as applicable.
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.
At March 31, 2004, the fair value of the Company's fixed rate debt was
$88.1 million compared with its carrying amount of $110 million.
26
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 March 31, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
27
PART II: OTHER INFORMATION
Item 6.(a) Exhibits
31.1 Chief Executive Officer's Certification, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certification, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certification, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
2002.
32.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
2002.
Item 6.(b) Reports on Form 8-K
During the quarter ended March 31, 2004, the Registrants filed one
Current Report on Form 8-K: (Items 5 and 7) on January 13, 2004.
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 May 7, 2004.
GB HOLDINGS, INC.
GB PROPERTY FUNDING CORP.
GREATE BAY HOTEL AND CASINO, INC.
Registrants
Date: May 7, 2004 /s/ Douglas S. Niethold
------------- ------------------------------------
Douglas S. Niethold
Interim Vice President, Finance and
Chief Financial Officer
28