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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 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 HOLDINGS, INC.
- --------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2502293
- ------------------------------------------ ---------------------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification Nos.)
C/O SANDS HOTEL & CASINO
INDIANA AVENUE & BRIGHTON PARK
ATLANTIC CITY, NEW JERSEY 08401
- ---------------------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(Registrants" telephone number, including area code): (609) 441-4633
--------------------------
(NOT APPLICABLE)
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether each of the Registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO __________
---
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES X NO_______
---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
REGISTRANT CLASS OUTSTANDING AT AUGUST 12, 2004
- ------------------------------- ---------------------------------- --------------------------------------
GB Holdings, Inc. Common stock, $.01 par value 10,000,000 shares
GB HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
------------------------- -------------------------
Current Assets:
Cash and cash equivalents $ 30,266,000 $ 33,454,000
Accounts receivable, net of allowances
of $4,565,000 and $5,918,000, respectively 5,355,000 5,247,000
Inventories 2,169,000 2,222,000
Income tax deposits 87,000 1,365,000
Prepaid expenses and other current assets 3,548,000 3,343,000
---------------- -----------------
Total current assets 41,425,000 45,631,000
---------------- -----------------
Property and Equipment:
Land 54,344,000 54,344,000
Buildings and improvements 88,512,000 88,249,000
Equipment 71,323,000 64,722,000
Construction in progress 1,437,000 2,111,000
---------------- -----------------
215,616,000 209,426,000
Less - accumulated depreciation and
amortization (47,136,000) (40,013,000)
---------------- -----------------
Property and equipment, net 168,480,000 169,413,000
---------------- -----------------
Other Assets:
Obligatory investments, net of allowances of
$11,800,000 and $11,340,000, respectively 11,082,000 10,705,000
Other assets 1,433,000 1,814,000
---------------- -----------------
Total other assets 12,515,000 12,519,000
---------------- -----------------
$ 222,420,000 $ 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)
JUNE 30, DECEMBER 31,
2004 2003
------------------------- -------------------------
Current Liabilities
Accounts payable $ 6,902,000 $ 6,815,000
Accrued liabilities -
Salaries and wages 3,959,000 3,570,000
Interest 3,092,000 3,092,000
Gaming obligations 3,105,000 2,744,000
Self-insurance 2,477,000 2,505,000
Other 3,001,000 3,473,000
----------------- ------------------
Total current liabilities 22,536,000 22,199,000
----------------- ------------------
Long-Term Debt, net of current maturities 110,000,000 110,000,000
----------------- ------------------
Other Noncurrent Liabilities 3,882,000 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 (38,998,000) (33,365,000)
----------------- ------------------
Total shareholders' equity 86,002,000 91,635,000
----------------- ------------------
$ 222,420,000 $ 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
JUNE 30,
------------------------------------------------------
2004 2003
------------------------- -------------------------
Revenues:
Casino $ 50,061,000 $ 49,647,000
Rooms 2,776,000 2,956,000
Food and beverage 5,797,000 5,511,000
Other 1,023,000 1,080,000
------------------------- -------------------------
59,657,000 59,194,000
Less - promotional allowances (14,320,000) (13,164,000)
------------------------- -------------------------
Net revenues 45,337,000 46,030,000
------------------------- -------------------------
Expenses:
Casino 32,967,000 33,072,000
Rooms 724,000 596,000
Food and beverage 2,204,000 2,425,000
Other 678,000 784,000
General and administrative 3,005,000 2,739,000
Depreciation and amortization,
including provision for obligatory investments 4,017,000 3,947,000
Gain on disposal of assets (31,000) (1,000)
------------------------- -------------------------
Total expenses 43,564,000 43,562,000
------------------------- -------------------------
Income from operations 1,773,000 2,468,000
------------------------- -------------------------
Non-operating income (expense):
Interest income 117,000 172,000
Interest expense (3,006,000) (2,963,000)
Debt restructuring costs (1,129,000) -
------------------------- -------------------------
Total non-operating expense, net (4,018,000) (2,791,000)
------------------------- -------------------------
Loss before income taxes (2,245,000) (323,000)
Income tax provision (248,000) (184,000)
------------------------- -------------------------
Net loss $ (2,493,000) $ (507,000)
========================= =========================
Basic/diluted loss per common share $ (0.25) $ (0.05)
========================= =========================
Basic/diluted weighted average common shares outstanding 10,000,000 10,000,000
========================= =========================
The accompanying notes to condensed
consolidated financial statements are an integral part
of these condensed consolidated financial statements.
4
GB HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------------------------------------
2004 2003
------------------------- -------------------------
Revenues:
Casino $ 94,561,000 $ 93,286,000
Rooms 5,061,000 5,415,000
Food and beverage 10,785,000 10,175,000
Other 1,953,000 1,963,000
------------------------- -------------------------
112,360,000 110,839,000
Less - promotional allowances (25,574,000) (25,008,000)
------------------------- -------------------------
Net revenues 86,786,000 85,831,000
------------------------- -------------------------
Expenses:
Casino 63,298,000 64,958,000
Rooms 1,332,000 1,030,000
Food and beverage 4,294,000 4,481,000
Other 1,375,000 1,388,000
General and administrative 5,878,000 5,261,000
Depreciation and amortization, including provision
for obligatory investments 8,090,000 7,678,000
Loss (gain) on disposal of assets (31,000) 3,000
------------------------- -------------------------
Total expenses 84,236,000 84,799,000
------------------------- -------------------------
Income from operations 2,550,000 1,032,000
------------------------- -------------------------
Non-operating income (expense):
Interest income 228,000 361,000
Interest expense (6,057,000) (5,958,000)
Debt restructuring costs (1,839,000) -
------------------------- -------------------------
Total non-operating expense, net (7,668,000) (5,597,000)
------------------------- -------------------------
Loss before income taxes (5,118,000) (4,565,000)
Income tax provision (515,000) (343,000)
------------------------- -------------------------
Net loss $ (5,633,000) $ (4,908,000)
========================= =========================
Basic/diluted loss per common share $ (0.56) $ (0.49)
========================= =========================
Weighted average common shares outstanding 10,000,000 10,000,000
========================= =========================
The accompanying notes to condensed
consolidated financial statements are an integral
part of these consolidated financial statements.
5
GB HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------------------------------------
2004 2003
------------------------- -------------------------
OPERATING ACTIVITIES:
Net loss $ (5,633,000) $ (4,908,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization, including provision
for obligatory investments 8,090,000 7,678,000
Loss (gain) on disposal of assets (31,000) 3,000
Provision for doubtful accounts 347,000 688,000
Decrease (increase) in income tax deposits 1,278,000 (4,000)
Decrease in accounts receivable (455,000) (349,000)
Increase in accounts payable
and accrued liabilities 221,000 63,000
(Increase) decrease in other current assets (152,000) 182,000
Net change in other noncurrent assets and liabilities 169,000 176,000
------------------------- -------------------------
Net cash provided by operating activities 3,834,000 3,529,000
------------------------- -------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (6,190,000) (6,576,000)
Proceeds from disposition of assets 40,000 2,000
Purchase of obligatory investments (872,000) (1,098,000)
------------------------- -------------------------
Net cash used in investing activities (7,022,000) (7,672,000)
------------------------- -------------------------
FINANCING ACTIVITIES:
Repayments of long-term debt - -
------------------------- -------------------------
Net cash used in financing activities - -
------------------------- -------------------------
Net decrease in cash and cash equivalents (3,188,000) (4,143,000)
Cash and cash equivalents at beginning of period 33,454,000 50,645,000
------------------------- -------------------------
Cash and cash equivalents at end of period $ 30,266,000 $ 46,502,000
========================= =========================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 6,050,000 $ 6,050,000
========================= =========================
Interest capitalized $ 101,000 $ 211,000
========================= =========================
Income taxes paid $ 603,000 $ 376,000
========================= =========================
The accompanying notes to condensed
consolidated financial statements are an integral
part of these condensed consolidated financial
statements.
6
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
GB Holdings, Inc. and subsidiaries ("Holdings" or the "Company"). All
significant intercompany transactions and balances have been eliminated in
consolidation. In management's opinion, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the condensed
consolidated financial position as of June 30, 2004 and the condensed
consolidated results of operations for the three and six months ended June 30,
2004 and 2003 have been made. The results set forth in the condensed
consolidated statement of operations for the three and six months ended June 30,
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 accounting principles generally
accepted in the United States of America can be condensed or omitted.
The Company is responsible for the unaudited condensed consolidated
financial statements included in this document. As these are condensed
consolidated 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
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 or State
income tax benefit for the three and six months ended June 30, 2004. 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 The State income tax provision of $248,000 and $515,000 for the
three and six months ended June 30, 2004, respectively, is comprised of applying
the statutory alternative minimum assessment rate of 0.4% to gross receipts, as
defined in the Business Tax Reform Act ($160,000 and $340,000, respectively)
plus two quarterly installment payments of the Casino Income Tax ($88,000 and
$175,000, respectively).
(3) TRANSACTIONS WITH RELATED PARTIES
The Company's rights to the trade name "Sands" (the "Trade Name") were
derived from a license agreement with an unaffiliated third party. Amounts
payable by the Company for these rights were equal to the amounts paid to the
unaffiliated third party. The rights were assigned to the Company by High River
Limited Partnership ("High River"), which obtained 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 (the
Company's chairman and majority shareholder). High River received no payments
for its assignment of these rights.
7
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Payment is made directly to the owner of the Trade Name. Such charges amounted
to $119,000 and $130,000, respectively, for the six months ended June 30, 2004
and 2003 and $66,000 and $71,000, respectively, for the three months ended June
30, 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 Richard P. Brown (the Company's chief executive officer), as well as
charges for tax preparation to the Company. Charges incurred from the
Stratosphere for the six months ended June 30, 2004 and 2003 were $215,000 and
$108,000, respectively, and $109,000 and $42,000, respectively, for the three
months ended June 30, 2004 and 2003.
On February 28, 2003, the Company 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. Charges incurred for the six months ended June 30, 2004
were $81,000 and $26,000, respectively. Such charges amounted to $40,000 and
$26,000, respectively, for the three months ended June 30, 2004 and 2003.
(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.
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.
The Company is a party in various legal proceedings with respect to the
conduct of casino and hotel operations and has been receiving employee 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 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 and diluted loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding.
8
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) COMMITMENTS AND CONTINGENCIES
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"). Under the plan, casinos will pay a total of $96 million over
a period of four years, of which $10 million will fund, through project grants,
North Jersey CRDA projects and $86 million will be paid to the New Jersey Sports
and Exposition Authority which will then subsidize certain New Jersey horse
tracks to increase purses and attract higher-quality races that would allow them
to compete with horse tracks in neighboring states. In return, the race tracks
and New Jersey have committed to postpone any attempts to install VLTs for at
least four years. $52 million of the $86 million would be donated by the CRDA
from the casinos' North Jersey obligations and $34 million would be paid by the
casinos directly. It is currently estimated that The 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.
(7) SUBSEQUENT EVENT
On July 22, 2004, Atlantic Coast Entertainment Holdings, Inc. ("Atlantic
Holdings"), a subsidiary of the Company, consummated the Consent Solicitation
and Offer to Exchange which it commenced and in which Atlantic Holdings offered
to exchange its 3% Notes due 2008 for 11% Notes due 2005, issued by the Company.
Pursuant to the Consent Solicitation and Offer to Exchange, an aggregate
principal amount of $66,258,970 of 11% Notes, representing 60.2% of the
outstanding 11% Notes, were tendered to Atlantic Holdings, on a dollar for
dollar basis, in exchange for an aggregate principal amount of $66,258,970 of 3%
Notes. At the election of the holders of a majority in principal amount of the
outstanding 3% Notes, each $1,000 principal amount of 3% Notes is payable in or
convertible into 65.909 shares of common stock, par value $.01 per share
("Atlantic Holdings Common Stock") of Atlantic Holdings, subject to adjustments
for stock dividends, stock splits, recapitalizations and the like. Holders of
the 11% Notes that tendered in the Consent Solicitation and Offer to Exchange
also received their pro rata share of the aggregate consent fees ($6.6 million)
at the rate of $100 per $1000 principal amount of the 11% Notes tendered, plus
accrued interest ($2.3 million) on the 11% Notes tendered, which amounts were
paid at the consummation of the transaction. As indicated in the Consent
Solicitation and Offer to Exchange, an aggregate of 10,000,000 warrants were
distributed on a pro rata basis to the shareholders of Holdings upon the
consummation of the transaction. Such Warrants allow the holders to purchase, at
an excercise price of $.01 per share, an aggregate of 2,750,000 shares of
Atlantic Holdings' Common Stock and are only exercisable following the earlier
of (a) either the 3% Notes being paid in cash or upon conversion, in whole or in
part, into Atlantic Holdings Common Stock, (b) payment in full of the
outstanding principal of the 11% Notes which have not been exchanged, and (c) a
determination by a majority of the board of directors of Atlantic Holdings
(including at least one independent director of Atlantic Holdings) that the
Warrants may be exercised. An additional $1.3 million in legal and state
transfer fees were expended at the consummation of the transaction. Also on July
22, in connection with the consummation of the Consent Solicitation and Offer to
Exchange, in a series of transactions, GB Property Funding Corp. ("Property"), a
Delaware corporation, and Greate Bay Hotel and Casino, Inc. ("Operating"), a New
Jersey corporation, both wholly owned subsidiaries of Holdings, merged into
Holdings, with Holdings as the surviving entity. All references to Holdings and
Company refer to such entity as it existed following the consummation of those
transactions and mergers.
9
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On July 23, 2004, the Board of Directors of Holdings authorized the
filing of a request with the Securities and Exchange Commission and the American
Stock Exchange to withdraw its common stock, par value $.01 per share (the
"Common Stock"), from listing and registration on the American Stock Exchange
(Ticker Symbol: GBH). On July 29, 2004, Holdings filed an application to
voluntarily delist its common stock from the American Stock Exchange.
10
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 GB Holdings, Inc.
("Holdings"), Atlantic Coast Entertainment Holdings, Inc. ("Atlantic Holdings")
and ACE Gaming LLC ("ACE") collectively 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 Holdings, Atlantic Holdings, ACE or its management
are intended to identify forward-looking statements (see "Private Securities
Litigation Reform Act" below).
OVERVIEW
Holdings is a Delaware corporation. In February 1994, Holdings acquired
Greate Bay Hotel and Casino, Inc. ("Operating"), through a capital contribution
by its then parent. Operating's principal business activity was its ownership of
the Sands Casino Hotel (the "Sands"). As a result of the consummation of the
transactions and mergers described below, The Sands is now owned by ACE, a New
Jersey limited liability company and a wholly owned subsidiary of Atlantic
Holdings.
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.
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.
On July 22, 2004, Atlantic Holdings consummated the Consent Solicitation
and Offer to Exchange in which holders of an aggregate principal amount of
$66,258,970 of 11% Notes tendered such notes for exchange on a dollar for dollar
basis for 3% Notes and each holder that tendered received their pro rata share
of the aggregate consent fees ($6.6 million) at the rate of $100 per $1,000
principal amount of the 11% Notes tendered, plus accrued interest ($2.3 million)
on the 11% Notes tendered. Pursuant to the terms of the 3% Notes, such Notes
are, at the election of the holders of a majority of the aggregate principal
amount, either payable. in or convertible into an aggregate of 4,367,062 shares
of Atlantic Holdings Common Stock, subject to adjustments for stock dividends,
stock splits, recapitalizations and the like. Also, an aggregate of 10,000,000
warrants to purchase an aggregate of 2,750,000 shares of Atlantic Holdings
Common Stock were distributed on a pro rata basis to the shareholders of
Holdings upon the consummation of the transaction. Such Warrants allow the
holders to purchase, at an exercise price of $.01 per share, an aggregate of
2,750,000 shares of Atlantic Holdings' Common Stock and are only exercisable
upon following the earlier of (a) either the 3% Notes being paid in cash or upon
conversion, in
11
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
whole or in part, into Atlantic Holdings Common Stock, (b) payment in full of
the outstanding principal of the 11% Notes which have not been exchanged, and
(c) a determination by a majority of the board of directors of Atlantic Holdings
(including at least one independent director of Atlantic Holdings) that the
Warrants may be exercised. Also on July 22, in connection with the consummation
of the Consent Solicitation and Offer to Exchange, in a series of transactions,
Property and Operating merged with Holdings.
Pursuant to New Jersey law, the corporate owner of the Sands is required
to maintain a casino license in order to operate The Sands. The gaming licenses
required to own and operate The Sands must be renewed in 2004, which requires
that the New Jersey Casino Control Commission ("CCC") determine that among other
things, Atlantic Holdings and ACE are financially stable. In order to be found
"financially stable" under the New Jersey Casino Control Act ("NJCCA"), Atlantic
Holdings and ACE must demonstrate among other things, their ability to pay,
exchange, or refinance debts that mature or otherwise become due and payable
during the license term, or to otherwise manage such debts. During July 2004,
The Sands filed a timely renewal application of its casino license for a four
year term. The CCC will consider The Sands casino license renewal application on
September 29, 2004. There has been no precedent of non-renewal of a casino
license in this situation.
In connection with the Consent Solicitation and Exchange Offer described
above, holders of $66,258,970 of 11% Notes exchanged such notes for an equal
principal amount of 3% Notes. As a result, $43,741,030 of principal amount of
the 11% Notes remain outstanding and mature in September 2005. Holdings' ability
to pay interest on such outstanding 11% Notes is dependent upon receipt of funds
from Atlantic Holdings in amounts sufficient to make such interest payments, and
such disbursements are subject to (i) a number of conditions including that such
payment is required to be made prior to or at maturity of the 11% Notes and that
at the time of such payment and after giving effect thereto, no event of default
exists and no event that could result in an event of default has occurred or is
incipient and (ii) Atlantic Holdings being able to make such payments. In
addition, Holdings' ability to pay the principal amount of the remaining 11%
Notes at maturity in September 2005 will depend upon its ability to refinance
such Notes on favorable terms, or at all, or to derive sufficient funds from the
sale of its Atlantic Holdings Common Stock or from a borrowing. If Holdings does
not pay the principal due on the remaining 11% Notes at maturity it could result
in among other things, the possibility of Holdings seeking bankruptcy
protection.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY
12
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 Carl C. Icahn
(the Company's chairman and majority shareholder), 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. After receipt of Ealing's commitment, the
Company contacted several other lenders and was able to obtain a term sheet,
from an unaffiliated lender for financing its working capital needs and the
Company then allowed the commitment from Ealing to expire. In the term sheet,
the unaffiliated lender agreed to provide a revolving credit facility to the
Company allowing the Company to borrow up to an aggregate principal amount of
$10 million for working capital purposes, which shall mature 364 days following
the execution of definitive documents, which is secured by a first lien on all
of the assets of the Company, and has an interest rate of LIBOR plus 8% per
annum.
OPERATING ACTIVITIES
At June 30, 2004, the Company had cash and cash equivalents of $30.3
million. The Company generated $3.8 million of net cash from operations during
the six months ended June 30, 2004 compared to $3.5 million during the same
prior year period.
INVESTING ACTIVITIES
Capital expenditures at The Sands for the six months ended June 30, 2004
amounted to approximately $7.0 million compared to $7.7 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.
The Sands is required by the Casino Act to make certain quarterly
deposits based on gross revenue with the Casino Reinvestment Development
Authority ("CRDA") in lieu of a certain investment alternative tax. Deposits for
the six months ended June 30, 2004 and 2003 amounted to $872,000 and $1.1
million, respectively.
13
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FINANCING ACTIVITIES
There were no financing activities during the six months ended June 30,
2004. As of June 30, 2004, the only scheduled payment of long-term debt is the
11% Notes, which mature on September 29, 2005. During 2004, Management
anticipates making its next scheduled interest payment on the 11% Notes of $2.4
million on September 29, 2004; since the anticipated exchange was consummated
prior to September 29, 2004, holders that exchanged were entitled to payments
for accrued interest at the time of the exchange. As noted above, Holdings'
ability to pay interest is dependent upon the receipt of payments from Atlantic
Holdings and its ability to pay the principal amount of the remaining 11% Notes
at maturity in September 2005 will depend upon its ability to refinance such
Notes on favorable terms or at all or to derive sufficient funds from the sale
of its Atlantic Holdings Common Stock or from a borrowing.
Pursuant to New Jersey law, the corporate owner of The Sands is required
to maintain a casino license in order to operate The Sands. The gaming licenses
required to own and operate The Sands must be renewed in 2004, which requires
that the CCC determine that among other things, Atlantic Holdings and ACE are
financially stable. In order to be found "financially stable" under NJCCA,
Atlantic Holdings and ACE must demonstrate among other things, its ability to
pay, exchange, or refinance debts that mature or otherwise become due and
payable during the license term, or to otherwise manage such debts. During July
2004, the Sands filed a timely renewal application of its casino license for a
four year term. The CCC will consider the Sands casino license renewal
application on September 29, 2004. There has been no precedent of non-renewal of
a casino license in this situation.
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 ("USA GAAP"). The preparation
of financial statements in conformity with USA 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:
14
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 and major medical claims for non-union
employees. The Company accrues for outstanding reported claims, claims that have
been incurred but not reported and projected claims based upon management's
estimates of the aggregate liability for uninsured claims using historical
experience, 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. Recently, however, CRDA donations have not yielded a specific
future credit percentage. Certain donations have made the Sands eligible for a
100% return of existing investments under certain conditions. Other donations
have little or no future credit value. Management has reserved the predominant
balance of its obligatory investments at between 33% and 49%.
15
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
GAMING OPERATIONS
Information contained herein, regarding Atlantic City casinos other than
the Sands, was obtained from reports filed with the CCC.
The following table sets forth certain unaudited financial and operating
data relating to the Sands' and all other Atlantic City casinos' capacities,
volumes of play, hold percentages and revenues:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -------------------------------
2004 2003 2004 2003
------------- -------------- -------------- --------------
(Dollars in Thousands) (Dollars in Thousands)
UNITS: (AT END OF PERIOD)
Table Games - Sands 75 61 75 61
- Atlantic City (ex. Sands) 1,324 1,154 1,324 1,154
Slot Machines - Sands 2,186 2,171 2,186 2,171
- Atlantic City (ex. Sands) 40,121 36,034 40,121 36,034
GROSS WAGERING (1)
Table Games - Sands $ 59,714 $ 53,144 $ 119,611 $ 98,315
- Atlantic City (ex. Sands) 1,812,558 1,610,605 3,594,662 3,130,602
Slot Machines - Sands 481,878 514,630 913,426 993,880
- Atlantic City (ex. Sands) 10,515,398 9,787,048 20,329,207 18,502,770
HOLD PERCENTAGES (2)
Table Games - Sands 17.04% 15.21% 16.23% 14.65%
- Atlantic City (ex. Sands) 15.34% 16.39% 15.82% 16.52%
Slot Machines - Sands (accrual basis) 8.20% 8.02% 8.15% 7.89%
- Sands (cash basis) 8.36% 8.18% 8.35% 8.07%
- Atlantic City (ex. Sands) (accrual basis) N/A N/A N/A N/A
- Atlantic City (ex. Sands) (cash basis) 8.23% 8.15% 8.16% 8.09%
REVENUES (2)
Table Games - Sands $ 10,175 $ 8,085 $ 19,407 $ 14,404
- Atlantic City (ex. Sands) 278,028 264,049 568,607 517,194
Slot Machines - Sands (accrual basis) 39,530 41,259 74,457 78,422
- Sands (cash basis) 40,291 42,089 76,301 80,221
- Atlantic City (ex. Sands) (accrual basis) N/A N/A N/A N/A
- Atlantic City (ex. Sands) (cash basis) 865,731 797,265 1,659,570 1,496,331
Other (3) - Sands 356 303 697 461
- Atlantic City (ex. Sands) 14,201 10,367 27,923 20,040
- -------------------------------
(1) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (the "Drop") and coins wagered
in slot machines (the "Handle").
16
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(2) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the
"hold percentage." The Sands' hold percentages and revenues are
reflected on an accrual basis. Comparable accrual basis data for the
remainder of the Atlantic City gaming industry as a whole is not
available; consequently, industry hold percentages and revenues are
based on information available from the Commission.
PATRON GAMING VOLUME
Information contained herein, regarding Atlantic City casinos other than
the Sands, was obtained from reports filed with the Commission.
For the three and six months ended June 30, 2004 the table game drop
increased $6.6 million (12.4%) and $21.3 million (21.7%) compared to the
comparable periods in 2003. These results are compared to the Atlantic City
Industry table drop results, which increased $202.0 million (12.5%) and $464.1
million (14.8%) for the three months and six months ended June 30, 2004
respectively compared to the same periods in 2003. During these 2004 periods,
the Borgata was in operation with no comparable operations during the same prior
year periods. Despite the impact of a major new competitor in the Atlantic City
market, the Company maintained its table game market share (3.3%) for the second
quarter 2004 and increased its table game market share by 0.2 percentage points
to 3.3% the first half of 2004 when compared to the same prior year periods.
Table game hold percentage for the Company increased by 1.8 percentage points to
17.0% and 1.5 percentage points to 16.2% for the three and six month periods
ended June 30, 2004, respectively, compared to the same periods in 2003. The
number of table games in operation, as of June 30, 2004, was 75 compared to 61
at the same time in 2003. On an industry-wide basis, the number of table games
increased by 170 units or 14.7% to 1,324 at June 30, 2004 compared to 2003.
Slot machine handle for the Company decreased $32.8 million (6.4%) and
$80.5 million (8.1%) for the three and six month periods ended June 30, 2004,
respectively, compared to the same periods in 2003. By comparison, the
percentage change in slot machine handle for all other Atlantic City casinos
during these periods in 2004 compared to the same periods was 7.4% increase for
the three month period and a 9.9% increase for the six month period. The
Company's 2004 decrease in handle was primarily due to the competitive impact of
Borgata on the Atlantic City market. The Borgata added 3,550 units of Atlantic
City's highest daily win per unit slot machines, as measured over the first half
of 2004. The Sands decrease in slot machine handle was offset by an increase in
the hold percentage of 0.2 percentage points to 8.2% and 0.3 percentage points
to 8.2% for the three and six month periods ended June 30, 2004 compared to the
same periods in 2003. This positive variance in hold percentage was not enough
to offset the decrease in slot machine handle and resulted in a decrease in Slot
revenue of $1.7 million (4.2%) and $4.0 million (5.1%) for the three and six
month periods ended June 30, 2004, respectively, compared to the periods in
2003. The number of slot machine units as of June 30, 2004 was 2,186 compared to
2,171 at the same time in 2003. On an industry-wide basis, the number of slot
machines increased by 4,057 units or 11.3% to 40,121 at June 30, 2004 compared
to 2003.
17
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth the changes in operating revenues and
expenses (unaudited) for the three month and six month periods ended June 30,
2004 and 2003:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------------- ------------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
2004 2003 $ % 2004 2003 $ %
--------- ---------- ------------ --------- ---------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
Revenues:
Casino $ 50,061 $ 49,647 $ 414 0.83 $ 94,561 $ 93,286 $ 1,275 1.37
Rooms 2,776 2,956 (180) (6.09) 5,061 5,415 (354) (6.54)
Food and Beverage 5,797 5,511 286 5.19 10,785 10,175 610 6.00
Other 1,023 1,080 (57) (5.28) 1,953 1,963 (10) (0.51)
Promotional Allowances 14,320 13,164 1,156 8.78 25,574 25,008 566 2.26
EXPENSES:
Casino 32,967 33,072 (105) (0.32) 63,298 64,958 (1,660) (2.56)
Rooms 724 596 128 21.48 1,332 1,030 302 29.32
Food and Beverage 2,204 2,425 (221) (9.11) 4,294 4,481 (187) (4.17)
Other 678 784 (106) (13.52) 1,375 1,388 (13) (0.94)
General and Administrative 3,005 2,739 266 9.71 5,878 5,261 617 11.73
Depreciation and Amortization 4,017 3,947 70 1.77 8,090 7,678 412 5.37
Loss (gain) on disposal of assets (31) (1) (30) 3,000.00 (31) 3 (34) (1,133.33)
INCOME FROM OPERATIONS 1,773 2,468 (695) (28.16) 2,550 1,032 1,518 147.09
Non-operating expense, net 4,018 2,791 1,227 43.96 7,668 5,597 2,071 37.00
Income Tax Provision 248 184 64 34.78 515 343 172 50.15
REVENUES
Overall casino revenues increased $414,000 (0.8%) and $1.3 million
(1.4%) for the three and six month periods ended June 30, 2004, respectively,
compared to the same periods in 2003. The increase in casino revenues is
attributable to the increases in table game revenue ($2.1 million) and other
casino revenue ($53,000) offset by a decrease in slot machine revenue ($1.7
million) with the related changes in hold percentage.
Room revenue decreased $180,000 (6.1%) and $354,000 (6.5%) for the three
and six month periods ended June 30, 2004, respectively, compared to the same
period in 2003. The decrease in room revenue is directly attributable to the
decrease in room occupancy for the three and six months ended June 30, 2004,
respectively, compared to the same period in 2003. The decrease in occupancy was
primarily due to a reduction in promotional room nights.
Food and Beverage revenues increased $286,000 (5.2%) and $610,000 (6.0%)
for the three and six month periods ended June 30, 2004, respectively, compared
to the same periods in 2003. These increases are directly attributable to the
new casino bar ("Swingers") ($308,000 quarter-to-date and $622,000
year-to-date), which opened in July 2003.
18
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other revenues decreased $57,000 (5.3%) and $10,000 (0.5%) for the three
and six month periods ended June 30, 2004, respectively, compared to the same
periods in 2003. The decrease during the three and six month periods is
primarily attributable to a reduction in the people-mover monthly rental with
Caesars Entertainment. The rent was lowered by $30,000 per month in July 2003,
according to the lease.
PROMOTIONAL ALLOWANCES
Promotional allowances are comprised of (i) the estimated retail value
of goods and services provided free of charge to casino customers under various
marketing programs, (ii) the cash value of redeemable points earned under a
customer loyalty program based on the amount of slot play and (iii) coin and
cash coupons and discounts. The dollar amount of promotional allowances
increased $1.2 million (8.8%) and $566,000 (2.3%) for the three and six month
periods ended June 30, 2004, respectively, compared to the same periods in 2003.
As a percentage of casino revenues, promotional allowances increased to 28.6%
from 26.5% and 27.0 % from 26.8% for the three and six month periods ended June
30, 2004, respectively, compared to the same periods in 2003. The increase in
this ratio is directly attributable to the increased casino revenues as a result
of the Company's continued focus on its table game enhancement and refocus on
the mid to high end slots.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands decreased by $105,000 (0.3%) and $1.7
million (2.6%), respectively, for the three and six months ended June 30, 2004
compared to the same prior year period. The decrease in casino expenses is
primarily due to a reduction of allocable costs to the casino department for
overhead, marketing and complimentary expenses ($355,000 and $1.2 million,
respectively, for the three and six months ended June 30, 2004 compared to the
same prior year periods). Payroll expenses decreased ($209,000 and $231,000 for
the three and six months ended June 30, 2004, respectively) due to the reduction
in personnel. The provision for doubtful accounts was reduced by $204,000 and
$379,000 for the three and six months ended June 30, 2004, respectively, as a
result of less casino credit activity.
Rooms expenses increased $128,000 (21.5%) and $302,000 (29.3%) for the
three and six months ended June 30, 2004 compared to the same prior year period.
The increased rooms expenses are almost entirely due to a reduction of allocable
costs to the casino department for complimentary expenses ($209,000 and
$501,000, respectively, for the three and six months ended June 30, 2004
compared to the same prior year periods) as a result of fewer complimentary
promotional room nights in 2004 compared to 2003. These were offset slightly by
favorable variances in payroll and benefits ($134,000 and $225,000,
respectively, for the three and six months primarily ended June 30, 2004
compared to the same prior year period) due to reductions in staffing.
Food and beverage expenses decreased $221,000 (9.1%) and $187,000
(4.2%), respectively, for the three and six months ended June 30, 2004 compared
to the same prior year period. The decreases were primarily due to decreased
payroll and benefits costs ($169,000 and $263,000 for the three and six months
ended June 30, 2004, respectively, compared to the same prior year periods as a
result of lower staffing levels). Also contributing to the decreased food and
beverage expense were increases in allocable overhead and complimentary expense
to the casino department ($73,000 and $126,000 for the three and six months
ended June 30, 2004, respectively) and food and beverage cost of sales ($71,000
and $207,000 for the three and six months ended June 30, 2004, respectively),
which were a result of increased sales.
19
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other expenses decreased $106,000 (13.5%) and $13,000 (0.9%) for the
three and six months ended June 30, 2004, compared to the same prior year
periods. The decreased costs were due to an unfavorable variance in allocable
costs to casino expense for complimentaries ($281,000 and $356,000 for the three
and six months ended June 30, 2004, respectively). Decreased payroll and
benefits costs also contributed favorably $133,000 and $299,000 for the three
and six months ended June 30, 2004, respectively) due to reduced staffing. These
were offset by increases in entertainment costs ($246,000 and $361,000 for the
three and six months ended June 30, 2004, respectively) due to increased
headline entertainment compared to the prior year periods.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $266,000 (9.7%) and
$617,000 (11.7%), respectively, for the three and six months ended June 30,
2004, compared to the same prior year periods. The increases were due to lower
allocable costs for property overhead to the casino department ($480,000 and
$1.0 million for the three and six months ended June 30, 2004, respectively) and
the increased cost of electricity ($193,000 and $340,000 for the three and six
months ended June 30, 2004, respectively, compared to the same prior year
periods) due to increased energy costs.
DEPRECIATION AND AMORTIZATION, INCLUDING PROVISION FOR OBLIGATORY
INVESTMENTS
Depreciation and amortization, including provision for obligatory
investments, increased $70,000 (1.8%) and $412,000 (5.4%), respectively, for the
three and six month periods ended June 30, 2004, compared to the same prior year
periods due to an increase in depreciation expense ($140,000 and $399,000 for
the three and six months ended June 30, 2004, respectively) as a result of the
continued investment in infrastructure and equipment during the current and
preceding year.
INTEREST INCOME AND EXPENSE
Interest income decreased by $55,000 (32.0%) and $133,000 (36.8%),
respectively, during the three and six month periods ended June 30, 2004,
compared to the same prior year periods. The decrease was due to smaller
earnings on decreased cash reserves.
Interest expense increased $42,000 and $99,000, respectively, during the
three and six month periods ended June 30, 2004, compared to the same periods in
2003. The increase is due to a larger accrual of capitalized interest in 2003
compared to 2004 for both the quarterly and year-to-date comparison ($47,000 and
$110,000,respectively, for the three and six months ended June 30, 2004 compared
to the same prior year periods).
20
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DEBT RESTRUCTURING COSTS
Debt Restructuring Costs amounted to $1.1 million and $1.8 million,
respectively, for the three and six month periods ended June 30, 2004, as a
direct result of the Consent Solicitation and Offer to Exchange commenced by
Atlantic Holdings. There were no similar costs incurred during the same periods
in 2003.
INCOME TAX PROVISION
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
for the six months ended June 30, 2004.
The State income tax provision increased $64,000 (34.8%) and $172,000
(50.2%), respectively, for the three and six months ended June 30, 2004 compared
to the same prior year periods is a result of the casino net income tax, which
became effective in July 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.
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 the Company 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 in particular. Such
forward-looking information involves important risks and uncertainties that
21
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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. 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
HOLDINGS MAY BE UNABLE TO PAY EITHER THE INTEREST ON THE 11% NOTES EITHER AT OR
PRIOR TO MATURITY OR THE PRINCIPAL ON THE 11% NOTES AT MATURITY
Holdings' ability to pay (i) interest on the 11% Notes is dependent upon
the receipt of payments from Atlantic Holdings, which is subject to (A) a number
of conditions, including that such payment is required to be made prior to or at
maturity of the 11% Notes and that at the time of such payment and giving effect
thereto, no event of default exists and no event that could result in an event
of default has occurred or is incipient and (ii) the principal amount of the
remaining 11% Notes at maturity in September 2005 will depend upon its ability
to refinance such Notes on favorable terms or at all or to derive sufficient
funds from the sale of its Atlantic Holdings Common Stock or from a borrowing.
THE CORPORATE OWNER OF THE SANDS MAY BE UNABLE TO OBTAIN RENEWAL FROM THE CCC OF
THE CASINO LICENSE THAT IS NECESSARY TO OPERATE THE SANDS DUE TO ITS OUTSTANDING
DEBT.
Pursuant to New Jersey law, the corporate owner of The Sands is required
to maintain a casino license in order to operate The Sands. The gaming licenses
required to own and operate The Sands must be renewed in 2004, which requires
that the CCC determine that among other things, Atlantic Holdings and ACE are
financially stable. In order to be found "financially stable" under NJCCA,
Atlantic Holdings and ACE must demonstrate among other things, their ability to
pay, exchange, or refinance debts that mature or otherwise become due and
payable during the license term, or to otherwise manage such debts. During July
2004, the Sands filed a timely renewal application of its casino license for a
four year term. The CCC will consider the Sands casino license renewal
application on September 29, 2004. There has been no precedent of non-renewal of
a casino license in this situation.
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.
22
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 Corp., a Nevada
corporation and an affiliate of Carl C. Icahn (the Company's chairman and
majority shareholder), 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. After receipt of Ealing's commitment, the Company contacted several
other lenders and was able to obtain a term sheet, from an unaffiliated lender
for financing its working capital needs and the Company then allowed the
commitment from Ealing to expire. In the term sheet, the unaffiliated lender
agreed to provide a revolving credit facility to the Company allowing the
Company to borrow up to an aggregate principal amount of $10 million for working
capital purposes, which shall mature 364 days following the execution of
definitive documents, which is secured by a first lien on all of the assets of
the Company, and has an interest rate of LIBOR plus 8% per annum. The revolving
credit facility is subject to the execution of definitive documents and certain
other conditions and the consummation of the loan facility is therefore not
assured.
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.
THE COMPANY'S QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND
SEASONALITY.
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 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.
23
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 six months ended June 30, 2004 and 2003, there was a charge to
income tax provision of $340,000 and $343,000, 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.
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
24
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
25
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 Atlantic Holdings, a wholly owned subsidiary of Holdings, has
agreed in the Indenture governing its 3% Notes to maintain insurance customary
and appropriate for its business, the Company cannot assure you that insurance
will be available or adequate to cover all loss and damage to which the
Company's business or the Company's assets might be subjected. In connection
with insurance renewals subsequent to September 11, 2001, the insurance coverage
for certain types of damages or occurrences have been diminished substantially
and are 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 future operating income, require it to find
replacements or repairs for destroyed property and reduce the funds available
for the principal and interest payments to service its debt.
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 six months ended June 30, 2004, gaming
credit extended to Sands' table game patrons accounted for approximately 24.7%
of overall table game wagering, and table game wagering accounted for
approximately 11.6% of overall casino wagering during the period. At June 30,
2004, gaming receivables amounted to $9.5 million before an allowance for
uncollectible gaming receivables of $5.6 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.
26
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 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. Additionally, the Borgata announced expansion plans that include
additional gaming and retail space. Construction is expected to commence in
2005. In addition, other competitors of the Company 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 recently completed a hotel room addition of
approximately 400 rooms. 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).
27
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.
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"). 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.
28
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Pennsylvania legislature passed and the governor signed a bill in
July 2004 that will allow for up to 60,000 slot machines to operate at eight
authorized race tracks and four stand alone slot parlors. The first of these
slot machines are expected to be operational during 2005.
Maryland is among the other states currently contemplating some form of
gaming legislation. Maryland's proposed legislation would authorize video
lottery terminals at some of Maryland's racing facilities. Maryland was unable
to enact any legalized gaming legislation in their legislative sessions during
the six months ended June 30, 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 11% Notes are subject to certain regulatory restrictions on
ownership. While holders of publicly traded obligations such as the 3% Notes are
generally not required to be investigated and found suitable to hold such
securities, the CCC has the discretionary authority to (i) require holders of
securities of corporations governed by New Jersey gaming law to file
applications; (ii) investigate such holders; and (iii) require such holders to
be found suitable or qualified to be an owner or operator of a gaming
establishment. Pursuant to the regulations of the CCC such gaming corporations
may be sanctioned, including the loss of its approvals, if, without prior
approval of the CCC, it (i) pays to the unsuitable or unqualified person any
dividend, interest or any distribution whatsoever; (ii) recognizes any voting
right by such unsuitable or unqualified person in connection with the
securities; (iii) pays the unsuitable or unqualified person remuneration in any
form; or (iv) makes any payments to the unsuitable or unqualified person by way
of principal, redemption, conversion, exchange, liquidation, or similar
transaction. If 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 3%
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 April 16, 2004, the last full trading day prior to the delisting of
11% Notes from trading on the American Stock Exchange, the fair value of the
Company's fixed rate debt was $89.1 million compared with its carrying amount of
$110 million.
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.
29
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 June 30, 2004 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 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 June 30, 2004, the Registrant filed one Current
Report on Form 8-K: (Items 5 and 7) on April 22, 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 August 13, 2004.
GB HOLDINGS, INC.
Registrant
Date: August 13, 2004 /s/ Denise Barton
-------------------------------- -----------------------------
Denise Barton
Chief Financial Officer
31
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 June 30, 2004, the Registrants filed one
Current Report on Form 8-K: (Items 5 and 7) on April 22, 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 August 13, 2004.
GB HOLDINGS, INC.
Registrant
Date: August 13, 2004
-------------------------------- --------------------------------
Denise Barton
Chief Financial Officer
32