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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 SEPTEMBER 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 NOVEMBER 9, 2004
- ----------------------- ---------------------------- --------------------------------------
GB Holdings, Inc. Common stock, $.01 par value 10,000,000 shares
1
PART I: FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS
GB HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------------------- -------------------------
Current Assets:
Cash and cash equivalents $ 19,164,000 $ 33,454,000
Accounts receivable, net of allowances
of $4,175,000 and $5,918,000, respectively 4,534,000 5,247,000
Inventories 2,311,000 2,222,000
Income tax deposits - 1,365,000
Prepaid expenses and other current assets 6,541,000 3,343,000
------------------------- -------------------------
Total current assets 32,550,000 45,631,000
------------------------- -------------------------
Property and Equipment:
Land 54,344,000 54,344,000
Buildings and improvements 88,512,000 88,249,000
Equipment 74,787,000 64,722,000
Construction in progress 1,177,000 2,111,000
------------------------- -------------------------
218,820,000 209,426,000
Less - accumulated depreciation and
amortization (50,877,000) (40,013,000)
------------------------- -------------------------
Property and equipment, net 167,943,000 169,413,000
------------------------- -------------------------
Other Assets:
Obligatory investments, net of allowances of
$12,222,000 and $11,340,000, respectively 11,369,000 10,705,000
Other assets 6,256,000 1,814,000
------------------------- -------------------------
Total other assets 17,625,000 12,519,000
------------------------- -------------------------
$ 218,118,000 $ 227,563,000
========================= =========================
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these condensed consolidated financial
statements.
2
GB HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------------------- -------------------------
Current Liabilities:
Current maturities of long-term debt $ 43,741,000 $ -
Accounts payable 5,761,000 6,815,000
Accrued liabilities -
Salaries and wages 4,288,000 3,570,000
Interest 13,000 3,092,000
Gaming obligations 3,473,000 2,744,000
Self-insurance 4,177,000 2,505,000
Other 3,182,000 3,473,000
------------------------- -------------------------
Total current liabilities 64,635,000 22,199,000
------------------------- -------------------------
Long-Term Debt, net of current maturities 66,259,000 110,000,000
Other non-current liabilities 4,346,000 3,729,000
Warrants in Atlantic Coast Entertainment Holdings, Inc. 43,587,000 -
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 81,313,000 124,900,000
Accumulated deficit (42,122,000) (33,365,000)
------------------------- -------------------------
Total shareholders' equity 39,291,000 91,635,000
------------------------- -------------------------
$ 218,118,000 $ 227,563,000
========================= =========================
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these condensed consolidated financial
statements.
3
GB HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------------------
2004 2003
------------------------- -------------------------
Revenues:
Casino $ 47,934,000 $ 48,907,000
Rooms 3,281,000 3,115,000
Food and beverage 5,687,000 6,627,000
Other 873,000 1,047,000
------------------------- -------------------------
57,775,000 59,696,000
Less - promotional allowances (13,018,000) (13,655,000)
------------------------- -------------------------
Net revenues 44,757,000 46,041,000
------------------------- -------------------------
Expenses:
Casino 32,808,000 35,291,000
Rooms 781,000 605,000
Food and beverage 2,117,000 2,833,000
Other 1,083,000 992,000
General and administrative 3,164,000 2,630,000
Depreciation and amortization,
including provision for obligatory investments 4,092,000 3,975,000
Gain on disposal of assets (7,000) (107,000)
------------------------- -------------------------
Total expenses 44,038,000 46,219,000
------------------------- -------------------------
Income (loss) from operations 719,000 (178,000)
------------------------- -------------------------
Non-operating income (expense):
Interest income 85,000 136,000
Interest expense (2,473,000) (3,142,000)
Debt restructuring costs (1,238,000) -
------------------------- -------------------------
Total non-operating expense, net (3,626,000) (3,006,000)
------------------------- -------------------------
Loss before income taxes (2,907,000) (3,184,000)
Income tax provision (217,000) (272,000)
------------------------- -------------------------
Net loss $ (3,124,000) $ (3,456,000)
========================= =========================
Basic/diluted loss per common share $ (0.31) $ (0.35)
========================= =========================
Basic/diluted weighted average common shares outstanding 10,000,000 10,000,000
========================= =========================
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these condensed consolidated financial
statements.
4
GB HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------------------
2004 2003
------------------------- -------------------------
Revenues:
Casino $ 142,495,000 $ 142,193,000
Rooms 8,342,000 8,530,000
Food and beverage 16,472,000 16,802,000
Other 2,826,000 3,010,000
------------------------- -------------------------
170,135,000 170,535,000
Less - promotional allowances (38,592,000) (38,663,000)
------------------------- -------------------------
Net revenues 131,543,000 131,872,000
------------------------- -------------------------
Expenses:
Casino 96,106,000 100,249,000
Rooms 2,113,000 1,635,000
Food and beverage 6,411,000 7,314,000
Other 2,458,000 2,380,000
General and administrative 9,042,000 7,891,000
Depreciation and amortization, including provision
for obligatory investments 11,905,000 11,376,000
Loss (gain) on disposal of assets (38,000) (104,000)
------------------------- -------------------------
Total expenses 127,997,000 130,741,000
------------------------- -------------------------
Income from operations 3,546,000 1,131,000
------------------------- -------------------------
Non-operating income (expense):
Interest income 313,000 497,000
Interest expense (8,807,000) (9,377,000)
Debt restructuring costs (3,077,000) -
------------------------- -------------------------
Total non-operating expense, net (11,571,000) (8,880,000)
------------------------- -------------------------
Loss before income taxes (8,025,000) (7,749,000)
Income tax provision (732,000) (615,000)
------------------------- -------------------------
Net loss $ (8,757,000) $ (8,364,000)
========================= =========================
Basic/diluted loss per common share $ (0.88) $ (0.84)
========================= =========================
Weighted average common shares outstanding 10,000,000 10,000,000
========================= =========================
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these consolidated financial statements.
5
GB HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------------------
2004 2003
------------------------- -------------------------
OPERATING ACTIVITIES:
Net loss $ (8,757,000) $ (8,364,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization, including provision
for obligatory investments 11,905,000 11,376,000
Gain on disposal of assets (38,000) (104,000)
Provision for doubtful accounts 262,000 858,000
Decrease in income tax deposits 1,365,000 -
Decrease (increase) in accounts receivable 451,000 (243,000)
Decrease in accounts payable
and accrued liabilities (1,290,000) (3,914,000)
Increase in other current assets (1,446,000) (765,000)
Decrease in noncurrent assets 188,000 407,000
Increase in noncurrent liabilities 602,000 277,000
------------------------- -------------------------
Net cash provided by (used in) operating
activities 3,242,000 (472,000)
------------------------- -------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (9,393,000) (10,614,000)
Proceeds from disposition of assets 38,000 110,000
Purchase of obligatory investments (1,551,000) (1,714,000)
------------------------- -------------------------
Net cash used in investing activities (10,906,000) (12,218,000)
------------------------- -------------------------
FINANCING ACTIVITIES:
Cost of issuing long-term debt (6,626,000) -
------------------------- -------------------------
Net cash used in financing activities (6,626,000) -
------------------------- -------------------------
Net decrease in cash and cash equivalents (14,290,000) (12,690,000)
Cash and cash equivalents at beginning of period 33,454,000 50,645,000
------------------------- -------------------------
Cash and cash equivalents at end of period $ 19,164,000 $ 37,955,000
========================= =========================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 10,744,000 $ 12,100,000
========================= =========================
Interest capitalized $ 83,000 $ 303,000
========================= =========================
Income taxes paid $ 691,000 $ 463,000
========================= =========================
Warrants in Atlantic Coast Entertainment Holdings, Inc. $ 43,587,000 $ -
========================= =========================
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these condensed consolidated financial
statements.
6
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
GB Holdings, Inc. ("GB Holdings"), Atlantic Coast Entertainment Holdings, Inc.
("Atlantic Holdings") and ACE Gaming, LLC ("ACE"), (collectively the "Company").
Atlantic Holdings is a Delaware corporation and was a wholly-owned subsidiary of
Greate Bay Hotel and Casino, Inc. ("GBHC") which was a wholly-owned subsidiary
of GB Holdings. Until July 22, 2004, GBHC was the owner and operator of The
Sands Hotel and Casino in Atlantic City ("The Sands"). ACE a New Jersey limited
liability company and a wholly-owned subsidiary of Atlantic Holdings was formed
in November 2003. Atlantic Holdings and ACE were formed in connection with a
transaction (the "Transaction"), in which Atlantic exchanged $66.3 million of
11% Notes due 2005 (the "11% Notes"), issued by GB Property Funding Corp.
("Property"), a wholly-owned subsidiary of GB Holdings, for $66.3 million 3%
Notes due 2008 (the "3% Notes"), issued by Atlantic Holdings. In connection with
the Consent Solicitation and Exchange offer, the indenture governing the 11%
Notes was amended to eliminate certain covenants and to release the lien on the
collateral securing such notes. The Transaction included, among other things,
the transfer of substantially all of the assets of GB Holdings, Inc. to Atlantic
Holdings. The transfer of net assets has been accounted for as an exchange of
net assets between entities under common control, whereby the entity receiving
the net assets shall initially recognize the assets and liabilities transferred
at their historical carrying amount in the accounts of the transferring entity
at the date of transfer. No gain or loss was recorded relating to the transfer.
The 3% Notes, in connection with the closing of the transaction, are guaranteed
on a joint and several basis by ACE. Atlantic Holdings and its subsidiary, ACE
had limited operating activities prior to July 22, 2004. Also on July 22, in
connection with the consummation of the Transaction and the Consent Solicitation
and Offer to Exchange, Property and GBHC, merged into GB Holdings, with GB
Holdings as the surviving entity. All references to GB Holdings and the Company
refer to such entity as it existed following the consummation of the
Transaction. In connection with the transfer of the assets and liabilities of GB
Holdings including those of GBHC, Atlantic Holdings issued 2,882,938 shares of
Atlantic Holdings Common Stock to GBHC which following the merger of GBHC became
the sole asset of GB Holdings. Substantially all of the assets, liabilities and
operations of GB Holdings and GBHC (with the exception of the remaining 11%
Notes due 2005 and accrued interest thereon, the Atlantic Holdings Common Stock,
and the related pro rata share of deferred financing costs) were transferred to
Atlantic Holdings or ACE. The Sands New Jersey gaming license was transferred to
ACE in accordance with the approval of the New Jersey Casino Control Commission.
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 will mature in September 2005. GB 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 by Atlantic Holdings is required to be made only in
respect of interest due prior to the 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 under the indenture for the 3% Notes and (ii) Atlantic Holdings being
able to make such payments. In addition, GB Holding's ability to pay 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 GB Holdings does not pay the remaining 11% Notes at maturity it could result
in, among other things, the possibility of GB Holdings seeking bankruptcy
protection.
7
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with the Contribution Agreement pursuant to which GB
Holdings contributed its net assets to Atlantic Holdings, GB Holdings normal,
ordinary course operating expenses (including legal and accounting costs,
directors' and officers' insurance premiums, and fees for SEC filings) not to
exceed in the aggregate $250,000 in any twelve month period are to be paid by
Atlantic Holdings subject to a number of conditions.
Additionally, on July 22, in connection with the consummation of the
Transaction, GB Holdings issued warrants which will initially be exercisable for
an aggregate of 2,750,000 shares of Atlantic Holdings Common Stock to GB
Holdings stockholders (the "Warrants"). The Warrants are exercisable at an
exercise price of $.01 per share and expire seven years from date of issuance on
July 22, 2011.
All significant intercompany transactions and balances have been
eliminated in consolidation. In management's opinion, all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the condensed consolidated financial position as of September 30, 2004 and
the condensed consolidated results of operations for the three and nine months
ended September 30, 2004 and 2003 have been made. The results set forth in the
condensed consolidated statement of operations for the three and nine months
ended September 30, 2004 are not necessarily indicative of the results to be
expected for the full year. Certain reclassifications have been made to the
prior year condensed consolidated financial statements to conform to the current
year condensed consolidated financial statement presentations.
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) LONG-TERM DEBT
Long-term debt is comprised of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------------------- -------------------------
11% notes, due September 29, 2005 $ 43,741,000 $ 110,000,000
3% Notes due September 29, 2008 66,259,000 -
------------------------- -------------------------
Total indebtedness 110,000,000 110,000,000
Less - current maturities (43,741,000) -
------------------------- -------------------------
Total long-term debt $ 66,259,000 $ 110,000,000
========================= =========================
8
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On July 22, 2004, Atlantic Holdings consummated the Consent Solicitation
and Offer to Exchange which it commenced and in which Atlantic Holdings offered
to exchange its 3% Notes due 2008 for 11% Notes due 2005, issued by GB Property
Funding Corp. ("Property"). Pursuant to the Consent Solicitation and Offer to
Exchange, an aggregate principal amount of $66,258,970 of 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. The exchange is
being accounted for as a modification of debt. The consent fees paid are being
amortized over the term of the 3% Notes using the effective yield method. All
external costs associated with the issuance of the 3% Notes have been expensed.
As indicated in the Consent Solicitation and Offer to Exchange, an aggregate of
10,000,000 warrants were distributed on a pro rata basis to the shareholders of
GB Holdings upon the consummation of the transaction. Such Warrants allow the
holders to purchase, at an exercise price of $.01 per share, an aggregate of
2,750,000 shares of Atlantic Holdings Common Stock and are only exercisable
following the earlier of (a) either the 3% Notes being paid in cash or upon
conversion, in whole or in part, into Atlantic Holdings Common Stock, (b)
payment in full of the outstanding principal of the 11% Notes which have not
been exchanged, or (c) a determination by a majority of the board of directors
of Atlantic Holdings (including at least one independent director of Atlantic
Holdings) that the Warrants may be exercised. The fair value of the warrants as
of July 22, 2004 (date of issuance) was $43,587,000 (as determined by a third
party valuation). An additional $4.9 million in legal, accounting, professionals
and state transfer fees were expended related to the Transaction, of which $3.1
million and $1.8 million were charged to debt restructuring costs during 2004
and 2003, respectively.
(3) 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 nine months ended September 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 $217,000 and $732,000
for the three and nine months ended September 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 ($129,000 and
$469,000, respectively) plus three quarterly installment payments of the Casino
Income Tax ($88,000 and $263,000, respectively).
(4) 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. Payment is made directly to the owner of the
Trade Name. Such charges amounted to $197,000 and $203,000, respectively, for
the nine months ended September 30, 2004 and 2003 and $78,000 and $73,000,
respectively, for the three months ended September 30, 2004 and 2003. On or
about July 14, 2004, GBHC entered into a license agreement with Las Vegas
Sands, Inc., for the use of the trade name "Sands" through May 19, 2086, subject
to termination rights for a fee after a certain minimum term. This new license
agreement superseded and replaced the above-mentioned trade name rights assigned
to the Company by High River. By operation of the Consent Solicitation and Offer
to Exchange discussed above, the July 14, 2004 license agreement was assigned to
ACE Gaming, LLC as of July 22, 2004.
9
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Stratosphere Casino Hotel & Tower (the "Stratosphere"), an entity
controlled by Carl C. Icahn, allocates a portion of certain executive salaries
as well as charges for tax preparation to the Company. Payments for charges
incurred from the Stratosphere for the nine months ended September 30, 2004 and
2003 were $250,000 and $143,000, respectively, and $35,000 and $35,000,
respectively, for the three months ended September 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. Payments for charges incurred for the nine months ended
September 30, 2004 were $133,000 and $89,000, respectively. Such charges
amounted to $52,000 and $64,000, respectively, for the three months ended
September 30, 2004 and 2003.
(5) 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.
(6) 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.
10
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES
In April 2004, the casino industry, the Casino Reinvestment Development
Authority (the "CRDA") and the New Jersey Sports and Exposition Authority agreed
to a plan regarding New Jersey video lottery terminals ("VLTs"). Under the plan,
casinos will pay a total of $96 million over a period of four years, of which
$10 million will fund, through project grants, North Jersey CRDA projects and
$86 million will be paid to the New Jersey Sports and Exposition Authority which
will then subsidize certain New Jersey horse tracks to increase purses and
attract higher-quality races that would allow them to compete with horse tracks
in neighboring states. In return, the race tracks and New Jersey have committed
to postpone any attempts to install VLTs for at least four years. $52 million of
the $86 million would be donated by the CRDA from the casinos' North Jersey
obligations and $34 million would be paid by the casinos directly. It is
currently estimated that The Sands current CRDA deposits for North Jersey
projects are sufficient to fund The Sands proportionate obligations with respect
to the $10 million and $52 million commitments. The Sands proportionate
obligation with respect to the $34 million commitment is estimated to be
approximately $1.3 million payable over a four year period in annual
installments due October 15th ranging from $278,000 to $398,000 per year. The
Sands proportionate obligation with respect to the combined $10 million and $52
million commitment is estimated to be approximately $2.5 million payable over a
four year period. The amounts will be charged to operations, on a straight-line
basis, through January 1, 2009. The Sands made its initial cash payment of
$278,000 in satisfaction of this obligation during October 2004.
(8) CASINO LICENSE PROCEEDINGS
Pursuant to New Jersey law, the corporate owner of the Sands is required
to maintain a casino license in order to operate The Sands. The gaming licenses
required to own and operate The Sands were required to be renewed in 2004, which
required that the 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 approved The Sands casino license renewal
application for a four year term on September 29, 2004 with certain conditions,
including monthly written reports on the status of the 11% Notes, and a
definitive plan to address the maturity of the 11% Notes to be submitted no
later than August 1, 2005 as well as other standard industry reporting
requirements.
(9) SUBSEQUENT EVENT
On November 12, 2004, Atlantic Holdings and ACE entered into a Loan and
Security Agreement (the "Loan Agreement"), by and among Atlantic Holdings, as
borrower, ACE, as guarantor, and Fortress Credit Corp. ("Fortress"), as lender,
and certain related ancillary documents, pursuant to which, Fortress agreed to
make available to Atlantic Holdings a senior secured revolving credit line
providing for working capital loans of up to $10 million (the "Loans"), to be
used for working capital purposes in the operation of The Sands, located in
Atlantic City, New Jersey. The Loan Agreement and the Loans thereunder have been
designated by the Board of Directors of Atlantic Holdings and the Manager of
ACE, as Working Capital Indebtedness (as that term is defined in the Indenture)
(the "Indenture"), dated as of July 22, 2004, among Atlantic Holdings, as
issuer, ACE, as guarantor, and Wells Fargo Bank, National Association, as
trustee (the "Trustee").
11
GB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The aggregate amount of the Loans shall not exceed $10 million plus
interest. All Loans under the Loan Agreement are payable in full by no later
than the day immediately prior to the one-year anniversary of the Loan
Agreement, or any earlier date on which the Loans are required to be paid in
full, by acceleration or otherwise, pursuant to the Loan Agreement.
The outstanding principal balance of the Loan Agreement will accrue
interest at a fixed rate to be set monthly which is equal to one month LIBOR
(but not less than 1.5%), plus 8% per annum. In addition to interest payable on
the principal balance outstanding from time to time under the Loan Agreement,
Atlantic Holdings is required to pay to Fortress an unused line fee for each
preceding three-month period during the term of the Loan Agreement in an amount
equal to .35% of the excess of the available commitment over the average
outstanding monthly balance during such preceding three-month period.
The Loans are secured by a first lien and security interest on all of
Atlantic Holdings' and ACE's personal property and a first mortgage on The Sands
Hotel & Casino. Fortress entered into an Intercreditor Agreement, dated as of
November 12, 2004, with the Trustee pursuant to the Loan Agreement. The Liens
(as that term defined in the Indenture) of the Trustee on the Collateral (as
that term is defined in the Indenture), are subject and inferior to Liens which
secure Working Capital Indebtedness such as the Loans.
Fortress may terminate its obligation to advance and declare the unpaid
balance of the Loans, or any part thereof, immediately due and payable upon the
occurrence and during the continuance of customary defaults which include
payment default, covenant defaults, bankruptcy type defaults, attachments,
judgments, the occurrence of certain material adverse events, criminal
proceedings, and defaults by Atlantic Holdings or ACE under certain other
agreements.
12
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. ("GB
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 GB Holdings, Atlantic Holdings, ACE or its
management are intended to identify forward-looking statements (see "Private
Securities Litigation Reform Act" below).
OVERVIEW
GB Holdings is a Delaware corporation. In February 1994, Holdings
acquired Greate Bay Hotel and Casino, Inc. ("GBHC"), through a capital
contribution by its then parent. GBHC's principal business activity was its
ownership of the Sands Casino Hotel ("The Sands"). Atlantic Holdings is a
Delaware corporation and was a wholly-owned subsidiary of GBHC which was a
wholly-owned subsidiary of GB Holdings. Until July 22, 2004, GBHC was the owner
and operator of The Sands Hotel and Casino in Atlantic City ("The Sands"). ACE a
New Jersey limited liability company and a wholly-owned subsidiary of Atlantic
Holdings was formed in November 2003. Atlantic Holdings and ACE were formed in
connection with a transaction (the "Transaction"), in which Atlantic exchanged
$66.3 million of 11% Notes due 2005 (the "11% Notes"), issued by GB Property
Funding Corp. ("Property"), a wholly-owned subsidiary of GB Holdings Inc., for
$66.3 million 3% Notes due 2008 (the "3% Notes"), issued by Atlantic Holdings.
In connection with the Consent Solicitation and Exchange offer, the indenture
governing the 11% Notes was amended to eliminate certain covenants and to
release the liens on the collateral securing such notes. The Transaction
included, among other things, the transfer of substantially all of the assets of
GB Holdings to Atlantic Holdings. The transfer of net assets has been accounted
for as an exchange of net assets between entities under common control, whereby
the entity receiving the net assets shall initially recognize the assets and
liabilities transferred at their historical carrying amount in the accounts of
the transferring entity at the date of transfer. No gain or loss was recorded
relating to the transfer. The 3% Notes, in connection with the closing of the
transaction, are guaranteed on a joint and several basis by ACE, Atlantic
Holdings and its subsidiary, ACE had limited operating activities prior to July
22, 2004. Also on July 22, in connection with the consummation of the
Transaction and the Consent Solicitation and Offer to Exchange, Property and
GBHC, merged into GB Holdings, with GB Holdings as the surviving entity. All
references to GB Holdings and the Company refer to such entity as it existed
following the consummation of the Transaction. In connection with the transfer
of the assets and certain liabilities of GB Holdings, including the assets and
certain liabilities of GBHC, Atlantic Holdings issued 2,882,938 shares of common
stock, par value $.01 per share (the "Atlantic Holdings Common Stock") of
Atlantic Holdings to GBHC which following the merger of GBHC became the sole
asset of GB Holdings. Substantially all of the assets, liabilities and
operations of GB Holdings and GBHC (with the exception of the remaining 11%
Notes due 2005 and accrued interest thereon, the Atlantic Holdings Common Stock,
and the related pro rata share of deferred financing costs) were transferred to
Atlantic Holdings or ACE. As indicated in the Consent Solicitation and Offer to
Exchange, as part of the Transaction an aggregate of 10,000,000 warrants were
distributed on a pro rata basis to the stockholders of GB Holdings upon the
consummation of the Transaction. Such Warrants allow the holders to purchase, at
an exercise price of $.01 per share, an aggregate of 2,750,000 shares of
Atlantic Holdings Common Stock and are only exercisable following the earlier of
(a) either the 3% Notes being paid in cash or upon conversion, in whole or in
part, into Atlantic Holdings Common Stock, (b) payment in full of the
outstanding principal of the 11% Notes exchanged, or (c) a determination by a
majority of the board of directors of Atlantic Holdings (including at least one
independent director of Atlantic Holdings) that the Warrants may be exercised.
The Sands New Jersey gaming license was transferred to ACE in accordance with
the approval of the New Jersey Casino Control Commission.
13
ITEM 2
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On September 2, 2004, the Securities and Exchange Commission granted GB
Holdings application to delist the common stock, par value $.01 per share (the
"Common Stock") of GB Holdings from trading on the American Stock Exchange
("Amex") effective at the opening of business on September 3, 2004. On September
4, 2004, the Amex delisted the Common Stock.
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. 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 Borgata, increased competition from
other existing casinos that invested in capital improvements, and a
corresponding increase in competition for both table game and slot machine
players.
The status of the GB Holdings 11% Notes due September 2005 is currently
being reviewed by senior management. The various alternatives for the redemption
or refinancing of the Notes are being evaluated, as well as, the status of the
current capital markets. Those alternatives include extending the term of the
11% Notes, refinancing the debt utilizing the Atlantic Holdings common stock as
collateral or redeeming the debt through a sale of the Atlantic Holdings common
stock. If GB Holdings does not pay the principal due on the remaining 11% Notes
at maturity it could result in, among other things, the possibility of GB
Holdings seeking bankruptcy protection.
Pursuant to New Jersey law, the corporate owner of the Sands is required
to maintain a casino license in order to operate The Sands. The gaming licenses
required to own and operate The Sands were required to be renewed in 2004, which
required that the 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 approved The Sands casino license renewal
application for a four year term on September 29, 2004 with certain conditions,
including monthly written reports on the status of the 11% Notes, a definitive
plan to address the maturity of the 11% Notes, to be submitted no later than
August 1, 2005 as well as other standard industry reporting requirements.
14
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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. GB 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 by Atlantic Holdings is required to be made only in
respect of interest due prior to the 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 under the indenture for the 3% Notes and (ii) Atlantic Holdings being
able to make such payments. In addition, GB Holding's ability to pay 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 GB Holdings does not pay the remaining 11% Notes at maturity it could result
in, among other things, the possibility of GB Holdings seeking bankruptcy
protection.
In accordance with the Contribution Agreement pursuant to which GB
Holdings contributed its net assets to Atlantic Holdings, GB Holdings normal,
ordinary course operating expenses (including legal and accounting costs,
directors' and officers' insurance premiums, and fees for SEC filings) not to
exceed in the aggregate $250,000 in any twelve month period are to be paid by
Atlantic Holdings subject to a number of conditions.
15
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY
During 2004, management anticipates making tax payments of
approximately $950,000 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. As a result of this
determination, on November 12, 2004, Atlantic Holdings and ACE entered into a
senior secured revolving credit facility, with Fortress Credit
Corp.("Fortress"), which provides for working capital loans of up to $10 million
to be used for working capital purposes, in the operation of The Sands Hotel and
Casino, located in Atlantic City, New Jersey. The loan agreement and the loans
there under have been designated by the Board of Directors of Atlantic and the
Manager of ACE, as Working Capital indebtedness (as that term is defined in the
Indenture, dated as of July 22, 2004, among Atlantic Holdings, as issuer, ACE,
as guarantor, and Wells Fargo Bank, National Association, as trustee.
OPERATING ACTIVITIES
At September 30, 2004, the Company had cash and cash equivalents of
$19.2 million. The Company generated $3.2 million of net cash from operations
during the nine months ended September 30, 2004 compared to the same prior year
period in which the Company used $472,000 in operating activities.
INVESTING ACTIVITIES
Capital expenditures at The Sands for the nine months ended September
30, 2004 amounted to approximately $9.4 million compared to $10.6 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 deferred some slot machine
replacements and casino renovations to the latter half of 2004 and may defer it
beyond 2004, 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 nine months ended September 30, 2004 and 2003 amounted to $1.6 million and
$1.7 million, respectively.
16
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FINANCING ACTIVITIES
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. GB 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 by Atlantic Holdings is required to be made only in
respect of interest due prior to the 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 under the indenture for the 3% Notes and (ii) Atlantic Holdings being
able to make such payments. In addition, GB Holding's ability to pay 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 GB Holdings does not pay the remaining 11% Notes at maturity it could result
in, among other things, the possibility of GB Holdings seeking bankruptcy
protection.
On November 12, 2004, Atlantic Holdings and ACE entered into a Loan and
Security Agreement (the "Loan Agreement"), by and among Atlantic Holdings, as
borrower, ACE, as guarantor, and Fortress Credit Corp. ("Fortress"), as lender,
and certain related ancillary documents, pursuant to which, Fortress agreed to
make available to Atlantic a senior secured revolving credit line providing for
working capital loans of up to $10 million (the "Loans"), to be used for working
capital purposes in the operation of The Sands, located in Atlantic City, New
Jersey. The Loan Agreement and the Loans thereunder have been designated by the
Board of Directors of Atlantic Holdings and the Manager of ACE, as Working
Capital Indebtedness (as that term is defined in the Indenture) (the
"Indenture"), dated as of July 22, 2004, among Atlantic Holdings, as issuer,
ACE, as guarantor, and Wells Fargo Bank, National Association, as trustee (the
"Trustee").
The aggregate amount of the Loans shall not exceed $10 million plus
interest. All Loans under the Loan Agreement are payable in full by no later
than the day immediately prior to the one-year anniversary of the Loan
Agreement, or any earlier date on which the Loans are required to be paid in
full, by acceleration or otherwise, pursuant to the Loan Agreement.
The outstanding principal balance of the Loan Agreement will accrue
interest at a fixed rate to be set monthly which is equal to one month LIBOR
(but not less than 1.5%), plus 8% per annum. In addition to interest payable on
the principal balance outstanding from time to time under the Loan Agreement,
Atlantic Holdings is required to pay to Fortress an unused line fee for each
preceding three-month period during the term of the Loan Agreement in an amount
equal to .35% of the excess of the available commitment over the average
outstanding monthly balance during such preceding three-month period.
The Loans are secured by a first lien and security interest on all of
Atlantic Holdings' and ACE's personal property and a first mortgage on The Sands
Hotel & Casino. Fortress entered into an Intercreditor Agreement, dated as of
November 12, 2004, with the Trustee pursuant to the Loan Agreement. The Liens
(as that term defined in the Indenture) of the Trustee on the Collateral (as
that term is defined in the Indenture), are subject and inferior to Liens which
secure Working Capital Indebtedness such as the Loans.
Fortress may terminate its obligation to advance and declare the unpaid
balance of the Loans, or any part thereof, immediately due and payable upon the
occurrence and during the continuance of customary defaults which include
payment default, covenant defaults, bankruptcy type defaults, attachments,
judgments, the occurrence of certain material adverse events, criminal
proceedings, and defaults by Atlantic Holdings or ACE under certain other
agreements.
Pursuant to New Jersey law, the corporate owner of The Sands is required
to maintain a casino license in order to operate The Sands. The gaming licenses
required to own and operate The Sands were required to be renewed in 2004, which
required that the CCC determine that among other things, Atlantic Holdings and
ACE are financially stable. In order to be found "financially stable" under
NJCCA, Atlantic Holdings and ACE had to demonstrate among other things, its
ability to pay, exchange, or refinance debts that mature or otherwise become due
and payable during the license term, or to otherwise manage such debts. During
July 2004, the Sands filed a timely renewal application of its casino license
for a four year term. The CCC approved the Sands casino license renewal
application on September 29, 2004 with certain conditions, including monthly
written reports on the status of the 11% Notes, a definitive plan to address the
maturity of the 11% Notes, to be submitted no later than August 1, 2005 as well
as other standard industry reporting requirements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its results of operations and
financial condition are based upon its 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.
17
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company believes the following accounting policies are critical to
its business operations and the understanding of results of operations and
affect the more significant judgments and estimates used in the preparation of
its condensed consolidated financial statements:
Allowance for Doubtful Accounts - The Company maintains accounts receivable
allowances for estimated losses resulting from the inability of its customers to
make required payments. Additional allowances may be required if the financial
condition of the Company's customers deteriorates.
Commitments and Contingencies - Litigation - On an ongoing basis, the Company
assesses the potential liabilities related to any lawsuits or claims brought
against the Company. While it is typically very difficult to determine the
timing and ultimate outcome of such actions, the Company uses its best judgment
to determine if it is probable that it will incur an expense related to the
settlement or final adjudication of such matters and whether a reasonable
estimation of such probable loss, if any, can be made. In assessing probable
losses, the Company makes estimates of the amount of insurance recoveries, if
any. The Company accrues a liability when it believes a loss is probable and the
amount of loss can be reasonably estimated. Due to the inherent uncertainties
related to the eventual outcome of litigation and potential insurance recovery,
it is possible that certain matters may be resolved for amounts materially
different from any provisions or disclosures that the Company has previously
made.
Impairment of Long-Lived Assets - The Company periodically reviews long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Assumptions and
estimates used in the determination of impairment losses, such as future cash
flows and disposition costs, may affect the carrying value of long-lived assets
and possible impairment expense in the Company's condensed consolidated
financial statements.
Self-Insurance - The Company retains the obligation for certain losses related
to customer's claims of personal injuries incurred while on the Company property
as well as workers compensation claims 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%.
18
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
SEPTEMBER 30,
------------------------------------------
2004 2003
-------------------- --------------------
(Dollars in Thousands)
UNITS: (AT END OF PERIOD)
Table Games - Sands 76 71
- Atlantic City (ex. Sands) 1,352 1,304
Slot Machines - Sands 2,190 2,205
- Atlantic City (ex. Sands) 39,984 40,185
GROSS WAGERING (1)
Table Games - Sands $ 61,990 $ 63,826
- Atlantic City (ex. Sands) 2,135,833 1,981,991
Slot Machines - Sands 466,255 517,397
- Atlantic City (ex. Sands) 11,748,661 11,136,772
HOLD PERCENTAGES (2)
Table Games - Sands 14.72% 13.67%
- Atlantic City (ex. Sands) 14.52% 15.27%
Slot Machines - Sands (accrual basis) 8.24% 7.70%
- Sands (cash basis) 8.34% 7.84%
- Atlantic City (ex. Sands) (accrual basis) N/A N/A
- Atlantic City (ex. Sands) (cash basis) 8.18% 8.23%
REVENUES (2)
Table Games - Sands $ 9,123 $ 8,725
- Atlantic City (ex. Sands) 310,137 302,590
Slot Machines - Sands (accrual basis) 38,414 39,857
- Sands (cash basis) 38,882 40,562
- Atlantic City (ex. Sands) (accrual basis) N/A N/A
- Atlantic City (ex. Sands) (cash basis) 961,311 916,919
Other (3) - Sands 397 325
- Atlantic City (ex. Sands) 18,070 13,561
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
2004 2003
------------------- -------------------
(Dollars in Thousands)
UNITS: (AT END OF PERIOD)
Table Games - Sands 76 71
- Atlantic City (ex. Sands) 1,352 1,304
Slot Machines - Sands 2,190 2,205
- Atlantic City (ex. Sands) 39,984 40,185
GROSS WAGERING (1)
Table Games - Sands $ 181,602 $ 162,141
- Atlantic City (ex. Sands) 5,730,494 5,115,909
Slot Machines - Sands 1,379,681 1,511,277
- Atlantic City (ex. Sands) 32,077,869 29,670,141
HOLD PERCENTAGES (2)
Table Games - Sands 15.71% 14.30%
- Atlantic City (ex. Sands) 15.35% 16.10%
Slot Machines - Sands (accrual basis) 8.18% 7.80%
- Sands (cash basis) 8.35% 8.00%
- Atlantic City (ex. Sands) (accrual basis) N/A N/A
- Atlantic City (ex. Sands) (cash basis) 8.17% 8.15%
REVENUES (2)
Table Games - Sands $ 28,530 $ 23,129
- Atlantic City (ex. Sands) 879,381 822,834
Slot Machines - Sands (accrual basis) 112,871 118,278
- Sands (cash basis) 115,183 120,893
- Atlantic City (ex. Sands) (accrual basis) N/A N/A
- Atlantic City (ex. Sands) (cash basis) 2,620,881 2,416,733
Other (3) - Sands 1,094 786
- Atlantic City (ex. Sands) 45,992 33,600
- -------------------------------
(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").
19
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 months ended September 30, 2004 the table game drop
decreased $1.8 million (2.9%) and increased $19.5 million (12.0%) for the nine
months ended September 30, 2004, compared to the comparable periods in 2003.
These results are compared to the Atlantic City Industry table drop results,
which increased $611.9 million (5.5%) and $2.41 billion (8.1%) for the three
months and nine months ended September 30, 2004 respectively compared to the
same periods in 2003. Despite the impact of a major new competitor in the
Atlantic City market, the Sands maintained its table game market share (3.1%)
for the nine months ended September 30, 2004 compared to the same prior year
period. Competition for the table game market has intensified during the third
quarter and has negatively impacted the Sands table game market share for the
three months ended September 30, 2004 compared to the same prior year period
(2.8% in 2004 vs 3.1% in 2003). Resorts completed a property expansion project
in June 2004 that included approximately 400 additional rooms and further
intensified the competition in the table game market. Table game hold percentage
for the Sands increased by 1.0 percentage points to 14.7% and 1.4 percentage
points to 15.7% for the three and nine month periods ended September 30, 2004,
respectively, compared to the same periods in 2003. The number of table games in
operation, as of September 30, 2004, was 76 compared to 71 at the same time in
2003. For all other Atlantic City Casinos, the number of table games increased
by 48 units or 3.7% to 1,352 at September 30, 2004 compared to 2003.
Slot machine handle for The Sands decreased $51.1 million (9.9%) and
$131.6 million (8.7%) for the three and nine month periods ended September 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 prior year periods was a 5.5%
increase for the three month period and a 8.1% increase for the nine month
period. The Sands' 2004 decrease in handle was primarily due to the
competitive impact of Borgata on the Atlantic City market. The Borgata added
3,510 units to Atlantic City's slot market. In addition, Resorts expanded their
casino floor by 22,000 square feet and added 638 slot machines in June of 2004.
The Sands decrease in slot machine handle was offset by an increase in the hold
percentage of 0.5 percentage points to 8.2% and 0.4 percentage points to 8.2%
for the three and nine month periods ended September 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 $1.4 million (3.6%) and $5.4 million (4.6%) for the three and nine
month periods ended September 30, 2004, respectively, compared to the periods in
2003. The number of slot machine units as of September 30, 2004 was 2,190
compared to 2,205 at the same time in 2003. For all other Atlantic City Casinos,
the number of slot machines decreased by 201 units or 0.5% to 39,984 at
September 30, 2004 compared to 2003.
20
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth the changes in operating revenues and
expenses (unaudited) for the three month and nine month periods ended September
30, 2004 and 2003:
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------
INCREASE (DECREASE)
2004 2003 $ %
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
REVENUES:
Casino $ 47,934 $ 48,907 $ (973) (1.99)
Rooms 3,281 3,115 166 5.33
Food and Beverage 5,687 6,627 (940) (14.18)
Other 873 1,047 (174) (16.62)
Promotional Allowances 13,018 13,655 (637) (4.66)
EXPENSES:
Casino 32,808 35,291 (2,483) (7.04)
Rooms 781 605 176 29.09
Food and Beverage 2,117 2,833 (716) (25.27)
Other 1,083 992 91 9.17
General and Administrative 3,164 2,630 534 20.30
Depreciation and Amortization 4,092 3,975 117 2.94
Gain on disposal of assets (7) (107) (100) (93.46)
INCOME (LOSS) FROM OPERATIONS 719 (178) 897 503.93
Non-operating expense, net 3,626 3,006 620 20.63
Income Tax Provision (217) (272) (55) (20.22)
Net loss (3,124) (3,456) (332) (9.61)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
INCREASE (DECREASE)
2004 2003 $ %
------------- ------------- ------------ --------------
(DOLLARS IN THOUSANDS)
REVENUES:
Casino $ 142,495 $ 142,193 $ 302 0.21
Rooms 8,342 8,530 (188) (2.20)
Food and Beverage 16,472 16,802 (330) (1.96)
Other 2,826 3,010 (184) (6.11)
Promotional Allowances 38,592 38,663 (71) (0.18)
EXPENSES:
Casino 96,106 100,249 (4,143) (4.13)
Rooms 2,113 1,635 478 29.24
Food and Beverage 6,411 7,314 (903) (12.35)
Other 2,458 2,380 78 3.28
General and Administrative 9,042 7,891 1,151 14.59
Depreciation and Amortization 11,905 11,376 529 4.65
Gain on disposal of assets (38) (104) (66) (63.46)
INCOME (LOSS) FROM OPERATIONS 3,546 1,131 2,415 213.53
Non-operating expense, net 11,571 8,880 2,691 30.30
Income Tax Provision (732) (615) 117 19.02
Net loss (8,757) (8,364) 393 4.70
REVENUES
Overall casino revenues decreased $973,000 (2.0%) and increased $302,000
(0.2%) for the three and nine month periods ended September 30, 2004,
respectively, compared to the same periods in 2003. The year-to-date increase in
casino revenues is attributable to the increases in table game revenue ($5.4
million) and other casino revenue ($308,000) offset by a decrease in slot
machine revenue ($5.4 million).
Room revenue increased $166,000 (5.3%) and decreased $188,000 (2.2%) for
the three and nine month periods ended September 30, 2004, respectively,
compared to the same periods in 2003. The year-to-date decrease in room revenue
is directly attributable to the decrease in room occupancy for the three and
nine months ended September 30, 2004, respectively, compared to the same period
in 2003 (1,279 and 9,420 fewer occupied rooms, respectively). The decrease in
occupancy was primarily due to a reduction in complimentary promotional room
nights. The increase in room revenue for the comparative three month periods is
due to an increase in average room rate ($4.20) primarily due to increased rates
in group and transient sales.
21
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Food and Beverage revenues decreased $940,000 (14.2%) and $330,000
(2.0%) for the three and nine month periods ended September 30, 2004,
respectively, compared to the same periods in 2003. These decreases were
primarily attributable to decreases in food revenue ($811,000 quarter-to-date
and $824,000 year-to-date, in high volume, non-gourmet outlets as a result of
discontinuing discount and coupon programs during the peak summer months. These
were offset by increases in beverage revenue ($131,000 quarter-to-date and
$492,000 year-to-date) as a result of the continued popularity of Swingers Bar.
Other revenues decreased $174,000 (16.6%) and $184,000 (6.1%) for the
three and nine month periods ended September 30, 2004, respectively, compared to
the same periods in 2003. The decrease during the nine 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. The decrease during the three month periods is due to
reduced entertainment revenue due to fewer shows including the postponement of
headline artist engagement in September 2004.
PROMOTIONAL ALLOWANCES
Promotional allowances are comprised of (i) the estimated retail value
of goods and services provided free of charge to casino customers under various
marketing programs, (ii) the cash value of redeemable points earned under a
customer loyalty program based on the amount of slot play and (iii) coin and
cash coupons and discounts. The dollar amount of promotional allowances
decreased $637,000 (4.7%) and $71,000 (0.2%) for the three and nine month
periods ended September 30, 2004, respectively, compared to the same periods in
2003. As a percentage of casino revenues, promotional allowances decreased to
27.2% from 27.9% and 27.1 % from 27.2% for the three and nine month periods
ended September 30, 2004, respectively, compared to the same periods in 2003.
The decrease in this ratio is directly attributable to a decrease in
complimentaries and coupons during the Summer 2004.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands decreased by $2.5 million (7.0%) and $4.1
million (4.1%), respectively, for the three and nine months ended September 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 ($845,000 and $2.1 million,
respectively, for the three and nine months ended September 30, 2004 compared to
the same prior year periods). Payroll expenses decreased ($421,000 and $650,000
for the three and nine months ended September 30, 2004, respectively) due to the
reduction in personnel. The provision for doubtful accounts was reduced by
$256,000 and $477,000 for the three and nine months ended September 30, 2004,
respectively, as a result of less casino credit activity.
Rooms expenses increased $176,000 (29.1%) and $478,000 (29.2%) for the
three and nine months ended September 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 ($111,000
and $612,000, respectively, for the three and nine months ended September 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 ($97,000 and $325,000, respectively,
for the three and nine months primarily ended September 30, 2004 compared to the
same prior year period) due to reductions in staffing.
22
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Food and beverage expenses decreased $716,000 (25.3%) and $903,000
(12.4%), respectively, for the three and nine months ended September 30, 2004
compared to the same prior year period. The decreases were primarily due to
decreased payroll and benefits costs ($309,000 and $571,000 for the three and
nine months ended September 30, 2004, respectively, compared to the same prior
year periods as a result of lower staffing levels). Also contributing to the
decrease in food and beverage expense were decreases in food and beverage cost
of sales ($327,000 and $145,000 for the three and nine months ended September
30, 2004, respectively), which were a result of decreased sales.
Other expenses increased $91,000 (9.2%) and $78,000 (3.3%) for the three
and nine months ended September 30, 2004, compared to the same prior year
periods. The increased costs were due to an unfavorable variance in allocable
costs to casino expense for complimentaries ($801,000 and $445,000 for the three
and nine months ended September 30, 2004, respectively). These were offset by
decreased payroll and benefits costs $228,000 and $529,000 for the three and
nine months ended September 30, 2004, respectively) due to reduced staffing.
Decreases in entertainment costs ($461,000 and $100,000 for the three and nine
months ended September 30, 2004, respectively) due to decreased headline
entertainment compared to the prior year periods.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $534,000 (20.3%) and $1.2
million (14.6%), respectively, for the three and nine months ended September 30,
2004, compared to the same prior year periods. The increases were due to lower
allocable costs for property overhead to the casino department ($741,000 for the
nine months ended September 30, 2004) and the increased cost of electricity
($99,000 and $440,000 for the three and nine months ended September 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 $117,000 (2.9%) and $529,000 (4.7%), respectively, for
the three and nine month periods ended September 30, 2004, compared to the same
prior year periods due to an increase in depreciation expense ($109,000 and
$638,000 for the three and nine months ended September 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 $51,000 (31.8%) and $185,000 (37.1%),
respectively, during the three and nine month periods ended September 30, 2004,
compared to the same prior year periods. The decrease was due to smaller
earnings on decreased cash reserves.
Interest expense decreased $669,000 and $570,000, respectively, during
the three and nine month periods ended September 30, 2004, compared to the same
periods in 2003. The decrease is due to the exchange of $66.3 million in 11%
debt for an equal amount at 3%.
23
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 $1.2 million and $3.1 million,
respectively, for the three and nine month periods ended September 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, Federal income tax has not been recorded
for the nine months ended September 30, 2004.
The State income tax provision decreased $55,000 (20.2%) and increased
$117,000 (19.0%), respectively, for the three and nine months ended September
30, 2004 compared to the same prior year periods. The quarter-to-date decrease
is a result of the decrease in tax basis and an adjustment to tax rate. The
year-to-date increase is primarily attributable to the casino net income tax
enacted 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 GB Holdings in particular. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of GB 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).
24
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RISK FACTORS RELATED TO THE BUSINESS OF THE COMPANY
GB HOLDINGS MAY BE UNABLE TO PAY THE OUTSTANDING INTEREST ON THE 11% NOTES PRIOR
TO MATURITY OR THE INTEREST OR PRINCIPAL ON THE 11% NOTES AT MATURITY
GB 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 by Atlantic Holdings is
required to be made only in respect of interest due prior to the maturity date
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 under the Indenture for the 3% Notes and
(ii) the interest and 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. In addition, GB Holding's ability to
pay the remaining 11% Notes at maturity in September2005 will depend upon its
ability to refinance such Notes on favorable terms, or at all, or to derive
sufficient funds from the sale of its Atlantic Holdings Common Stock or from a
borrowing. If GB Holdings does not pay the remaining 11% Notes at maturity it
could result in, among other things, the possibility of GB Holdings seeking
bankruptcy protection.
The corporate owner of The Sands must continue to maintain and meet the
conditions of its casino license.
Pursuant to New Jersey law, the corporate owner of the Sands is required
to maintain a casino license in order to operate The Sands. The gaming licenses
required to own and operate The Sands were required to be renewed in 2004, which
required that the 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 approved The Sands casino license renewal
application for a four year term on September 29, 2004 with certain conditions,
including monthly written reports on the status of the 11% Notes, and a
definitive plan to address the maturity of the 11% Notes to be submitted no
later than August 1, 2005 as well as other standard industry reporting
requirements. There is a risk that a definitive plan to address the maturity of
the 11% Notes will not be approved by the CCC.
25
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company will need to increase capital expenditures to compete effectively.
Capital expenditures, such as room refurbishments, amenity upgrades and
new gaming equipment, are necessary from time to time to preserve the
competitiveness of The Sands. The gaming industry market is very competitive and
is expected to become more competitive in the future. If cash from operations is
insufficient to provide for needed levels of capital expenditure, The Sands'
competitive position could deteriorate if the Company is unable to borrow funds
for such purposes.
IF THE COMPANY FAILS TO OFFER COMPETITIVE PRODUCTS AND SERVICES OR MAINTAIN THE
LOYALTY OF THE SANDS PATRONS, ITS BUSINESS WILL BE ADVERSELY AFFECTED.
In addition to capital expenditures, the Company is required to
anticipate the changing tastes of The Sands' patrons and offer both competitive
and innovative products and services to ensure that repeat patrons return and
new patrons visit The Sands. The demands of meeting the Company's debt service
payments and the need to make capital expenditures limits the available cash to
finance such products and services. In addition, the consequences of incorrect
strategic decisions may be difficult or impossible to anticipate or correct in a
timely manner.
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.
INCREASED STATE TAXATION OF GAMING AND HOSPITALITY REVENUES COULD ADVERSELY
AFFECT THE COMPANY'S RESULTS OF OPERATIONS.
The casino industry represents a significant source of tax revenues to
the various jurisdictions in which casinos operate. Gaming companies are
currently subject to significant state and local taxes and fees in addition to
normal federal and state corporate income taxes. For example, casinos in
Atlantic City pay for licenses as well as special taxes to the city and state.
New Jersey taxes annual gaming revenues at the rate of 8.0%. New Jersey also
levies an annual investment alternative tax of 2.5% on annual gaming revenues in
addition to normal federal and state income taxes. This 2.5% obligation,
however, can be satisfied by purchasing certain bonds or making certain
investments in the amount of 1.25% of annual gaming revenues. On July 3, 2002,
the State of New Jersey passed the New Jersey Business Tax Reform Act, which,
among other things, suspended the use of the New Jersey net operating loss
carryforwards for two years and introduced a new alternative minimum assessment
under the New Jersey corporate business tax based on gross receipts or gross
profits. For the nine months ended September 30, 2004 and 2003, there was a
charge to income tax provision of $527,000 and $527,000, respectively, related
to the impact of the New Jersey Business Tax Reform Act.
26
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On July 1, 2003, the State of New Jersey amended the New Jersey Casino
Control Act (the "NJCCA") to impose various tax increases on Atlantic City
casinos, including The Sands. Among other things, the amendments to the NJCCA
include the following new tax provisions: (i) a new 4.25% tax on casino
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
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.
27
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
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.
28
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 GB 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 nine months ended September 30, 2004,
gaming credit extended to Sands' table game patrons accounted for approximately
22.5% of overall table game wagering, and table game wagering accounted for
approximately 11.6% of overall casino wagering during the period. At September
30, 2004, gaming receivables amounted to $7.0 million before an allowance for
uncollectible gaming receivables of $3.8 million. There can be no assurance that
defaults in the repayment of credit by patrons of The Sands would not have a
material adverse effect on the results of operations of The Sands and,
consequently the Company.
THE COMPANY'S SUCCESS DEPENDS IN PART ON THE AVAILABILITY OF QUALIFIED
MANAGEMENT AND PERSONNEL AND ON THE COMPANY'S ABILITY TO RETAIN SUCH EMPLOYEES.
The quality of individuals hired for positions in the hotel and gaming
operations will be critical to the success of the Company's business. It may be
difficult to attract, retain and train qualified employees due to the
competition for employees with other gaming companies and their facilities in
the Company's jurisdiction and nationwide. The Borgata, which opened in July
2003 and is 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.
29
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On July 3, 2003, The Borgata, owned by Boyd Gaming Corporation and MGM
Mirage, opened in the marina district of Atlantic City. The Borgata features a
40-story tower with 2,010 rooms and suites as well as a 135,000 square-foot
casino, restaurants, retail shops, a spa and pool, and entertainment venues.
This project represented a significant increase in capacity in that market. In
addition, other of The Sands' competitors in Atlantic City have recently
completed expansions of their hotels or have announced expansion projects. For
example, Tropicana Atlantic City began 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
fourth quarter of 2004. Resorts constructed a hotel room addition of
approximately 400 rooms, which opened in the second quarter of 2004. Our
business may be adversely impacted (i) by the additional gaming and room
capacity generated by this increased competition in Atlantic City and/or (ii) by
other projects not yet announced in New Jersey or in other markets (e.g.
Pennsylvania, New York and Connecticut).
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.
In April 2004, the casino industry, the CRDA and the New Jersey Sports
and Exposition Authority agreed to a plan regarding New Jersey video lottery
terminals ("VLTs"). Under the plan, casinos will pay a total of $96 million over
a period of four years, of which $10 million will fund, through project grants,
North Jersey CRDA projects and $86 million will be paid to the New Jersey Sports
and Exposition Authority who will then subsidize certain New Jersey horse tracks
to increase purses and attract higher-quality races that would allow them to
compete with horse tracks in neighboring states. In return, the race tracks and
New Jersey have committed to postpone any attempts to install VLTs for at least
four years. $52 million of the $86 million would be donated by the CRDA from the
casinos' North Jersey obligations and $34 million would be paid by the casinos
directly. It is currently estimated that The Sands current CRDA deposits for
North Jersey projects are sufficient to fund The Sands proportionate obligations
with respect to the $10 million and $52 million commitments. The Sands
proportionate obligation with respect to the $34 million commitment is estimated
to be approximately $1.3 million payable over a four year period. The Sands
proportionate obligation with respect to the combined $10 million and $52
million commitment is estimated to be approximately $2.5 million payable over a
four year period.
30
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Sands also competes with legalized gaming from casinos located on
Native American tribal lands. In July 2004, the Appellate Division of the
Supreme Court of New York unanimously ruled that Native American owned casinos
could legally be operated in New York under the New York State law passed in
October 2001. That law permits three casinos in Western New York, all of which
would be owned by the Seneca Indian Nation. The law also permits up to three
casinos in the Catskills in Ulster and Sullivan Counties, also to be owned by
Native American Tribes. In addition, the legislation allows slot machines to be
placed in Native American-owned casinos. The court also ruled that New York
could participate in the Multi-State Mega Millions Lottery Game. On November 18,
2004, the State of New York and the Cayuga Nation of New York ("Cayuga Nation")
announced that they have entered into a definitive agreement providing for the
settlement of the Cayuga Nation's land title and trespass claims against the
State dating back to the 1700's. The agreement would permit the Cayuga Nation to
operate a casino in the Catskills.
The New York law had also permitted the installation of video lottery
terminals ("VLT's") at five racetracks situated across the State of New York. In
the July 2004 ruling, the Appellate Division ruled that a portion of the law was
unconstitutional because it required a portion of the VLT revenues to go to
horse-racing, breeding funds and track purses. It is anticipated that ruling
will be appealed.
The Pennsylvania legislature passed and the governor signed a bill in
July 2004 that will allow for up to 61,000 slot machines state wide in up to 14
different locations, seven or eight of which would be racetracks plus four or
five slot parlors in Philadelphia and Pittsburgh and two small resorts.
Maryland is among the other states contemplating some form of gaming
legislation. Maryland's proposed legislation would authorize VLT's at some of
Maryland's racing facilities. The Maryland Legislature did not enact any
legalized gaming legislation during their 2004 legislative sessions which ended
September 30, 2004.
The Sands' market is primarily a drive-to market, and legalized gambling
in Pennsylvania, the Catskills and any other neighboring state within close
proximity to New Jersey could have a material adverse effect on the Atlantic
City gaming industry overall, including The Sands.
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 11% 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 11%
Notes, as applicable.
31
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from changes in market rates and
prices, such as interest rates and foreign currency exchange rates. The Company
does not have securities subject to interest rate fluctuations and has not
invested in derivative-based financial instruments.
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.
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company
carried out an evaluation, with the participation of the Chief Executive Officer
and Chief Financial Officer, as well as other key members of the Company's
management, of the effectiveness of the Company's disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective,
as of the end of the period covered by this report, to provide reasonable
assurance that information required to be disclosed in the Company's reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
No change occurred in the Company's internal controls concerning
financial reporting during the fiscal quarter ended September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
32
GB HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
33
PART II: OTHER INFORMATION
ITEM 1. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 30, 2004, GB Holdings held a special meeting of its
stockholders. At this meeting, 7,806,488 stockholders voted to approve the
Transaction, 40,139 stockholders voted against the Transaction, 442 stockholders
abstained, and there were 1,649,406 broker non-votes. The effect of the
Transaction which was approved was the transfer of substantially all of the
assets and certain liabilities of GB Holdings and GBHC to Atlantic Holdings.
Upon consummation of the Transaction, which was approved an aggregate of 72.5%
(on a fully diluted basis) of the issued and outstanding common stock of
Atlantic Holdings was to be issued pro rata to the holders of the 3% Notes who
exchanged and to GB Holdings in respect of the 11% Notes that were not
exchanged, thereby resulting in GB Holdings and such noteholders beneficially
owning up to 72.5% of Atlantic Holdings. Atlantic Holdings, through its
wholly-owned subsidiary, will own substantially all of the assets previously
owned by GB Holdings and GBHC. The matters which were presented to the
stockholders of GB Holdings for a vote were as follows:
(a) Following the receipt of the necessary approval from the holders of
a majority of the 11% Notes through the exchange of the 11% Notes
for the 3% Notes:
(i) GB Holdings will transfer all of its assets (other than the
stock of Property and GBHC) and liabilities (other than its
obligations under the 11% Notes) to GBHC;
(ii) GBHC will transfer all of the assets and liabilities which it
received from GB Holdings and substantially all of its assets
(other than the stock of Atlantic Holdings) and certain of its
liabilities to Atlantic Holdings (which will agree to issue
the 3% Notes in exchange for the 11% Notes that are tendered
for exchange and cancel such Notes) in exchange for either:
(A) 27.5% of the outstanding Atlantic Holdings Common Stock
of (on a fully diluted basis) (if 100% of the 11% Notes
are exchanged for the 3% Notes); or
(B) (1) warrants to purchase 27.5% of the outstanding
Atlantic Holdings Common Stock of (on a fully diluted
basis) at a purchase price of $.01 per share (if less
than 100% of the 11% Notes are exchanged for the 3%
Notes) and (2) Atlantic Holdings will transfer to GBHC
additional Atlantic Holdings Common Stock of so that
GBHC has a pro rata share of 72.5% of the Atlantic
Holdings Common Stock of which is equal to the
percentage of the principal amount of the 11% Notes that
are not exchanged; and
34
(iii) Atlantic Holdings will transfer to ACE (A) the cash it
received, except for the cash that Atlantic Holdings will pay
to the holders of the 11% Notes that exchange for the 3% Notes
and (B) all of the assets and liabilities it received from
GBHC;
(b) Atlantic Holdings will offer the holders of the outstanding 11%
Notes the opportunity to exchange their 11% Notes for (i) $100 in
cash for every $1,000 in principal amount of the 11% Notes
exchanged; (ii) on a dollar for dollar basis, the 3% Notes which, at
the election of the holders of a majority of the aggregate principal
amount of the 3% Notes outstanding, will be payable in the form of
72.5% of the issued and outstanding shares of Atlantic Holdings
Common Stock (on a fully diluted basis, assuming 100% of the 11%
Notes are exchanged for the 3% Notes), or 65.909 shares of common
stock of Atlantic Holdings for each $1,000 of principal amount of
the 3% Notes, as full consideration for the principal and accrued
interest owed thereunder; and (iii) a cash payment of accrued, but
unpaid interest on the 11% Notes;
(c) Through a series of mergers, Property, GBHC, and GB Holdings will
merge and GB Holdings will be the surviving entity and:
(i) The 11% Notes tendered for exchange for the 3% Notes will be
cancelled;
(ii) GB Holdings will be the obligor of the 11% Notes (which will
no longer be secured by liens on the collateral);
(iii) GB Holdings will own the shares of Atlantic Holdings Common
Stock or warrants to purchase Atlantic Holdings Common Stock;
(iv) Atlantic Holdings will be a wholly-owned subsidiary of GB
Holdings (immediately prior to the completion of the
Transaction);
(d) GB Holdings will distribute, to you as its stockholders, pro rata,
either:
(i) 0.275 shares of Atlantic Holdings Common Stock for each share
of common stock of GB Holdings that you currently own, so that
the stockholders of GB Holdings will own an aggregate of 27.5%
(or 2,750,000 shares) of the issued and outstanding Atlantic
Holdings Common Stock (on a fully diluted basis, if 100% of
the 11% Notes are exchanged for the 3% Notes); or
(ii) warrants to purchase 0.275 shares of Atlantic Holdings common
Stock, at a purchase price of $.01 per share, for each share
of GB Holdings Common Stock that you currently own, so that
the stockholder of GB Holdings will own, upon exercise of the
warrants, an aggregate of 27.5% (or 2,750,000 shares) of the
issued and outstanding Atlantic Holdings common Stock (on a
fully diluted basis, if less than 100% of the 11% Notes are
exchanged for the 3% Notes); and
(e) As soon as reasonably practicable following the consummation of the
Transaction, GB Holdings will apply to delist the common stock of GB
Holdings from trading on the American Stock Exchange. Also, if 100%
of the 11% Notes are exchanged, the Board of Directors of GB
Holdings will take the steps necessary to dissolve GB Holdings,
satisfy any obligations or liabilities with its assets, and
distribute any remaining assets to its stockholders.
35
ITEM 5. OTHER INFORMATION
(a). During the quarter ended September 30, 2004, the Registrant filed the
following reports on form 8-K.
Date Item(s)
---- -------
July 7, 2004 5 and 7
July 14, 2004 5 and 7
July 23, 2004 5 and 7
July 23, 2004 5
July 29, 2004 5 and 7
September 3, 2004 3.01 and 9.01
ITEM 6. 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 Chief Financial Officer's Certification, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 2002.
36
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Atlantic City, State of New Jersey on November 22, 2004.
GB HOLDINGS, INC.
Registrant
Date: November 22, 2004 /s/ Denise Barton
-------------------------------- -----------------------------
Denise Barton
Chief Financial Officer
37