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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the annual period ended December 31, 2003
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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
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GB PROPERTY FUNDING CORP.
GB HOLDINGS, INC.
GREATE BAY HOTEL AND CASINO, INC.
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(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2502290
DELAWARE 75-2502293
NEW JERSEY 22-2242014
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(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
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(Address of principal executive offices) (Zip Code)
(Registrants" telephone number, including area code): (609) 441-4433
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(Not Applicable)
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(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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
Securities registered pursuant to Section 12(b) of the Act: GB Holdings,
Inc. Common Stock, $.01 par value per share.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2. Yes No X
---- -----
As of March 3, 2004, the aggregate market value of GB Holdings, Inc.'s
Common Stock held by non-affiliates of the registrant was approximately
$25,000,000.
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 March 12, 2004
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GB Property Funding Corp. Common stock, $1.00 par value 100 shares
GB Holdings, Inc. Common stock, $.01 par value 10,000,000 shares
Greate Bay Hotel and Casino, Inc. Common stock, no par value 100 shares
2
PART I
ITEM 1. BUSINESS
GB Holdings, Inc. ("Holdings") is a Delaware corporation and was a wholly
owned subsidiary of Pratt Casino Corporation ("PCC") through December 31, 1998.
PCC, a Delaware corporation, was incorporated in September 1993 and was wholly
owned by PPI Corporation ("PPI"), a New Jersey corporation and a wholly owned
subsidiary of Greate Bay Casino Corporation ("GBCC"). Effective after December
31, 1998, PCC transferred 21% of the stock ownership in Holdings to PBV, Inc.
("PBV"), a newly formed entity controlled by certain stockholders of GBCC. As a
result of a certain confirmed plan of reorganization of PCC and others in
October 1999, the remaining 79% stock interest of PCC in Holdings was
transferred to Greate Bay Holdings, LLC ("GBLLC"), whose sole member as a result
of the same reorganization was PPI. In February 1994, Holdings acquired Greate
Bay Hotel and Casino, Inc. ("GBHC"), a New Jersey corporation, through a capital
contribution by its then parent. GBHC's principal business activity is its
ownership of The Sands Hotel and Casino located in Atlantic City, New Jersey
("The Sands"). GB Property Funding Corp. ("GB Property"), a Delaware corporation
and a wholly owned subsidiary of Holdings, was incorporated in September 1993 as
a special purpose subsidiary of Holdings for the purpose of borrowing funds for
the benefit of GBHC. Atlantic Coast Entertainment Holdings, Inc. ("Atlantic
Holdings") is a Delaware corporation and a wholly-owned subsidiary of GBHC.
Atlantic Holdings was formed in November 2003 for the purpose of the
contemplated exchange of $110 million 11% Notes due 2005 for $110 million 3%
Notes due 2008 to be issued by Atlantic Holdings (see Financing Activities in
Item 7). ACE Gaming LLC, ("ACE Gaming"), a New Jersey limited liability company
and a wholly-owned subsidiary of Atlantic Holdings was formed in November 2003.
Atlantic Holdings and its subsidiary, ACE Gaming, had no operating activities in
2003. Holdings has no operating activities and its only source of income is
interest on cash equivalent investments. Holdings only significant assets are
its investment in GBHC and its cash and cash equivalents of $16.6 million and
$31.8 million as of December 31, 2003 and 2002, respectively.
The consolidated financial statements included in Item 8 include the
accounts and operations of Holdings and its subsidiaries (Holdings, GBHC
(including its subsidiaries Atlantic Holdings and ACE Gaming), and GB Property,
collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated. Throughout this document, references to Notes
are referring to the Notes to Consolidated Financial Statements contained
herein.
On January 5, 1998, the Company filed petitions for relief under Chapter
11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United
States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court").
On August 14, 2000, the Bankruptcy Court entered an order (the "Confirmation
Order") confirming the Modified Fifth Amended Joint Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code Proposed by the Official Committee of
Unsecured Creditors and High River Limited Partnership and its affiliates (the
"Plan") for the Company. High River Limited Partnership ("HighRiver") is an
entity controlled by Carl C. Icahn. On September 13, 2000, the New Jersey Casino
Control Commission (the "Commission") approved the Plan. On September 29, 2000,
the Plan became effective (the "Effective Date") (see Note 2). All material
conditions precedent to the Plan becoming effective were satisfied on or before
September 29, 2000. In addition, as a result of the Confirmation Order and the
occurrence of the Effective Date, and in accordance with Statement of Position
No. 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7"), the Company has adopted "fresh start reporting"
in the preparation of the accompanying consolidated financial statements. The
Company's emergence from Chapter 11 resulted in a new reporting entity with no
retained earnings or accumulated deficit as of September 30, 2000.
3
On the Effective Date, GB Property's existing debt securities, consisting
of its 10 7/8% First Mortgage Notes due January 15, 2004 (the "Old Notes") and
all of Holdings' issued and outstanding shares of common stock owned by PBV and
GBLLC (the "Old Common Stock") were cancelled. As of the Effective Date, an
aggregate of 10,000,000 shares of new common stock of Holdings (the "New Common
Stock") were issued and outstanding, and $110,000,000 of 11% Notes due 2005 were
issued by GB Property (the "Existing Notes"). Holders of the Old Notes received
a distribution of their pro rata shares of (i) the Existing Notes and (ii)
5,375,000 shares of the New Common Stock (the "Stock Distribution").
Holdings and GB Property listed the New Common Stock and Existing Notes,
respectively, on the American Stock Exchange on March 27, 2001. On January 13,
2004, the Securities and Exchange Commission granted Holdings application to
delist the Existing Notes from trading on the American Stock Exchange ("Amex").
On January 14, 2004, the Amex halted trading on the Existing Notes and on
January 15, 2004, the Amex delisted the Existing Notes.
The Sands
For a description of The Sands' facilities, please refer to "Item 2. -
Properties."
The Sands has segregated its gaming customers into three broad
categories:
The Premium Categories - Those customers who have a high potential loss
per trip. This category has the lowest profit margin percentage per customer.
The Middle Categories - Those customers who have a high repeat trip
frequency along with a potential loss per trip that equates to a high annual
potential loss per customer.
The Mass Categories - Those customers who have a low casino loyalty and a
low potential loss per trip. This category has the highest profit margin
percentage per customer.
Business Strategy. Traditionally, The Sands' marketing strategy in the highly
competitive Atlantic City market has consisted of seeking premium category
patrons. In the past, The Sands has been successful in its marketing efforts
towards these premium patrons through its offering of private, limited-access
facilities, related amenities and use of sophisticated information technology to
monitor patron play, control certain casino operating costs and target marketing
efforts toward frequent visitors with above average gaming budgets. While The
Sands strived to maintain market share within this category, competition within
the industry for the premium category (both table and slot) reduced The Sands
ability to attract this type of player on a profitable basis.
In 2001, The Sands focused on the "Value Gaming" concept. The general
concept in "Value Gaming" is to provide the customer with the best possible
gaming experience for the amount of time that the customer is on property.
Whether that experience is enhanced by competitive odds on games, the ability to
find a food outlet that provides an affordable quality food product, or superior
service, the intent is to provide all categories with an expanded and improved
entertainment experience that would lead to an increase in subsequent trips.
As part of its commitment to make the "Value Gaming" concept a reality
for its customers, The Sands continued to provide the "loosest" slots in the
Atlantic City market during 2001 and through the first quarter of 2002. That is,
The Sands provided the best overall odds for winning at slots of any casino in
Atlantic City, according to monthly data filed with the Commission.
4
Additionally, in 2001, The Sands invested approximately $4.6 million in
new slot machines, gaming equipment and casino renovations. The Boardwalk Buffet
reopened after renovations in the summer of 2001, providing guests with an
expanded buffet outlet featuring a wide variety of culinary choices at an
affordable price in a nostalgic Atlantic City atmosphere.
In the second quarter of 2002, The Sands changed its marketing strategy
to reduce its focus on the lower profit margin table games business and focus
almost exclusively on the slot machine business. In the process The Sands
reduced the number of table games from 69 to 26 and increased its number of slot
machines by 400. The Sands began to market its product predominantly to the mass
slot player categories. As part of this strategy, The Sands, in keeping with its
"Value Gaming" concept, increased the number of lower denomination slot
machines, thus making the product more available to this mass category. However
the increase in the number of lower denomination slot machines created a more
competitive slot machine hold percentage and as a result caused The Sands to
move away from its "loosest" slots in Atlantic City. The "Value Gaming" concept
continued to be reinforced through the availability of slot machines, discounted
food product, and availability of hotel rooms to the mass category.
At the end of the third quarter of 2002, it had become apparent that
the gain in slot machine revenue could not offset the loss of table game
revenue. In addition, the volume required from the mass slot player categories,
to make up the loss of the middle to premium slot player categories, could not
be accommodated in a property with the physical constraints of The Sands.
Subsequent review of marketing data revealed that the loss in table game play
had a direct effect on the loss in some slot machine play, as many slot patrons
who frequented The Sands with family and friends were forced to patronize
competitors to find the variety of gaming experience they desired. As a result,
by the end of the fourth quarter of 2002, The Sands had added fourteen table
games to bring the total number of table games to forty, and changed its
marketing strategy to focus more on the middle to premium categories of slot
players.
During 2002 and 2003, The Sands continued to invest in improvements and
upgrades to the casino hotel complex. These improvements included new slot
machines, renovations to the first floor casino, the showroom, two private
lounges for casino guests and hotel room renovations to both The Sands and the
Madison House Hotel (see Properties). The Sands also introduced a new
comprehensive customer service program that included customer service training
for new employees, customer service monitoring for operations and customer
service recovery programs.
The Company recognized that The "Sands" name had a strong brand
recognition and a rich heritage in gaming that went back to the original
property in Las Vegas of the 1950's. Beginning in 2003, the Atlantic City Sands
stylized a new Sands logo, which reflected this rich heritage and began to
transform the property theme into the "Players' Place." The Players' Place
identity was woven into the value gaming strategy to provide the customer with
ample access to a variety of gaming and entertainment experiences that harkened
back to the glamorous era of the Las Vegas strip. The Property will offer
outstanding gaming odds, highest table limits, more liberal player rewards to
the avid customer and unparalleled, personal boutique service that exceeds guest
expectations; all in an environment that makes the better player feel like he
has a "home court advantage."
In 2003, further renovations to the casino floor occurred that supported
this theme. Swingers lounge was constructed in the center of the casino to
provide a multi-faceted state-of-the-art entertainment experience. The Swingers
lounge includes bartop slot machines and is staffed by "Flair Bartenders" (part
mixologist, part performance artist). In addition, further renovations to the
bus lobby entrance, the promotions center and the Platinum and Plaza Clubs
improved the customer experience by providing easier access to facilities,
shorter lines and a more relaxing and personal environment. More table games
including poker were added during 2003 and some slot machines were displaced.
However, the slot product was upgraded during 2003 including the initial phase
of converting the slots to coinless system technology. These slots accept paper
cash, coin or coupons and allow the player an option to return winnings or
cash-outs in the form of redeemable tickets.
5
This technology has gained customer acceptance at competitors and
management believes it will enhance profitability by reducing labor intensive
slot transactions while providing greater customer service and more
uninterrupted player time on machines.
As part of The Sands capital expenditure program, certain improvements,
additions and enhancements have been made, or are planned to be made, to the
facility, including upgrades and amenities to the casino floor, slot machines,
other gaming equipment and other physical plant renovations. In 2004, an entire
floor of 37 rooms in the Sands will be converted into suites to improve the
inventory of accommodations for the premium category players. These additions
and enhancements will primarily benefit guests in a variety of services and will
compliment the "Players' Place" image and the "Value Gaming" marketing strategy.
The Sands uses sophisticated information technology that enables it to
track and rate patrons' play through the use of identification cards, which it
issues to patrons ("casino players' cards"). All Sands' slot machines are
connected with, and information with respect to table games activity can be
input into, a computer network. When patrons insert their casino players' card
into slot machines or present them to supervisors at table games, meaningful
information, including amounts wagered and duration of play, is transmitted in
real-time to a casino management database. The information contained in the
database facilitates the implementation of targeted and cost effective marketing
programs, which appropriately recognize and reward patrons during current and
future visits to The Sands. Certain of these marketing programs allow patrons to
obtain complimentaries based on levels of play. Such complimentaries include
free meals, hotel accommodations, entertainment, retail merchandise, parking,
and sweepstakes giveaways. Management believes that its ability to reward its
customers on a "same-visit" basis is valuable in encouraging the loyalty of
repeat visits. The computer systems also allow The Sands to monitor, analyze and
control the granting of gaming credit, promotional expenses and other marketing
costs. Sands Management believes this is a valuable tool and strategy that
allows The Sands to compete effectively in the Atlantic City market.
Management primarily focuses its marketing efforts on patrons who have
been identified by its casino management computer system as profitable patrons.
Management believes that its philosophy of encouraging participation in its
casino players' card program, using the information obtained thereby to identify
the relative playing patterns of patrons and tailoring specific marketing
programs and property amenities to this market category enhances profitability
of The Sands.
The Sands also markets to the mass casino patron market through various
forms of direct and indirect advertising, and group and bus tour programs. Once
new patrons are introduced to The Sands' "Value Gaming" concept and the casino
players' card program, management uses its information technology capabilities
to directly market to these patrons to encourage repeat patronage.
Competition. The Sands faces intense competition from the eleven other
Atlantic City casinos, including the newly opened Borgata. According to reports
of the Commission, the twelve Atlantic City casinos currently offer
approximately 1.4 million square feet of gaming space.
6
After completion of the acquisition of Caesars by Park Place
Entertainment Corp. in December 1999, Park Place Entertainment connected Caesars
to Bally's Park Place and added slot machines in the connecting space. In
January 2001, over the objections of The Sands, the CCC determined that the
proposed acquisition of the Claridge Hotel and Casino by Park Place
Entertainment which is located adjacent to The Sands and with whom The Sands
jointly operates the "People Mover" walkway from the boardwalk would not violate
the New Jersey Casino Control Act (the "NJCCA"), which includes a prohibition
against undue economic concentration. As a result of the confirmation of the
Claridge Chapter 11 Plan by the Bankruptcy Court, Park Place Entertainment
acquired the Claridge, and Park Place Entertainment constructed a connection
between the Claridge and Bally's Park Place Casino, which was already
interconnected to the Park Place Entertainment controlled Caesars Hotel and
Casino. In 2003, Bally's Park Place Casino merged the Claridge operations into
its corporate structure and under its casino license similar to its operation of
the Wild, Wild West Casino. Currently, Park Place Entertainment has changed its
name to Caesars Entertainment. Of the twelve Atlantic City casinos Caesars
Entertainment controls three casinos, the Trump Organization controls three and
the Harrah's Organization controls two. Caesars Entertainment also controls the
so-called Traymore site located between the boardwalk and The Sands and has
acquired a property contiguous to The Sands parking garage that formerly
contained the Continental Motel property. Caesars Entertainment announced that
it may develop another hotel-casino complex on this site but has not announced
specific plans at this time. On July 3, 2003, The Borgata, a joint venture of
Boyd Gaming Corporation and MGM Mirage, opened in the marina district of
Atlantic City. The Borgata features a 40-story tower with 2,010 rooms and
suites, as well as a 135,000 square-foot casino, restaurants, retail shops, a
spa and pool, and entertainment venues. This project represents a significant
increase to capacity in the market. In addition, other of the Company's
competitors in Atlantic City have recently completed expansions of their hotels
or have announced expansion projects. For example, Tropicana Atlantic City has
started to construct a 502-room hotel tower, a 25-room conference center, a
2,400 space parking garage, an expanded casino floor and a 200,000 square foot
themed shopping, dining and entertainment complex called The Quarter. Tropicana
intends to complete the project in the third quarter of 2004. Resorts is
currently constructing a hotel room addition of approximately 400 rooms and is
scheduled to open in the second quarter of 2004. During 2003, Showboat Atlantic
City opened a new 544-room hotel tower and expanded its gaming space to 101,000
square feet and increased its slot machines to 3,972. The business of the
Company may be adversely impacted (i) by the additional gaming and room capacity
generated by this increased competition in Atlantic City and/or (ii) by other
projects not yet announced in New Jersey or in other markets (e.g.,
Pennsylvania, New York and Connecticut). Accordingly, the existing and future
competing forces could have a materially adverse impact on the operations of The
Sands.
The gaming industry is highly competitive and the Company's competitors
may have greater resources than the Company. If other properties operate more
successfully, if existing properties are enhanced or expanded, or if additional
hotels and casinos are established in and around the location in which the
Company conduct business, the Company may lose market share. In particular,
expansion of gaming in or near the geographic area from which the Company
attracts or expects to attract a significant number of customers could have a
significant adverse effect on the Company's business, financial condition and
results of operations. The Sands competes, and will in the future compete, with
all forms of existing legalized gaming and with any new forms of gaming that may
be legalized in the future. Additionally, the Company faces competition from all
other types of entertainment.
The Casino Reinvestment Development Authority ("CRDA") is a governmental
agency that administers the statutorily mandated investments required to be
funded by casino licensees. Legislation enacted during 1993 and 1996 allocated
an aggregate of $175 million of CRDA funds and credits to subsidize and
encourage the construction of additional hotel rooms by Atlantic City casino
licensees. Competitors of The Sands that have the financial resources to
construct hotel rooms can take advantage of such credits more readily than The
Sands. The Sands has an approved hotel expansion program with the CRDA and a
retail entertainment development project. Plans have been announced by other
casino operators to complete expansions within the required subsidy period. The
expansion of existing gaming facilities and the addition of new casinos will
continue to increase competition within the Atlantic City market.
7
In this highly competitive environment, each property's relative success
is affected by a great many factors that relate to its location and facilities.
These include the number of parking spaces and hotel rooms it possesses, close
proximity to Pacific Avenue, the Boardwalk and to other casino/hotels and access
to the main expressway entering Atlantic City. The Company believe that, in
prior years, its operating strategy enabled The Sands to compete against most
other Atlantic City casino/hotels. In the past, many of their competitors had
greater financial resources for capital improvements, marketing and promotional
activities than the Company and, as a result, The Sands' facilities and
amenities fell behind many of the other casinos. In order to improve the
Company's competitive position, they sought the approval of the Bankruptcy Court
for a capital expenditure program to renovate the majority of its hotel rooms
and suites and to purchase approximately 700 slot machines. The Bankruptcy Court
approved the capital expenditure program in the amount of approximately $13.6
million in March 1998. In addition, the lack of access to Pacific Avenue
hampered The Sands' efforts to expand its "drive-in" patron base. During 1999,
in an effort to increase and utilize available Pacific Avenue frontage The Sands
acquired land parcels on Pacific Avenue and demolished the existing structures
and constructed a new front entrance to The Sands' facility on Pacific Avenue,
which opened in June 2000. During 2003, the new front entrance was redesigned
and refurbished as an exclusive entrance for its bus patrons, complete with a
new and expanded bus waiting lounge. Also during 2003, the porte cochere was
renovated and expanded in order to make The Sands more easily accessible to the
drive-in customer.
In order to enhance its competitive position in the marketplace, a
capital expenditure plan was recently approved by the Board of Directors of the
Company, and management believes that cash generated from operations and cash
reserves will be sufficient to meet the requirements of the plan. Based upon
expected cash flow generated from operations, management determined that it
would be prudent for the Company to obtain a line of credit to provide
additional cash availability, to meet the Company's working capital needs, in
the event that anticipated cash flow is less than expected or expenses exceed
those anticipated. At the request of the Company, Ealing Corp., a Nevada
corporation and an affiliate of Mr. Icahn, agreed to provide a revolving credit
facility, secured by a first lien on all of the assets of the Company, under
which the Company may borrow up to an aggregate amount of $10 million for
general working capital purposes. Ealing's obligation to provide the financing
pursuant to the commitment letter is subject to the negotiation and execution of
a definitive loan and security agreements and related documents as well as
certain customary conditions. However, there can be no assurance that the loan
agreement with Ealing will be consummated, that if the loan agreement with
Ealing is not consummated, the Company will be able to obtain financing from
another lender on terms as or more favorable than the terms of the commitment
letter, or whether the Company will need to borrow funds for working capital.
The Sands also competes with legalized gaming from casinos located on
Native American tribal lands. In October 2001, the New York State Legislature
enacted a bill, which the governor signed, authorizing a total of six Indian
casinos in the State of New York - three in Western New York and three in the
Catskill Region - and approved the use of video lottery terminals at racetracks
and authorized the participation of New York State in a multi-state lottery. On
January 29, 2002, a lawsuit was commenced contesting the above legislation
package on the grounds that certain of its provisions were adopted in violation
of the State's constitution. The likely outcome of this lawsuit cannot be
ascertained at this time. The implementation of VLT's and the outcome of this
lawsuit could adversely affect visitation of The Sands from New York residents.
8
Pennsylvania and Maryland are among the other states currently
contemplating some form of gaming legislation. Legislative proposals introduced
in Pennsylvania would potentially allow for a wide range of gaming activities,
including riverboat gaming, slot machines at racetracks, video lottery terminals
at liquor stores and the formation of a gaming commission. Maryland's proposed
legislation would authorize video lottery terminals at some of Maryland's racing
facilities. The results of the gubernatorial elections in Pennsylvania and
Maryland in 2002 have also increased the likelihood of gaming legislation in
such states. Since The Sands' market is primarily a drive-to-market, legalized
gambling in Pennsylvania or one or more states neighboring or within close
proximity to New Jersey could have a material adverse effect on the Atlantic
City gaming industry overall, including The Sands.
A significant amount of The Sands' revenues is derived from patrons
living in northern New Jersey, southeastern Pennsylvania and metropolitan New
York City. Proposals to allow casino gaming in certain areas of Pennsylvania
have been defeated within the past three years. If casino gaming were to be
legalized in those areas or in other venues that are more convenient to those
areas, it could have a material adverse effect on The Sands. Gaming is currently
conducted on Indian lands in nearby states, including the Foxwoods and Mohegan
Sun Casinos in Connecticut and the Turning Stone Casino in Oneida, New York near
Syracuse, Casino Niagara, which has operated a temporary casino facility in
Niagara Falls, Ontario, since 1996, intends to open an expanded permanent
facility in the spring of 2004. In addition, New York State passed legislation
that was signed by the Governor in October 2001 to allow slot machines at
racetracks and six Indian owned casinos within the State of New York. The
Saratoga race track in upstate New York began operating slot machines in January
2004. The legislation also allowed the State to join the multi-state Powerball
lottery. The gaming portion of the legislation may face legal challenges
including a challenge based on the New York State Constitution. Therefore, it is
not possible to determine the timing or financial impact of this legislation on
Atlantic City at this time.
Industry Developments. On July 1, 2003, the State of New Jersey amended
the NJCCA to impose various tax increases on Atlantic City casinos, including
The Sands. Among other things, the amendments to the NJCCA include the following
new tax provisions: (i) a new 4.25% tax on casino complimentaries, with proceeds
deposited to the Casino Revenue Fund; (ii) an 8% tax on casino service industry
multi-casino progressive slot machine revenue with the proceeds deposited to the
Casino Revenue Fund; (iii) a 7.5% tax on adjusted net income of licensed casinos
in State fiscal years 2004 through 2006 based upon 2003 Net Income with a
minimum payment of $350,000, with the proceeds deposited to the Casino Revenue
Fund; (iv) a fee of $3.00 per day on each hotel room in a casino hotel facility
that is occupied by a guest, for consideration or as a complimentary item, with
the proceeds deposited into the Casino Revenue Fund in State fiscal years 2004
through 2006 and, beginning in State fiscal year 2007, $2.00 of the fee
deposited into the Casino Revenue Fund and $1.00 to be transferred to the CRDA;
(v) an increase in the amount paid by the casino hotel for patron cars parked
from $1.50 to $3.00, of the minimum casino hotel parking charge from $2.00 to
$3.00, with $1.50 of the fee to be deposited into the Casino Revenue Fund in
State fiscal years 2004 through 2006 and, beginning in State fiscal year 2007,
$0.50 to be deposited into the Casino Revenue Fund and $1.00 to be transferred
to the CRDA for its purposes pursuant to law, and for use by the CRDA to bond
for $30 million for deposit into the Casino Capital Construction Fund, which was
also created by the July 1, 2003 Act that amended the NJCCA; and the new taxes
imposed on The Sands and other Atlantic City casinos, will reduce our
profitability. It is anticipated that these new and increased taxes will cost
The Sands approximately $1.5-$2.0 million annually in additional expenses.
9
Slot machines have become increasingly more popular than table games
particularly with frequent patrons and with recreational and other casual
visitors. Casino operators have been catering increasingly to slot patrons
through new forms of promotions and incentives such as slot machines that are
linked among the various casinos enabling the pay out of large pooled jackpots,
and through more attractive and entertaining gaming machines with secondary
jackpots. Various competitors have committed efforts to provide coinless
technology in their slot product, which appears to be an industry trend for the
future. Slot machines generally produce higher margins and profitability than
table games because they require less labor and have lower operating costs. As a
result, slot machine revenue growth has outpaced table game revenue growth in
recent years. In 2003, according to Commission filings, slot win accounted for
approximately 74.8% of total Atlantic City gaming win. However, table games
remain important to a select category of gaming patrons. Management believes the
availability of table games provides a varied gaming experience that benefits
both slot and table game revenues.
Casino Credit. Casino operations are conducted on both a credit and a
cash basis. Patron gaming debts incurred in accordance with the NJCCA are
enforceable under New Jersey law. For the year ended December 31, 2003, gaming
credit extended to The Sands' table game patrons accounted for approximately
22.0% of overall table game wagering, and table game wagering accounted for
approximately 10.2% of overall casino wagering during the period. At December
31, 2003, gaming receivables amounted to $9.5 million before an allowance for
uncollectible gaming receivables of $5.6 million. Management believes that such
allowance is adequate.
License Agreement. GBHC's rights to the trade name "Sands" (the "Trade
Name") were derived from a license agreement between Greate Bay Casino
Corporation and an unaffiliated third party. Amounts payable by GBHC for these
rights were equal to the amounts paid to the unaffiliated third party. On
September 29, 2000, High River Limited Partnership assigned GBHC the rights
under a certain agreement with the owner of the Trade Name to use the Trade Name
as of September 29, 2000 through May 19, 2086, subject to termination rights for
a fee after a certain minimum term. High River is an entity controlled by Carl
C. Icahn. High River received no payments for its assignment of these rights.
Payment is made directly to the owner of the Trade Name. For the years ended
December 31, 2003, 2002 and 2001, the license fee amounted to $263,000, $272,000
and $268,000, respectively.
Employees and Labor Relations. In Atlantic City, all employees, except
certain hotel employees, must be licensed under the Casino Act. Due to the
seasonality of the operations of The Sands, the number of employees varies
during the course of the year. At December 31, 2003, The Sands had approximately
2,211 employees. The Sands has collective bargaining agreements with three
unions that represent approximately 818 employees, most of whom are represented
by the Hotel, Restaurant Employees and Bartenders International Union, AFL-CIO,
Local 54. The collective bargaining agreement with Local 54 expires in September
2004. The collective bargaining agreements with the Carpenters, Local 623 and
Entertainment Workers, Local 68 expire in April and July 2005, respectively.
Management considers its labor relations to be good.
Casino Regulation
Casino gaming is strictly regulated in Atlantic City under the NJCCA and
the regulations of the Commission, which affect virtually all aspects of the
operations of The Sands. The Casino Act and regulations affecting Atlantic City
casino licensees concern primarily the financial stability, integrity and
character of casino operators, their employees, their debt and equity security
holders and others financially interested in casino operations; the nature of
casino/hotel facilities; the operation methods (including rules of games and
credit granting procedures); and financial and accounting practices used in
connection with casino operations. A number of these regulations require
practices that are different from those in casinos in Nevada and elsewhere, and
some of these regulations result in casino operating costs greater than those in
comparable facilities in Nevada and elsewhere.
10
Casino Licenses. The Casino Act requires that all casino owners and
management contractors be licensed by the Commission and that all employees
(except for certain non-casino related job positions), major shareholders and
other persons or entities financially interested in the casino operation be
either licensed or approved by the Commission. A license is not transferable and
may be revoked or suspended under certain circumstances by the Commission. A
plenary license authorizes the operation of a casino with the games authorized
in an operation certificate issued by the Commission, and the operation
certificate may be issued only on a finding that the casino conforms to the
requirements of the Casino Act and applicable regulations and that the casino is
prepared to entertain the public. Under such determination, GBHC has been issued
a plenary casino license. The plenary license issued to The Sands was renewed by
the Commission in September 2000 for a period of four years.
In order to renew GBHC's casino license, the Commission must determine
that GBHC and Holdings are financially stable. In order to be found "financially
stable" under the NJCCA, GBHC and Holdings must demonstrate, among other things,
their ability to pay, exchange, or refinance debts that mature or otherwise
become due and payable during the license term, or to otherwise manage such
debts. Because the Existing Notes will become due during the period following
the renewal of the license in 2004, the Commission will require GBHC and
Holdings to indicate the efforts they will pursue or are pursuing to refinance
the Existing Notes prior to maturity and during the new license term. Currently,
the Commission is and will continue to monitor the efforts of GBHC and Holdings
to manage and refinance the Existing Notes. There has been no precedent of
non-renewal of a casino license in this situation.
The NJCCA provides for a casino license fee of not less than $200,000
based upon the cost of the investigation and consideration of the license
application, and a renewal fee of not less than $100,000 or $200,000 for a one
year or four year renewal, respectively, based upon the cost of maintaining
control and regulatory activities. In addition, a licensee must pay annual taxes
of 8% of casino win (as defined in the Casino Act. During the years ended
December 31, 2003, 2002 and 2001, the taxes and the license and other fees
incurred by The Sands amounted to $19.0 million, $21.3 million and $23.0
million, respectively.
The NJCCA also requires casino licensees to pay an investment alternative
tax of 2.5% of Gross Revenue (the "2.5% Tax") or, in lieu thereof, to make
quarterly deposits of 1.25% of quarterly Gross Revenue with the CRDA (the
"Deposits"). The Deposits are then used to purchase bonds at below-market
interest rates from the CRDA or to make qualified investments approved by the
CRDA. The CRDA administers the statutorily mandated investments required to be
funded by casino licensees and is required to expend the monies received by it
for eligible projects as defined in the Casino Act. The Sands has elected to
make the Deposits with the CRDA rather than pay the 2.5% Tax.
The Sands has, from time to time, contributed certain amounts held in
escrow by the CRDA to fund CRDA sponsored projects. During 2003, The Sands
contributed $694,000 of its escrowed funds to CRDA sponsored projects. No
specific refund or future credit has been associated with the 2003
contributions. During 2002, The Sands contributed $925,000 of its escrowed funds
to CRDA sponsored projects and received $116,000 in a cash refund. In 2001, The
Sands contributed $322,000 of its escrowed funds to CRDA sponsored projects and
received $80,000 in a cash refund and $84,000 in waivers of certain future
Deposit obligations. Prior to this, the CRDA had granted The Sands both cash
refunds and waivers of certain of its future Deposit obligations in
consideration of similar contributions. Other assets aggregating $621,000 and
$811,000, respectively, have been recognized on the accompanying consolidated
balance sheets at December 31, 2003 and 2002, and are being amortized over a
period of ten years commencing with the completion of the projects. Amortization
of other assets totaled $205,000, $199,000 and $202,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
11
The NJCCA also imposes certain restrictions upon the ownership of
securities issued by a corporation that holds a casino license or is a holding
company of a corporate licensee. Among other restrictions, the sale, assignment,
transfer, pledge or other disposition of any security issued by a corporate
licensee or holding company is subject to the regulation of the Commission. The
Commission may require divestiture of any security held by a disqualified holder
such as an officer, director or controlling stockholder who is required to be
qualified under the NJCCA.
Note holders are also subject to the qualification provisions of the
NJCCA and may, in the sole discretion of the Commission, be required to make
filings, submit to regulatory proceedings and qualify under the Casino Act. If
an investor is an "Institutional Investor" such as a retirement fund for
governmental employees, a registered investment company or adviser, a collective
investment trust, or an insurance company, then, in the absence of a prima facie
showing by the New Jersey Division of Gaming Enforcement that the "Institutional
Investor" may be found unqualified, the Commission shall grant a waiver of this
qualification requirement with respect to publicly traded debt or equity
securities of parent companies or affiliates if the investor will own (i) less
than 10% of the common stock of the company in question on a fully diluted
basis, or (ii) less than 20% of such company's overall indebtedness provided the
investor owns less than 50% of an outstanding issue of indebtedness of such
company; the Commission, upon a showing of good cause, may, in its sole
discretion, grant a waiver of qualification to an "Institutional Investor" not
satisfying the above percentage criteria. An "Institutional Investor" must also
purchase securities for investment and have no intent to influence the
management or operations of such company. The Commission may, in its sole
discretion, grant a waiver of the qualification requirement to investors not
qualifying as "Institutional Investors" under the Casino Act if such investors
will own less than 5% of the publicly traded common stock of such company on a
fully diluted basis or less than 15% of the publicly traded outstanding
indebtedness of such company.
ITEM 2. PROPERTIES
The Sands is located in Atlantic City, New Jersey on approximately 6.1
acres of land one-half block from the Boardwalk at Brighton Park between Indiana
Avenue and Dr. Martin Luther King, Jr. Boulevard. The Sands facility currently
consists of a casino and simulcasting facility with approximately 78,000 square
feet of gaming space containing approximately 2,202 slot machines and
approximately 73 table games; 2 hotels (see discussion on the Madison House
Hotel immediately below) with an overall total of 637 rooms (including 170
suites); five restaurants; two cocktail lounges; two private lounges for invited
guests; an 800-seat cabaret theater; retail space; an adjacent nine-story office
building with approximately 77,000 square feet of office space for its
executive, financial and administrative personnel; the "People Mover", an
elevated, enclosed, one-way moving sidewalk connecting The Sands to the
Boardwalk using air rights granted by an easement from the City of Atlantic City
and a garage and surface parking for approximately 1,750 vehicles.
The Sands entered into a long-term lease of the Madison House Hotel. The
initial lease period is from December 2000 to December 2012 with lease payments
ranging from $1.8 million per year to $2.2 million per year. The Madison House
is physically connected at two floors to the existing Sands casino-hotel
complex. The Sands completed renovations in 2002 to upgrade and combine the
rooms of the Madison House into a total of 113 suites and 13 single rooms. It is
the intention of The Sands to maintain and operate the Madison House at the same
quality level as The Sands.
12
With the exception of the land over which the People Mover is constructed
and the Madison House Hotel land, The Sands owns the land and improvements
comprising The Sands facility. The Sands owns and operates the casino, the
hotel, all of the restaurants, the cocktail lounge, the private lounges, the
theatre and a retail gift shop. In addition, The Sands has licensed certain
space within the hotel building to unrelated third parties who operate a beauty
shop, a peanut shop, a game room and a coffee stand.
ITEM 3. LEGAL PROCEEDINGS
Tax appeals on behalf of GBHC and the City of Atlantic City challenging
the amount of GBHC's real property assessments for tax years 1996 through 2003
are pending before the NJ Tax Court.
In 2001, GBHC discovered certain failures relating to currency
transaction reporting which resulted in the failure of GBHC to file legally
required currency transaction reports. Following this discovery, GBHC
self-reported the situation to the applicable regulatory agencies. GBHC
conducted an internal examination of the matter and the New Jersey Division of
Gaming Enforcement conducted a separate review. There has not been an impact on
GBHC's financial reporting because of these failures, GBHC has revised internal
control processes and taken other measures to address the situation. In May
2003, GBHC was advised by the Department of the Treasury that it will not pursue
a civil penalty.
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.
On February 26, 2003, The Sands received a letter from counsel for Mr.
Frederick H. Kraus, Executive Vice President, General Counsel and Secretary,
indicating that he had been retained to represent Mr. Kraus "in regards to a
constructive discharge, breach of contract, severance pay" and other claims.
This matter has been amicably resolved.
GBHC is a party in various legal proceedings with respect to the conduct
of casino and hotel operations and has received employment related claims.
Although a possible range of losses cannot be estimated, in the opinion of
management, based upon the advice of counsel, GBHC does not expect settlement or
resolution of these proceedings or claims to have a material adverse impact upon
their consolidated financial position or results of operations, but the outcome
of litigation and the resolution of claims is subject to uncertainties and no
assurances can be given. The consolidated financial statements do not include
any adjustments that might result from these uncertainties.
From time to time, GBHC and certain of its officers, directors, agents
and employees, are subject to various legal and administrative proceedings
incidental to the business of GBHC, GBHC does not believe any proceedings
currently pending are material to the conduct of the business of GBHC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 9, 2003, the annual meeting of shareholders was held to elect
the Board of Directors and the appointment of independent auditors. Proxies were
solicited for the annual meeting under Regulation 14A.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
GB Property's voting securities consist of 100 shares of common stock
with a par value of $1.00 per share, all of which are owned by Holdings.
GBHC's voting securities consist of 100 shares of common stock with no
par value per share, all of which are owned by Holdings.
Holdings' voting securities consist of an aggregate of 10,000,000 shares
of common stock with a par value of .01 per share. As of March 1, 2004 there
were 9 record holders of GBHC common stock.
The Company has not paid any dividends in the past and has no plans to
pay any in the future.
The New Common Stock (trading symbol "GBH") and the Existing Notes were
listed and commenced trading on the American Stock Exchange ("AMEX") on March
27, 2002. To Holdings' knowledge, other than certain of the shares of the New
Common Stock owned by Icahn (77.49%), and HMC Investors, LLC (8%), substantially
all of the shares of the New Common Stock are held by Cede & Co. as nominee.
The range of high and low market prices for the New Common Stock on the
American Stock Exchange Composite Tape from January 1, 2002 through December 31,
2003 is as follows:
Quarter Ended: High Low
------------- ---- ---
March 31, 2002 $3.11 $2.48
June 30, 2002 $3.15 $2.22
September 30, 2002 $3.16 $2.25
December 31, 2002 $3.19 $2.62
March 31, 2003 $2.98 $2.45
June 30, 2003 $6.20 $2.66
September 30, 2003 $6.00 $2.56
December 31, 2003 $3.70 $2.41
14
Equity Compensation Plan Information
The Sands does not maintain any equity compensation plans.
- ----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
Plan category Number of securities to Weighted-average Number of securities
the issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation plans
(excluding securities
reflected in column (a))
- ----------------------------------------------------------------------------------------------------------------------
Equity Compensation plans
approved by security holders - - -
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders - - -
- ----------------------------------------------------------------------------------------------------------------------
Total - - -
- ----------------------------------------------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
GB Holdings, Inc. and Subsidiaries
The following table sets forth selected financial information for
Holdings, and is qualified in its entirety by, and should be read in conjunction
with, Holdings' Financial Statements and Notes thereto contained elsewhere
herein. The data as of December 31, 2003 and 2002 and for the years ended
December 31, 2003, 2002 and 2001 have been derived from the audited financial
statements of Holdings contained in Item 8 below.
The Company implemented SOP 90-7 and, therefore, adopted "fresh start
reporting" as of September 30, 2000. The Company's emergence from its Chapter 11
proceedings resulted in a new reporting entity with no retained earnings or
accumulated deficit as of September 30, 2000. Accordingly, the Company's
consolidated financial statements for periods prior to September 30, 2000 are
not comparable to consolidated financial statements presented on or subsequent
to September 30, 2000. Column headings have been included on the accompanying
Consolidated Statement of Operations Data and Consolidated Balance Sheet Data to
distinguish between the pre-reorganization and post-reorganization entities. A
black line has been drawn on the accompanying consolidated financial statements
data to distinguish between the pre-reorganization and post-reorganization
entities.
15
GB HOLDINGS, INC. AND SUBSIDIARIES
(dollars in thousands except income per share data)
Statement of Operations Data:
|
Post-reorganization | Pre-reorganization
---------------------------------------------------------------| -------------------------------
Year Year Year 10/01/00 | 01/01/00 Year
Ended Ended Ended Ended | Ended Ended
12/31/03 12/31/02 12/31/01 12/31/00 | 09/30/00 12/31/99
------------ ------------- ------------- -------------- | ------------ -------------
Total Revenues .................. $ 219,890 $ 244,601 $ 278,030 $ 62,485 | $ 209,575 $ 270,578
Promotional Allowances .......... (49,632) (51,128) (62,281) (15,774) | (47,112) (60,767)
------------ ------------- ------------ -------------- | ------------ -------------
Net revenues .................... 170,258 193,473 215,749 46,711 | 162,463 209,811
------------ ------------- ------------ -------------- | ------------ -------------
Expenses: |
|
Departmental................. 146,049 159,714 185,255 45,427 | 131,985 178,188
General and administrative... 11,582 12,799 11,512 2,175 | 7,663 10,586
Depreciation and |
amortization including |
provision for obligatory |
investments................ 16,244 15,457 12,133 3,834 | 9,414 16,215
|
Loss on impairment of assets. 1,282 - - - | - -
Loss (gain) on disposal of |
fixed assets............... (105) 185 20 11 | 10 (259)
------------ ------------- ------------ -------------- | ------------ -------------
Total Expenses............. 173,770 189,437 208,920 51,447 | 149,072 204,730
------------ ------------- ------------ -------------- | ------------ -------------
Income (loss) from operations (3,512) 4,036 6,829 (4,736) | 13,391 5,081
------------ ------------- ------------ -------------- | ------------ -------------
Non-operating income (expense): |
Interest income.............. 627 1,067 2,671 1,338 | 518 649
Interest expense............. (12,027) (11,640) (11,279) (3,133) | (366) (295)
Reorganization and other |
related costs.............. (1,843) - - 34 | (2,807) (2,154)
Gain on prepetition debt |
discharge.................. - - - - | 14,795 -
------------ ------------- ------------ -------------- | ------------ -------------
Total non-operating |
expense, net............. (13,243) (10,573) (8,608) (1,761) | 12,140 (1,800)
------------ ------------- ------------ -------------- | ------------ -------------
Income (loss) before |
income taxes ................... (16,755) (6,537) (1,779) (6,497) | 25,531 3,281
Income tax provision ............ (958) (784) (55) - | - (133)
------------ ------------- ------------ -------------- | ------------ -------------
Net income (loss) ............... $ (17,713) $ (7,321) $ (1,834) $ (6,497) | $ 25,531 $ 3,148
------------ ------------- ------------ -------------- | ------------ -------------
|
Basic/diluted income (loss) per |
common share: ................. $ (1.77) $ (0.73) $ (0.18) $ (0.65) | $ 2.55(2) $ 0.32(2)
============ ============= ============ ============== | ============ =============
Weighted avaerage common |
shares outstanding......... 10,000,000 10,000,000 10,000,000 10,000,000 | 10,000,000 10,000,000
============ ============= ============ ============== | ============ =============
Balance Sheet Data: Post-reorganization Pre-reorganization
------------------------------------------------------------------------------------------------
12/31/03 12/31/02 12/31/01 12/31/00 9/30/00 12/31/99
-------------- -------------- ------------- --------------- -------------- ------------
Total assets .................... $ 227,563 $ 244,712 $ 255,922 $ 264,247 $ 272,676 $ 208,416
Total long-term debt ............ 110,000 110,000 110,371 110,838 110,858 197,898
Shareholder's equity (deficit) .. 91,635 109,348 116,669 118,503 125,000 (39,593)
- ---------------
(1) On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of New Jersey. The accrual
of interest expense on the First Mortgage Notes, the Subordinated Notes
(as hereafter defined) and other affiliate advances for periods subsequent
to the filing was suspended.
(2) Income (loss) per share information is presented on a pro forma basis
for periods presented prior to the Effective Date.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements about
the business, financial condition and prospects of Holdings, GB Property Funding
and GBHC. The actual results could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties. Such
risks and uncertainties are beyond management's ability to control and, in many
cases, cannot be predicted by management. When used in this Annual Report on
Form 10-K, the words "believes", "estimates", "anticipates", "expects",
"intends" and similar expressions as they relate to Holdings, GB Property
Funding and GBHC or its management are intended to identify forward-looking
statements (see "Private Securities Litigation Reform Act" below).
OVERVIEW
The Company faced a number of competitive challenges during fiscal 2003,
including increased competition from the newly opened Borgata, increased
competition from existing casinos that invested in capital improvements, and a
corresponding increase in competition for slot machine players. Severe winter
weather and a loss of customers resulting in part from The Sands' decreased
table gaming capacity also had a negative effect on revenues for the first half
of fiscal 2003. These factors resulted in a decline of $23.2 million (12%), in
net revenues as compared to the prior fiscal year, and a net loss of $17.7
million compared to a net loss of $7.3 million in the prior fiscal year.
Management is currently focused on restructuring its debt to
significantly reduce the cash requirements for debt service and defer the
payment of principal, which is presently due in September 2005, for three years.
These funds would then be available for operational and capital investment,
including opportunities that arise to expand The Sands' casino, rooms, parking,
entertainment and retail facilities.
Pursuant to New Jersey law, GBHC is required to maintain a casino
license in order to operate The Sands. The gaming licenses required to own and
operate The Sands must be renewed in 2004, which requires that the CCC determine
that GBHC and Holdings are financially stable. In order to be found "financially
stable" under NJCCA, GBHC and Holdings must demonstrate among other things,
their ability to pay exchange, or refinance debts that mature or otherwise
become due and payable during the license term, or to otherwise manage such
debts. If the CCC determines that Holdings may be unable to make the required
payments pursuant to the Existing Notes or pay the principal when it becomes due
in 2005, GBHC may be unable to obtain renewal of the casino license required to
own and operate The Sands. Currently, the CCC is and will continue to monitor
the effect of GBHC and Holdings to manage and refinance the Existing Notes.
There has been no precedent of non-renewal of a casino license in this
situation.
The Sands primarily generates revenues from gaming operations in its
Atlantic City facility (see Properties). Although The Sands' other business
segments including rooms, entertainment, retail store, food and beverage
operations also generate some cash sales, these revenues are nominal in
comparison to the casino operations. The non-casino operations primarily support
the casino operation by providing complimentary goods and services to deserving
casino customers (see Promotional Allowances). The Company competes in a capital
intensive industry (see Competition) that requires continual reinvestment in its
facility and technology.
17
LIQUIDITY AND CAPITAL RESOURCES
Summary
During 2004, management anticipates making tax payments of approximately
$1.1 million to the State of New Jersey. Management believes that cash flows
generated from operations during 2004, as well as available cash reserves, will
be sufficient to meet its operating plan. In the first quarter of 2004, the
Board approved a capital expenditures program for 2004 under which Holdings and
its subsidiaries anticipate making capital expenditures of approximately $20.0
million to invest in and upgrade The Sands. Management believes that cash
generated from operations and cash reserves will be sufficient to meet the
requirements of the plan. Based upon expected cash flow generated from
operations, management determined that it would be prudent for the Company to
obtain a line of credit to provide additional cash availability, to meet the
Company's working capital needs, in the event that anticipated cash flow is less
than expected or expenses exceed those anticipated. At the request of the
Company, Ealing Corp., a Nevada corporation and an affiliate of Mr. Icahn,
agreed to provide a revolving credit facility, secured by a first lien on all of
the assets of the Company, under which the Company may borrow up to an aggregate
amount of $10 million for general working capital purposes. Ealing's obligation
to provide the financing pursuant to the commitment letter is subject to the
negotiation and execution of definitive loan and security agreements and related
documents as well as certain customary conditions. However, there can be no
assurance that the loan agreement with Ealing will be consummated, that if the
loan agreement with Ealing is not consummated, the Company will be able to
obtain financing from another lender on terms as or more favorable than the
terms of the commitment letter, or whether the Company will need to borrow funds
for working capital.
Operating Activities
At December 31, 2003, the Company had cash and cash equivalents of $33.5
million. The Company used $2.3 million of net cash from operations during the
year ended December 31, 2003 compared to generating $9.7 million during the same
prior year period. The 2003 decrease in net cash from operations was primarily
due to the decline in net revenues as a result of the increased competition and
capacity in the Atlantic City market. The 2002 increase in net cash from
operations is a result of a combination of a decrease in accounts receivable and
an increase in depreciation expense that offset a decrease in income from
operations. During 2002, based upon a periodic review of long-lived assets for
impairment in conjunction with a review of the Company's marketing programs and
product mix, certain expenditures incurred for property expansion plans, that
were included in construction in progress, were determined to be unusable and
resulted in a loss on asset impairment in the amount of $1.3 million.
Investing Activities
Capital expenditures at The Sands for the year ended December 31, 2003
amounted to approximately $12.8 million compared to $14.1 million in 2002 and
$23.1 million in 2001. 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 new slot machines, casino
and hotel renovations as well as replacement and upgrades to infrastructure and
technology. However, in order to avoid disruption of its operations during the
peak summer season and based upon operating results and available cash,
management may defer some slot machine replacements and casino renovations to
the latter half of 2004 or beyond, thereby reducing capital expenditures for
2004. Accordingly, additional financing requirements could be reduced
significantly.
18
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 years ended December 31, 2003, 2002 and 2001 amounted to $2.3 million, $2.5
million and $2.8 million, respectively.
Financing Activities
There were no financing activities during the year ended December 31,
2003. As of December 31, 2003, the only scheduled payment of long-term debt is
the Existing Notes, which mature on September 29, 2005.
On July 14, 2003, a Form 8-K was filed with the SEC reporting that a
committee of the independent directors of the Company approved a proposed
restructuring of the Existing Notes, together with various other corporate
changes to be accomplished in connection with the proposed restructuring. In
connection with the foregoing, on November 13, 2003, Atlantic Holdings filed
with the SEC, a Registration Statement on Form S-4 (which contains a preliminary
prospectus), under the Securities Act of 1933, as amended (the "Securities
Act"), to transfer substantially all of the assets and liabilities of Holdings,
GBHC, and GB Property, to Atlantic Holdings, in exchange for Atlantic Holdings
issuance of 3% Notes due 2008 in exchange for the Existing Notes and the
cancellation of such Notes) and the registration of certain securities to be
issued to the stockholders of the Company; and, also on such date, Atlantic
Holdings and ACE Gaming filed with the SEC, a Registration Statement on Form S-4
under the Securities Act, with respect to a consent solicitation and exchange
offer with respect to the Existing Notes. Neither of such Registration
Statements have been declared effective and each was amended by filing Amendment
No. 1 to Form S-4/A on February 13, 2004. The Company and Atlantic Holdings also
filed with the SEC a schedule 13e-3, under the Securities and Exchange Act of
1934, with respect to such transactions, which was also amended by the filing of
a Schedule 13e-3/A on February 13, 2004.
During 2004, Management anticipates making its next scheduled interest
payment on the Existing Notes of $6.1 million on March 29, 2004 and depending on
the timing of the anticipated exchange of Existing Notes, a payment of up to
$1.0 million per month for each month the Existing Notes remain outstanding.
Management estimates that consent fees associated with the exchange of
Existing Notes will be between $6.4 million and $11.0 million. Additional
financing fees are estimated to be between $700,000 and $800,000.
Pursuant to New Jersey law, GBHC is required to maintain a casino
license in order to operate The Sands. The gaming licenses required to own and
operate The Sands must be renewed in September 2004, and for each renewal the
CCC must determine that GBHC and Holdings are financially stable. In order to be
found "financially stable" under NJCCA, GBHC and Holdings must demonstrate among
other things, their ability to pay exchange, or refinance debts that mature or
otherwise become due and payable during the license term, or to otherwise manage
such debts. If the CCC determines that Holdings may be unable to make the
required payments pursuant to the Existing Notes or pay the principal when it
becomes due in 2005, GBHC may be unable to obtain renewal of the casino license
required to own and operate The Sands. GBHC's inability to obtain renewal of is
casino license will have a material adverse effect on Holdings.
19
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its results of operations and
financial condition are based upon its consolidated financial statements that
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("US GAAP"). The preparation of financial
statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosure of contingent assets and liabilities. Estimates
and assumptions are evaluated on an ongoing basis and are based on historical
and other factors believed to be reasonable under the circumstances. The results
of these estimates may form the basis of the carrying value of certain assets
and liabilities and may not be readily apparent from other sources. Actual
results, under conditions and circumstances different from those assumed, may
differ from estimates. The impact and any associated risks related to estimates,
assumptions, and accounting policies are discussed within Management's
Discussion and Analysis of Results of Operations and Financial Condition, as
well as in the Notes to the Consolidated Financial Statements, if applicable,
where such estimates, assumptions, and accounting policies affect the Company's
reported and expected financial results.
The Company believes the following accounting policies are critical to
its business operations and the understanding of results of operations and
affect the more significant judgments and estimates used in the preparation of
its consolidated financial statements:
Allowance for Doubtful Accounts - The Company maintains accounts
receivable allowances for estimated losses resulting from the inability of its
customers to make required payments. The adequacy of the allowance is determined
by management based on a periodic review of the receivable portfolio. Additional
allowances may be required if the financial condition of the Company's customers
deteriorates.
Commitments and Contingencies - Litigation - On an ongoing basis, the
Company assesses the potential liabilities related to any lawsuits or claims
brought against the Company. While it is typically very 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.
20
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 consolidated
financial statements.
Self-Insurance - The Company retains the obligation for certain losses
related to customer's claims of personal injuries incurred while on the Company
property as well as workers compensation claims beginning in 2002 and major
medical claims for non-union employees in 2003. The Company accrues for
outstanding reported claims, claims that have been incurred but not reported and
projected claims based upon management's estimates of the aggregate liability
for uninsured claims using historical experience, an adjusting company's
estimates and the estimated trends in claim values. Although management believes
it has the ability to adequately project and record estimated claim payments, it
is possible that actual results could differ significantly from the recorded
liabilities.
Allowance for Obligatory Investments - The Company maintains obligatory
investment allowances for its investments made in satisfaction of its CRDA
obligation. The obligatory investments may ultimately take the form of CRDA
issued bonds, which bear interest at below market rates, direct investments or
donations. CRDA bonds bear interest at approximately one-third below market
rates. Management bases its reserves on the type of investments the obligation
has taken or is expected to take. Donations of The Sands' quarterly deposits to
the CRDA have historically yielded a 51% future credit or refund of obligations.
Therefore, management has reserved the predominant balance of its obligatory
investments at between 33% and 49%.
21
RESULTS OF OPERATIONS
Gaming Operations
Information contained herein, regarding Atlantic City casinos other than
The Sands, was obtained from reports filed with the Commission.
The following table sets forth certain unaudited financial and operating
data relating to The Sands' and all other Atlantic City casinos' capacities,
volumes of play, hold percentages and revenues:
Year Ended December 31,
--------------------------------------------------------------
2003 2002 2001
-------------- ------------- ---------------
(Dollars In Thousands)
Units: (at year-end)
Table Games - Sands 73 40 69
- Atlantic City (ex. Sands) 1,311 1,167 1,061
Slot Machines - Sands 2,202 2,322 2,060
- Atlantic City (ex. Sands) 40,176 35,795 35,423
Gross Wagering (1)
Table Games - Sands $ 217,984 $ 242,731 $ 457,992
- Atlantic City (ex. Sands) 6,858,441 6,684,168 6,773,640
Slot Machines - Sands 1,920,379 2,227,830 2,348,180
- Atlantic City (ex. Sands) 39,025,945 38,237,932 36,772,969
Hold Percentages (2)
Table Games - Sands 14.89% 15.00% 14.92%
- Atlantic City (ex. Sands) 15.91% 15.73% 15.65%
Slot Machines - Sands (accrual basis) 7.78% 7.57% 6.88%
- Sands (cash basis) 7.94% 7.76% 7.10%
- Atlantic City (ex. Sands)
(accrual basis) N/A N/A N/A
- Atlantic City (ex. Sands)
(cash basis) 8.14% 8.08% 8.09%
Revenues (2)
Table Games - Sands $ 32,451 $ 36,401 $ 68,351
- Atlantic City (ex. Sands) 1,091,479 1,051,103 1,059,881
Slot Machines - Sands (accrual basis) 149,394 168,697 161,503
- Sands (cash basis) 152,527 172,833 166,657
- Atlantic City (ex. Sands)
(accrual basis) N/A N/A N/A
- Atlantic City (ex. Sands)
(cash basis) 3,174,834 3,089,067 2,974,610
Other (3) - Sands 1,191 1,319 2,515
- Atlantic City (ex. Sands) 45,510 41,735 42,554
- -------------------------------
(1) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (the "Drop") and coins, cash
and/or equivalent value tickets wagered in slot machines (the "Handle").
22
(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. Cash basis slot
machine revenue does not include an accrual for industry-wide
progressive slot jackpots, whereas accrual basis slot machine revenue
does include such accrual.
(3) Consists of revenues from poker and simulcast horse racing wagering. The
Sands provides its customers both poker and simulcast horse wagering,
however, not all Atlantic City Casinos provide these same gaming
options.
Patron Gaming Volume
Information contained herein, regarding Atlantic City casinos other than
The Sands, was obtained from reports filed with the Commission.
Table game drop decreased by $24.7 million (10.2%) during 2003 compared
with 2002 and by $215.3 million (47.0%) in 2002 compared to 2001. By comparison,
according to Commission reports, table game drop at all other Atlantic City
casinos increased 2.6% in 2003 compared to 2002 and decreased 1.3% in 2002
compared to 2001. During 2003, The Sands increased the number of table games
from 40 to 73 units in an effort to recapture market share by providing the
customer ample access to a variety of table games. The increase in table game
capacity was supported by marketing, player development and customer service
programs that focused on attracting premium and middle category table game
players.
During the second half of 2003, table game drop increased $36.3 million
(43.5%) compared to the same prior year period. This occurred despite a
significant increase in table games in the Atlantic City market as a result of
the opening of a new casino in July 2003. However, these positive results were
not enough to offset the decline in table game drop in the first half of 2003
compared to the same prior year period, which was negatively impacted by severe
winter weather.
Slot machine handle decreased $307.5 million (13.8%) during 2003,
compared with 2002 and $120.4 million (5.1%) in 2002 compared to 2001. By
comparison, according to Commission reports, the percentage increase in slot
machine handle for all other Atlantic City casinos for the same periods was 2.1%
and 4.0%, respectively. The decreased Sands slot handle during 2003 can be
attributed to a combination of a decrease in the number of units and an increase
in competitive capacity in the Atlantic City Market. The number of slot machines
decreased 5.2% at The Sands to 2,202 at December 31, 2003 compared to December
31, 2002. For all other Atlantic City casinos, the number of slot machines
increased 12.2% in 2003 compared to 2002, primarily due to the opening of a new
casino in July 2003.
The majority (52.3%) of the 2003 decrease in Sands slot machine handle
occurred during the second half of 2003 compared to the same prior year period.
This was primarily due to increased market capacity as a result of the Borgata
opening on July 3, 2003.
Aggregate gaming space at all other Atlantic City casinos increased by
approximately 144,000 square feet (12.1%) at December 31, 2003 compared to
December 31, 2002, primarily due to the opening of a new casino in July 2003.
The amount of gaming space at The Sands decreased approximately 781 square feet
(1.0%) between periods. Revenues
23
Casino revenues at The Sands decreased by $23.4 million (11.3%) in 2003
compared to 2002 and decreased by $26.0 million (11.2%) in 2002 compared to
2001. The 2003 decrease was due to the $19.3 million decline in slot revenues,
which was a result of the $307.5 million (13.8%) decrease in slot handle. An
increase in slot hold percentage from 7.57% in 2002 to 7.78% in 2003 slightly
offset the impact of the decrease in slot handle. The 2002 decrease was due to
the $32.1 million decline in table game revenues, which was a result of the
$215.3 million (47.0%) decrease in table game drop. The decrease in table game
drop was primarily due to fewer table games available during the third quarter
2002. Slot revenues increased during 2002 as a result of increased hold
percentage despite a decrease in handle of $120.4 million. The increase in slot
machine revenue was not enough to offset the decrease in table game revenue. As
a result, the Company, by the end of 2002, had replaced 14 of the table games
removed in the second quarter of 2002 and shifted its marketing strategy to
focus on the middle and premium category slot player business.
Room revenues decreased by $157,000 (1.4%) in 2003 compared to 2002 and
decreased by $430,000 (3.7%) in 2002 compared to 2001. The 2003 decrease is due
to a decrease in occupied room nights while average room rates remained flat.
This was a result of a decrease in occupied room nights for cash sales, offset
slightly by an increase in occupied room nights for complimentary rooms. The
decline in occupied room nights for cash sales is primarily due to the increased
rooms inventory in the Atlantic City market as a result of the Borgata, which
opened in July 2003, as well as room additions at existing competitors.
Management believes competition in this market will increase as further
expansion of the rooms inventory in Atlantic City is expected in 2004. The 2002
decrease is due to a decrease in occupied room nights and a slightly lower
average daily room rate. The 2002 decrease in occupied room nights is due to a
decrease in complimentary rooms.
Food and beverage revenues decreased $1.4 million (5.8%) in 2003
compared to 2002 and decreased by $6.1 million (20.8%) in 2002 compared to 2001.
The 2003 decrease is due to a decrease in food revenue ($2.2 million) partially
offset by an increase in beverage revenues ($841,000). The decrease in food
revenue occurred predominantly in the high volume outlets (Boardwalk Buffet and
Food Factory). The Food Factory has been closed since December 2002. In 2002,
these outlets were the preferred choice of the mass category slot player. The
2003 increase in beverage revenue is primarily due to the new Swingers lounge,
which opened in July 2003, as well as increases in room service and casino
service bars. The 2002 decrease was due to a decrease in the average check of
$6.89 (25.6%) as a result of fewer complimentaries to premium outlets.
Other revenues increased $186,000 (5.0%) in 2003 compared to 2002 and
decreased by $944,000 (20.2%) in 2002 compared to 2001. The 2003 increase is due
to increased revenue in entertainment ($338,000), lobby store sales ($142,000)
and parking ($53,000). These increases were primarily from complimentaries
provided to customers in the middle and premium categories. The 2002 decrease is
predominantly due to the decline in entertainment revenues, $470,000 (47.9%)
which was primarily a result of discontinuation of review shows in 2002.
Promotional Allowances
Promotional allowances are comprised of (i) the estimated retail value
of goods and services provided free of charge to casino customers under various
marketing programs, (ii) the cash value of redeemable points earned under a
customer loyalty program based on the amount of slot play and (iii) coin and
cash coupons and discounts. As a percentage of casino revenues, promotional
allowances increased to 27.1% during 2003 compared to 24.8% during 2002 and
26.8% in 2001. The 2003 increase is primarily attributable to marketing, player
development and customer service programs implemented to recapture lost market
share in the middle and premium player categories due to the reduction in table
games and the marketing program during the summer of 2002 that focused on the
mass slot player category.
24
Departmental Expenses
Casino expenses at The Sands decreased by $12.1 million (8.4%) in 2003
compared to 2002 and by $25.5 million (15.1%) in 2002 compared to 2001. The 2003
decrease is primarily due to reduction in casino payroll and employee benefits
($2.9 million) as a result of a full year of lower employment levels related to
a series of layoffs and job eliminations beginning in 2001. Other favorable
casino expense variances in 2003 were directly related to the lower casino
revenues, which in turn, lowers general, marketing and promotional allocations
($6.6 million) and gaming taxes ($1.8 million). The 2002 decrease in casino
expenses is primarily due to the reduction of complimentary costs associated
with food and beverage provided free of charge. Casino payroll expenses
decreased due to the reduction in table games. The decrease in the provision for
doubtful accounts expense was caused by a reduction in credit issuance due to
lower table game activity. Lower costs for customer transportation were a result
of reduced volume in air travel and ground transportation. Reductions in
advertising expense and gaming revenue tax also contributed significantly to the
decreases in casino expenses in 2002.
Rooms expenses decreased by $631,000 (21.1%) in 2003 compared to 2002
and $406,000 (12.0%) in 2002 compared to 2001. The 2003 decrease is primarily
due to reductions in staffing, which reduced payroll and employee benefits.
Linen usage and laundry expense decreased as a result of fewer occupied rooms in
2003 compared to 2002. The 2002 decreases were due to a decrease in housekeeping
supplies expense, amenity package costs, linen and uniform usage, which resulted
from fewer occupied room nights and also outside maintenance contracts.
Food and beverage expenses decreased by $1.5 million (13.3%) in 2003
compared to 2002 and by $1.1 million in 2002 compared to 2001. The 2003 decrease
is due to a decrease in payroll and employee benefits as a result of staffing
reductions. Food cost of sales decreased as a result of lower food costs in the
Boardwalk Buffet and the closing of the Food Factory in 2002. These favorable
variances were offset slightly by lower allocable food and beverage costs
transferred to other departments. The 2002 increases were due to a smaller share
of costs allocated to casino expense as a result of a decrease in food and
beverage complimentaries generated by casino operations. These were offset
slightly by decreases in payroll, benefits and food and beverage cost of sales
as a result of the lower volume.
Other expenses increased by $492,000 (18.7%) in 2003 compared to 2002
and decreased by $749,000 (22.2%) in 2002 compared to 2001. The 2003 increase
was due to increased entertainment costs as the theatre was open more often with
headliner entertainers than it was in 2002. The decrease in 2002 is primarily
due to savings resulting from discontinuation of review shows in the theatre.
General and Administrative Expenses
General and administrative expenses decreased by $1.2 million (9.5%) in
2003 compared to 2002 and increased by $1.3 million (11.2%) in 2002 compared to
2001. The 2003 decrease was primarily due to lower payroll and benefits costs
($2.1 million) as a result of continued staff reductions. Also contributing to
the decrease in 2003, was lower severance payouts ($1.6 million) than in 2002 as
a result of smaller adjustments in staffing levels than in the prior year. These
favorable variances were offset somewhat by increases in insurance premiums and
reserves due to market conditions and higher payouts and more significant claims
in 2003. The 2002 increase was due to costs arising from severance packages and
higher costs for insurance, property taxes and utilities.
25
Depreciation and Amortization, including Provision for Obligatory
Investments
Depreciation and amortization, including provision for obligatory
investments, increased by $787,000 (5.1%) in 2003 compared to 2002 and by $3.3
million (27.4%) in 2002 compared to 2001. The 2003 increase is due to increased
depreciation expense ($826,000) resulting from further renovations and upgrades
to infrastructure and public areas such as Swingers lounge, Platinum Club and
the new bus entrance and waiting area. The provision for obligatory investments
decreased in 2003 ($441,000) primarily due to a decrease in casino revenues, on
which the obligation is based. The 2002 increase is a result of the continued
investment in and renovation of the casino, hotel and administrative complex at
The Sands.
Interest Income and Expense
Interest income decreased by $440,000 (41.2%) in 2003 compared to 2002
and decreased by $1.6 million (60.1%) in 2002 compared to 2001. The 2003
decrease was due to lower invested cash reserves. The decrease in 2002 was due
to earnings on decreased cash reserves and lower interest rates.
Interest expense increased by $387,000 (3.3%) in 2003 compared to 2002
and $361,000 (3.2%) in 2002 compared to 2001. The increase in 2003 is due to
lower levels of capitalized interest than in 2002. The 2002 increase is due to a
lower amount of capitalized interest partially offset by the elimination of
debt.
Income Tax Provision
Income tax provision increased $174,000 (22.2%) in 2003 compared to 2002
and $729,000 (1,325.5%) in 2002 compared to 2001. The 2003 increase is
predominantly due to the newly enacted New Jersey Casino Net Income Tax
($175,000), which became effective in July 2003. The increase in 2002 was
directly related to the enactment of New Jersey alternative minimum assessment
in July 2002, which is based on gross receipts or gross profits.
26
Contractual Obligations
The following table sets forth the contractual obligations of the
Company at December 31, 2003:
Payments Due By Period
---------------------------------------------------------------------------------
More
Less than 1-3 3-5 Than
Contractual Obligations Total 1 year years years 5 years
- ------------------------ -------------- ----------- -------------- ------------ -------------
Long-Term Debt $ 110,000,000 $ - $ 110,000,000 $ - $ -
Capital Lease Obligations - - - - -
Obligatory Contributions 4,808,000 72,000 228,000 2,244,000 2,264,000
Operating Leases:
Madison House 18,026,000 1,800,000 5,797,000 3,996,000 6,433,000
Equipment 352,000 186,000 167,000 - -
Purchase Obligations - - - - -
Other Long-term liabilities on
balance sheet under GAAP - - - - -
-------------- ------------ -------------- ------------ ------------
Total Contractual Obligations $ 133,186,000 $ 2,058,000 $ 116,192,000 $ 6,240,000 $ 8,697,000
============== ============ ============== ============ ============
The Sands has agreed to contribute certain of its future investment
obligations to the CRDA in connection with the renovation related to the
Atlantic City Boardwalk Convention Center. The projected total contribution will
amount to $6.9 million, which will be paid through 2011 based on an estimate of
certain of The Sands' future CRDA deposit obligations. As of December 31, 2003,
The Sands had satisfied $2.1 million of this obligation.
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.
27
New Accounting Pronouncements
In June 2002, the FASB issued FAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS No. 146"). FAS No. 146
nullifies Emerging Issues Task Force or EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" and requires
that a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value in the period in which the
liability is incurred. Under EITF 94-3, a liability for an exit cost was
required to be recognized at the date of an entity's commitment to an exit plan.
The adoption of FAS No. 146 is expected to result in delayed recognition for
some types of costs as compared to the provisions of EITF 94-3. FAS No. 146 is
effective for new exit or disposal activities that are initiated after December
31, 2002, and does not affect amounts currently reported in the Company's
consolidated financial statements. FAS No. 146 will affect the types and timing
of costs included in future restructuring programs, if any.
On January 1, 2003, the Company adopted FAS No. 143, "Asset Retirement
obligations" ("FAS No. 143"), which provides the accounting requirements for
retirement obligations associated with tangible long-lived assets. This
statement requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. The adoption of FAS
No. 143 did not have any impact on the Company's consolidated financial
statements.
On January 1, 2003, the Company adopted FAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("FAS No. 148"), which
provides alternative methods of transition for companies that choose to switch
to the fair value method of accounting for stock options. FAS No. 148 also makes
changes in the disclosure requirements for stock-based compensation, regardless
of which method of accounting is chosen. The adoption of FAS No. 148 did not
have any impact on the Company's consolidated financial statements.
Private Securities Litigation Reform Act
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-K and other materials filed or to be filed by Holdings, GB Property or
GBHC with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made by such companies)
contains statements that are forward-looking, such as statements relating to
future expansion plans, future construction costs and other business development
activities including other capital spending, economic conditions, financing
sources, competition and the effects of tax regulation and state regulations
applicable to the gaming industry in general or Holdings, GB Property and GBHC
in particular. Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results in the future
and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of Holdings, GB Property or
GBHC. These risks and uncertainties include, but are not limited to, those
relating to development and construction activities, dependence on existing
management, leverage and debt service (including sensitivity to fluctuations in
interest rates), domestic or global economic conditions, activities of
competitors and the presence of new or additional competition, fluctuations and
changes in customer preference and attitudes, changes in federal or state tax
laws or the administration of such laws and changes in gaming laws or
regulations (including the legalization of gaming in certain jurisdictions).
28
Risk Factors Related to the Business of The Company
The Company's quarterly operating results are subject to fluctuations and
seasonality, and if the Company fails to meet the expectations of securities
analysts or investors, the Company's share price may decrease significantly.
The Company's quarterly operating results are highly volatile and
subject to unpredictable fluctuations due to unexpectedly high or low losses,
changing customer tastes and trends, unpredictable patron gaming volume, the
proportion of table game revenues to slot game revenues, weather and
discretionary decisions by The Sands' patrons regarding frequency of visits and
spending amounts. The Company's operating results for any given quarter may not
meet analyst expectations or conform to the operating results of the Company's
local, regional or national competitors. If the Company's operating results do
not conform to such expectations our share price may be adversely affected.
Conversely, favorable operating results in any given quarter may be followed by
an unexpected downturn in subsequent quarters.
GBHC may be unable to obtain renewal from the CCC of the casino license that is
necessary to operate The Sands due to the outstanding debt of GB Holdings.
Pursuant to New Jersey law, GBHC is required to maintain a casino
license in order to operate The Sands. The gaming licenses required to own and
operate The Sands must be renewed in September 2004, which requires that the CCC
determine that GBHC and GB Holdings are financially stable. In order to be found
"financially stable" under NJCCA, GBHC and GB Holdings must demonstrate among
other things, their ability to pay, exchange, or refinance debts that mature or
otherwise become due and payable during the license term, or to otherwise manage
such debts. If the CCC determines during its license renewal process that GB
Holdings is unable to make the required payments pursuant to the Existing Notes,
or pay the principal when it becomes due in 2005, or refinance its debt, GBHC
may be unable to obtain renewal of the casino license required to own and
operate The Sands. GBHC's inability to obtain renewal of is casino license will
have a material adverse effect on GB Holdings.
The Company will need to increase capital expenditures to compete effectively.
Capital expenditures, such as room refurbishments, amenity upgrades and
new gaming equipment, are necessary from time to time to preserve the
competitiveness of The Sands. The gaming industry market is very competitive and
is expected to become more competitive in the future. If cash from operations is
insufficient to provide for needed levels of capital expenditures, The Sands'
competitive position could deteriorate if the Company is unable to borrow funds
for such purposes.
The Company may need to obtain financing for working capital purposes.
A capital expenditure plan was recently approved by the Board of
Directors of the Company, and management believes that cash generated from
operations and cash reserves will be sufficient to meet the requirements of the
plan. Based upon expected cash flow generated from operations, management
determined that it would be prudent for the Company to obtain a line of credit
to provide additional cash availability, to meet the Company's working capital
needs, in the event that anticipated cash flow is less than expected or expenses
exceed those anticipated. At the request of the Company, Ealing agreed to
provide a revolving credit facility, secured by a first lien on all of the
assets of the Company, under which the Company may borrow up to an aggregate
amount of $10 million for general working capital purposes. Ealing's obligation
to provide the financing pursuant to the commitment letter is subject to the
negotiation and execution of a definitive loan and security agreements and
related documents as well as certain customary conditions. However, there can be
no assurance that the loan agreement with Ealing will be consummated, that if
the loan agreement with Ealing is not consummated, the Company will be able to
obtain financing from another lender on terms as or more favorable than the
terms of the commitment letter, or whether the Company will need to borrow funds
for working capital.
29
If the Company fails to offer competitive products and services or maintain the
loyalty of The Sands patrons, its business will be adversely affected.
In addition to capital expenditures, the Company is required to
anticipate the changing tastes of The Sands' patrons and offer both competitive
and innovative products and services to ensure that repeat patrons return and
new patrons visit The Sands. The demands of meeting the Company's debt service
payments and the need to make capital expenditures limits the available cash to
finance such products and services. In addition, the consequences of incorrect
strategic decisions may be difficult or impossible to anticipate or correct in a
timely manner.
Increased state taxation of gaming and hospitality revenues could adversely
affect the Company's results of
operations.
The casino industry represents a significant source of tax revenues to
the various jurisdictions in which casinos operate. Gaming companies are
currently subject to significant state and local taxes and fees in addition to
normal federal and state corporate income taxes. For example, casinos in
Atlantic City pay for licenses as well as special taxes to the city and state.
New Jersey taxes annual gaming revenues at the rate of 8.0%. New Jersey also
levies an annual investment alternative tax of 2.5% on annual gaming revenues in
addition to normal federal and state income taxes. This 2.5% obligation,
however, can be satisfied by purchasing certain bonds or making certain
investments in the amount of 1.25% of annual gaming revenues. On July 3, 2002,
the State of New Jersey passed the New Jersey Business Tax Reform Act, which,
among other things, suspended the use of the New Jersey net operating loss
carryforwards for two years and introduced a new alternative minimum assessment
under the New Jersey corporate business tax based on gross receipts or gross
profits. For the years ended December 31, 2003 and 2002, there was a charge to
income tax provision of $778,000 and $774,000, respectively, related to the
impact of the New Jersey Business Tax Reform Act.
On July 1, 2003, the State of New Jersey amended the New Jersey Casino
Control Act (the "NJCCA") to impose various tax increases on Atlantic City
casinos, including The Sands. Among other things, the amendments to the NJCCA
include the following new tax provisions: (i) a new 4.25% tax on casino
complimentaries, with proceeds deposited to the Casino Revenue Fund; (ii) an 8%
tax on casino service industry multi-casino progressive slot machine revenue,
with the proceeds deposited to the Casino Revenue Fund; (iii) a 7.5% tax on
adjusted net income of licensed casinos (the "Casino Net Income Tax) in State
fiscal years 2004 through 2006, with the proceeds deposited to the Casino
Revenue Fund; (iv) a fee of $3.00 per day on each hotel room in a casino hotel
facility that is occupied by a guest, for consideration or as a complimentary
item, with the proceeds deposited into the Casino Revenue Fund in State fiscal
years 2004 through 2006, and beginning in State fiscal year 2007 $2.00 of the
fee deposited into the Casino Revenue Fund and $1.00 transferred to the CRDA;
(v) an increase of the minimum casino hotel parking charge from $2 to $3, with
$1.50 of the fee to be deposited into the Casino Revenue Fund in State fiscal
years 2004 through 2006, and beginning in State fiscal year 2007, $0.50 to be
deposited into the Casino Revenue Fund and $1.00 to be transferred to the CRDA
for its purposes pursuant to law, and for use by the CRDA to post a bond for $30
million for deposit into the Casino Capital Construction Fund, which was also
created by the July 1, 2003 Act; and (vi) the elimination of the deduction from
casino licensee calculation of gross revenue for uncollectible gaming debt.
These changes to the NJCCA, and the new taxes imposed on The Sands and other
Atlantic City casinos, will reduce the Company's profitability.
30
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 ability to
access the public capital markets in the future, unless the Company's current
independent auditors or another independent accounting firm is able to audit the
consolidated financial statements originally audited by Arthur Andersen in a
timely manner. Any delay or inability to access the capital markets may have an
adverse impact on the business of the Company.
Energy price increases may adversely affect the Company's costs of operations
and revenues of The Sands.
The Sands uses significant amounts of electricity, natural gas and
other forms of energy. While no shortages of energy have been experienced,
substantial increases in the cost of forms of energy in the U.S. will negatively
affect the Company's operating results. The extent of the impact is subject to
the magnitude and duration of the energy price increases, but this impact could
be material. In addition, higher energy and gasoline prices which affect The
Sands' customers may result in reduced visitation to The Sands' property and a
reduction in revenues.
A downturn in general economic conditions may adversely affect the Company's
results of operations.
The Company's business operations are affected by international,
national and local economic conditions. A recession or downturn in the general
economy, or in a region constituting a significant source of customers for The
Sands' property, could result in fewer customers visiting the Company's property
and a reduction in spending by customers who do visit the Company's property,
which would adversely affect the Company's revenues while some of its costs
remain fixed, resulting in decreased earnings.
31
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 t