UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------- -------------------- Commission file number 33-69716 GB PROPERTY FUNDING CORP. GB HOLDINGS, INC. GREATE BAY HOTEL AND CASINO, INC. - -------------------------------------------------------------------------------- (Exact name of each Registrant as specified in its charter) DELAWARE 75-2502290 DELAWARE 75-2502293 NEW JERSEY 22-2242014 - ---------------------------------------- ------------------------------- (States or other jurisdictions of (I.R.S. Employer incorporation or organization) Identification No.'s) c/o Sands Hotel & Casino Indiana Avenue & Brighton Park Atlantic City, New Jersey 08401 - ---------------------------------------- ------------------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code): (609) 441-4633 (Not Applicable) - -------------------------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report.) Indicate by check mark whether each of the Registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ____ Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes____ No X Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the last practicable date. Registrant Class Outstanding at April 30, 2004 - -------------------------------------------------------------------------------------------------------- GB Property Funding Corp. Common stock, $1.00 par value 100 shares GB Holdings, Inc. Common stock, $.01 par value 10,000,000 shares Greate Bay Hotel and Casino, Inc. Common stock, no par value 100 shares GB HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (Unaudited) March 31, December 31, 2004 2003 ------------- ------------ Current Assets: Cash and cash equivalents $ 28,061,000 $ 33,454,000 Accounts receivable, net of allowances of $5,220,000 and $5,918,000, respectively 5,172,000 5,247,000 Inventories 2,114,000 2,222,000 Income tax deposits 1,364,000 1,365,000 Prepaid expenses and other current assets 2,639,000 3,343,000 ------------ ------------ Total current assets 39,350,000 45,631,000 ------------ ------------ Property and Equipment: Land 54,344,000 54,344,000 Buildings and improvements 88,262,000 88,249,000 Equipment 65,798,000 64,722,000 Construction in progress 3,141,000 2,111,000 ------------ ------------ 211,545,000 209,426,000 Less - accumulated depreciation and amortization (43,528,000) (40,013,000) ------------ ------------ Property and equipment, net 168,017,000 169,413,000 ------------ ------------ Other Assets: Obligatory investments, net of allowances of $11,702,000 and $11,340,000, respectively 10,875,000 10,705,000 Other assets 1,623,000 1,814,000 ------------ ------------ Total other assets 12,498,000 12,519,000 ------------ ------------ $219,865,000 $227,563,000 ============ ============ The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. 2 GB HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) March 31, December 31, 2004 2003 ------------ ------------ Current Liabilities Accounts payable $ 4,300,000 $ 6,815,000 Accrued liabilities - Salaries and wages 4,027,000 3,570,000 Interest 67,000 3,092,000 Gaming obligations 2,885,000 2,744,000 Insurance 3,136,000 2,505,000 Other 3,156,000 3,473,000 ------------ ------------ Total current liabilities 17,571,000 22,199,000 ------------ ------------ Long-Term Debt, net of current maturities 110,000,000 110,000,000 ------------ ------------ Other Noncurrent Liabilities 3,799,000 3,729,000 ------------ ------------ Commitments and Contingencies Shareholders' Equity: Preferred stock, $.01 par value per share; 5,000,000 shares authorized; 0 shares outstanding - - Common Stock, $.01 par value per share; 20,000,000 shares authorized; 10,000,000 shares issued and outstanding 100,000 100,000 Additional paid-in capital 124,900,000 124,900,000 Accumulated deficit (36,505,000) (33,365,000) -------------- ------------ Total shareholders' equity 88,495,000 91,635,000 -------------- ------------ $ 219,865,000 $227,563,000 ============== ============ The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. 3 GB HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended March 31, -------------------------------- 2004 2003 ------------- -------------- Revenues: Casino $ 44,500,000 $ 43,639,000 Rooms 2,285,000 2,459,000 Food and beverage 4,988,000 4,664,000 Other 930,000 883,000 ------------ ------------- 52,703,000 51,645,000 Less - promotional allowances (11,254,000) (11,844,000) ------------- ------------- Net revenues 41,449,000 39,801,000 ------------- ------------- Expenses: Casino 30,331,000 31,886,000 Rooms 608,000 434,000 Food and beverage 2,090,000 2,056,000 Other 697,000 604,000 General and administrative 2,873,000 2,522,000 Depreciation and amortization, including provision for obligatory investments 4,073,000 3,731,000 Loss on disposal of assets - 4,000 ------------ ------------- Total expenses 40,672,000 41,237,000 ------------ ------------- Income (loss) from operations 777,000 (1,436,000) ------------ ------------- Non-operating income (expense): Interest income 111,000 189,000 Interest expense (3,051,000) (2,995,000) Debt restructuring costs (710,000) - ------------ ------------- Total non-operating expense, net (3,650,000) (2,806,000) ------------ ------------- Loss before income taxes (2,873,000) (4,242,000) Income tax provision (267,000) (159,000) ------------ ------------- Net loss $ (3,140,000) $ (4,401,000) ============ ============= Basic/diluted loss per common share $ (0.31) $ (0.44) ============ ============= Basic/diluted weighted average common shares outstanding 10,000,000 10,000,000 ============ ============= The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. 4 GB HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, ------------------------------- 2004 2003 ------------- ------------- OPERATING ACTIVITIES: Net loss $ (3,140,000) $ (4,401,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 4,073,000 3,731,000 Loss on disposal of assets - 4,000 Provision for doubtful accounts 146,000 331,000 Increase in accounts receivable (71,000) (70,000) Decrease in accounts payable and accrued liabilities (4,679,000) (2,534,000) Decrease in other current assets 813,000 1,282,000 Net change in other noncurrent assets and liabilities 91,000 92,000 ------------ ------------- Net cash used in operating activities (2,767,000) (1,565,000) ------------ ------------- INVESTING ACTIVITIES: Purchase of property and equipment (2,118,000) (1,903,000) Proceeds from disposition of assets 9,000 2,000 Purchase of obligatory investments (517,000) (568,000) ------------ ------------- Net cash used in investing activities (2,626,000) (2,469,000) ------------ ------------- FINANCING ACTIVITIES: Repayments of long-term debt - - ------------ ------------- Net cash used in financing activities - - ------------ ------------- Net decrease in cash and cash equivalents (5,393,000) (4,034,000) Cash and cash equivalents at beginning of period 33,454,000 50,645,000 ------------ ------------- Cash and cash equivalents at end of period $ 28,061,000 $ 46,611,000 ============ ============= SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 6,050,000 $ 6,050,000 ============ ============= Interest capitalized $ 28,000 $ 91,000 ============ ============= Income taxes paid $ 88,000 $ 31,000 ============ ============= The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. 5 GB HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) Organization, Business and Basis of Presentation The condensed consolidated financial statements include the accounts of GB Holdings, Inc. and subsidiaries ("Holdings" or the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. In management's opinion, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the condensed consolidated financial position as of March 31, 2004 and the condensed consolidated results of operations for the three months ended March 31, 2004 and 2003 have been made. The results set forth in the condensed consolidated statement of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements were prepared following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP (accounting principles generally accepted in the United States of America) can be condensed or omitted. The Company is responsible for the unaudited financial statements included in this document. As these are condensed financial statements, they should be read in conjunction with the consolidated financial statements and notes included in the Company's latest Form 10-K/A. (2) Income Taxes The components of the provision for income taxes are as follows: Three Months Ending March 31, ------------------------------- 2004 2003 -------------- ------------ Federal income tax provision: Current $ - $ - Deferred - - State income tax provision: Current (267,000) (159,000) Deferred - - -------------- ------------ $ (267,000) $ (159,000) ============== ============ Federal and State income tax provisions are based upon the results of operations for the current period and the estimated adjustments for income tax purposes of certain nondeductible expenses. Due to recurring losses, the Company has not recorded Federal income tax benefits or provisions for the three months ended March 31, 2004. 6 GB HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) For the three months ended March 31, 2004 and 2003, there was a charge to income tax provision of $179,000 and $159,000, respectively, related to the impact of the New Jersey Business Tax Reform Act. On July 1, 2003, the State of New Jersey amended the new Jersey Casino Control Act (the "NJCCA") to impose various tax increases on Atlantic City casinos, including The Sands. Among other things, the amendments to the NJCCA include the following new tax provision: the greater of a $350,000 minimum tax or a 7.5% tax on adjusted net income of licensed casinos (the "Casino Net Income Tax) in State fiscal years 2004 through 2006 with the proceeds deposited to the Casino Revenue Fund. For the three months ended March 31, 2004, $87,500 was charged to the income tax provision related to the minimum Casino Net Income Tax, which is payable in quarterly installments of $87,500 each. (3) Transactions with Related Parties Greate Bay Hotel and Casino, Inc.'s ("GBHC") rights to the trade name "Sands" (the "Trade Name") were derived from a license agreement with an unaffiliated third party. Amounts payable by GBHC for these rights were equal to the amounts paid to the unaffiliated third party. GBHC was assigned by High River Limited Partnership ("High River") the rights under a certain agreement with the owner of the Trade Name to use the Trade Name as of September 29, 2000 through May 19, 2086 subject to termination rights for a fee after a certain minimum term. High River is an entity controlled by Carl C. Icahn. High River received no payments for its assignment of these rights. Payment is made directly to the owner of the Trade Name. Such charges amounted to $53,000 and $59,000, respectively, for the three months ended March 31, 2004 and 2003. The Stratosphere Casino Hotel & Tower (the "Stratosphere"), an entity controlled by Carl C. Icahn, allocates a portion of certain executive salaries, including the salary of Richard P. Brown, CEO of Holdings, as well as other charges for tax preparation and travel to GBHC. Payments for such charges incurred from the Stratosphere for the three months ended March 31, 2004 and 2003 amounted to $106,000 and $42,000, respectively. On February 28, 2003, GBHC entered into a two year agreement with XO New Jersey, Inc. a long-distance phone carrier controlled by Carl C. Icahn. The agreement can be extended beyond the minimum two year term on a month-to-month basis. Payments for such charges incurred for the three months ended March 31, 2004 amounted to $41,000. No payments were made during the three months ended March 31, 2003 related to this agreement. (4) Legal Proceedings Tax appeals on behalf of GBHC and the City of Atlantic City challenging the amount of GBHC's real property assessments for tax years 1996 through 2003 are pending before the NJ Tax Court. By letter dated January 23, 2004, Sheffield Enterprises, Inc. asserted potential claims against The Sands under the Lanham Act for permitting a show entitled The Main Event, to run at The Sands during 2001. Sheffield also asserts certain copyright infringement claims growing out of the Main Event performances. It has not yet been determined whether or not the claims made by Sheffield would, if adversely determined, materially impact the financial position or results of operations of the Company. 7 GB HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) GBHC is a party in various legal proceedings with respect to the conduct of casino and hotel operations and has receiving employed related claims. Although a possible range of losses cannot be estimated, in the opinion or management, based upon the advice of counsel, GBHC does not expect settlement or resolution of these proceedings or claims to have a material adverse impact upon their consolidated financial position or results of operations, but the outcome of litigation and the resolution of claims is subject to uncertainties and no assurances can be given. The consolidated financial statements do not include any adjustments that might result from these uncertainties. (5) Loss Per Share Statement of Financial Accounting Standards No. 128: "Earnings Per Share", requires, among other things, the disclosure of basic and diluted earnings per share for public companies. Since the capital structure of the Company is simple, in that no potentially dilutive securities were outstanding during the periods presented, basic and diluted loss per share are the same. Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. (6) Subsequent Events On April 12, 2004, the Securities and Exchange Commission granted GB Holdings application to delist the Existing Notes from trading on the American Stock Exchange. On April 19, 2004, the American Stock Exchange delisted the Existing Notes. Recently, the casino industry, the CRDA and the New Jersey Sports and Exposition Authority have agreed to a plan regarding New Jersey video lottery terminals ("VLTs"). Although not final, under the plan, casinos will pay a total of $96 million over a period of four years, of which $10 million will fund, through project grants, North Jersey CRDA projects and $86 million will be paid to the New Jersey Sports and Exposition Authority who will then subsidize certain New Jersey horse tracks to increase purses and attract higher-quality races that would allow them to compete with horse tracks in neighboring states. In return, the race tracks and New Jersey have committed to postpone any attempts to install VLTs for at least four years. $52 million of the $86 million would be donated by the CRDA from the casinos' North Jersey obligations and $34 million would be paid by the casinos directly. It is currently estimated that The Sands current CRDA deposits for North Jersey projects are sufficient to fund The Sands proportionate obligations with respect to the $10 million and $52 million commitments. The Sands proportionate obligation with respect to the $34 million commitment is estimated to be approximately $1.4 million payable over a four year period. The Sands proportionate obligation with respect to the combined $10 million and $52 million commitment is estimated to be approximately $2.6 million payable over a four year period. 8 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements about the business, financial condition and prospects of Holdings, GB Property Funding and GBHC. The actual results could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties. Such risks and uncertainties are beyond management's ability to control and, in many cases, cannot be predicted by management. When used in this Quarterly Report on Form 10-Q, the words "believes", "estimates", "anticipates", "expects", "intends" and similar expressions as they relate to Holdings, GB Property Funding and GBHC or its management are intended to identify forward-looking statements (see "Private Securities Litigation Reform Act" below). OVERVIEW The Company faces a number of competitive challenges during fiscal 2004, including increased competition from the newly opened Borgata, increased competition from existing casinos that invested in capital improvements, and a corresponding increase in competition for both table game and slot machine players. Management is currently focused on restructuring its debt to significantly reduce the cash requirements for debt service and defer the payment of principal, which is presently due in September 2005, for three years. These funds would then be available for operational and capital investment, including opportunities that arise to expand The Sands' casino, rooms, parking, entertainment and retail facilities. Pursuant to New Jersey law, GBHC is required to maintain a casino license in order to operate The Sands. The gaming licenses required to own and operate The Sands must be renewed in 2004, which requires that the CCC determine that GBHC and Holdings are financially stable. In order to be found "financially stable" under NJCCA, GBHC and Holdings must demonstrate among other things, their ability to pay, exchange, or refinance debts that mature or otherwise become due and payable during the license term, or to otherwise manage such debts. If the CCC determines that Holdings may be unable to make the required payments pursuant to the Existing Notes or pay the principal when it becomes due in 2005, GBHC may be unable to obtain renewal of the casino license required to own and operate The Sands. Currently, the CCC is and will continue to monitor the effect of GBHC and Holdings to manage and refinance the Existing Notes. There has been no precedent of non-renewal of a casino license in this situation. The Sands primarily generates revenues from gaming operations in its Atlantic City facility. Although The Sands' other business segments including rooms, entertainment, retail store, food and beverage operations also generate some cash sales, these revenues are nominal in comparison to the casino operations. The non-casino operations primarily support the casino operation by providing complimentary goods and services to deserving casino customers (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Promotional Allowances"). The Company competes in a capital intensive industry that requires continual reinvestment in its facility and technology. 9 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES Summary During 2004, management anticipates making tax payments of approximately $1.1 million to the State of New Jersey. Management believes that cash flows generated from operations during 2004, as well as available cash reserves, will be sufficient to meet its operating plan. In the first quarter of 2004, the Board approved a capital expenditures program for 2004 under which Holdings and its subsidiaries anticipate making capital expenditures of up to $23.6 million to invest in and upgrade The Sands. Based upon expected cash flow generated from operations, management determined that it would be prudent for the Company to obtain a line of credit to provide additional cash availability, to meet the Company's working capital needs, in the event that anticipated cash flow is less than expected or expenses exceed those anticipated. At the request of the Company, Ealing Corp., a Nevada corporation and an affiliate of Mr. Icahn, agreed to provide a revolving credit facility, secured by a first lien on all of the assets of the Company, under which the Company may borrow up to an aggregate amount of $10 million for general working capital purposes. Ealing's obligation to provide the financing pursuant to the commitment letter is subject to the negotiation and execution of definitive loan and security agreements and related documents as well as certain customary conditions by July 1, 2004. However, there can be no assurance that the loan agreement with Ealing will be consummated, that if the loan agreement with Ealing is not consummated, the Company will be able to obtain financing from another lender on terms as or more favorable than the terms of the commitment letter, or whether the Company will need to borrow funds for working capital. Ealing and GB Holdings have agreed to extend the commitment until July 1, 2004. Operating Activities At March 31, 2004, the Company had cash and cash equivalents of $28.1 million. The Company used $2.8 million of net cash from operations during the three months ended March 31, 2004 compared to using $1.6 million during the same prior year period. The 2004 decrease in net cash from operations was primarily due to a reduction in accounts payable and accrued liabilities for the period. Investing Activities Capital expenditures at The Sands for the three months ended March 31, 2004 amounted to approximately $2.1 million compared to $1.9 million in 2003. In order to enhance its competitive position in the market place, The Sands may determine to incur additional substantial costs and expenses to maintain, improve and expand its facilities and operations. Management has approval from its Board of Directors for a 2004 capital expenditure plan of up to $23.6 million, which includes a renovation of one floor of standard hotel rooms to suites, new slot machines, casino and hotel renovations as well as replacement and upgrades to infrastructure and technology. However, in order to avoid disruption of its operations during the peak summer season and based upon operating results and available cash, management may defer some slot machine replacements and casino renovations to the latter half of 2004 or beyond, thereby reducing capital expenditures for 2004. Accordingly, additional financing requirements could be reduced significantly. 10 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Sands is required by the Casino Act to make certain quarterly deposits based on gross revenue with the Casino Reinvestment Development Authority ("CRDA") in lieu of a certain investment alternative tax. Deposits for the three months ended March 31, 2004 and 2003 amounted to $517,000 and $568,000, respectively. Financing Activities There were no financing activities during the three months ended March 31, 2004. As of March 31, 2004, the only scheduled payment of long-term debt is the Existing Notes, which mature on September 29, 2005. On July 14, 2003, a Form 8-K was filed with the SEC reporting that a committee of the independent directors of the Company (the "Special Committee") approved a proposed restructuring of the Existing Notes, together with various other corporate changes to be accomplished in connection with the proposed restructuring. In connection with the foregoing, on November 13, 2003, Atlantic Holdings filed with the SEC, a Registration Statement on Form S-4 (which contains a preliminary prospectus), under the Securities Act of 1933, as amended (the "Securities Act"), to transfer substantially all of the assets and liabilities of Holdings, GBHC, and GB Property, to Atlantic Holdings, in exchange for Atlantic Holdings issuance of 3% Notes due 2008 in exchange for the Existing Notes and the cancellation of such Notes) and the registration of certain securities to be issued to the stockholders of the Company; and, also on such date, Atlantic Holdings and ACE Gaming filed with the SEC, a Registration Statement on Form S-4 under the Securities Act, with respect to a consent solicitation and exchange offer with respect to the Existing Notes. Neither of such Registration Statements have been declared effective and each was amended by filing Amendments No. 1, 2 and 3 to Form S-4/A on February 13, 2004, March 22, 2004 and April 22, 2004, respectively. The Company and Atlantic Holdings also filed with the SEC a Schedule 13E-3, under the Securities and Exchange Act of 1934, with respect to such transactions, which was also amended by the filings of a Schedule 13E-3/A on November 17, 2003 and February 13, 2004. During 2004, Management anticipates making its next scheduled interest payment on the Existing Notes of $6.1 million on September 29, 2004; interest on such notes accrue at a rate of up to $1.0 million per month for each month, and if the anticipated exchange is consummated prior to September 29, 2004, holders that exchange will be entitled to payments for accrued interest at the time of the exchange. The Board adopted the Special Committee's belief that, based on a review of the business, financial condition, and prospects of GB Holdings and its subsidiaries, it is reasonably likely that GB Holdings would not have sufficient funds to pay the $110 million principal, plus accrued interest, on the Existing Notes at maturity in 2005 and that refinancing the Existing Notes now was in the best interest of GB Holdings and its subsidiaries. Also, the Board adopted the Special Committees' determination that it is reasonably likely that prior to maturity in 2005, GB Holdings would not be able to refinance the Existing Notes on favorable terms or at all and that such inability could result in a default on the Existing Notes and the possibility of GB Holdings being forced to seek bankruptcy protection. Management estimates that consent fees associated with the exchange of Existing Notes will be between $6.4 million and $11.0 million. 11 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Pursuant to New Jersey law, GBHC is required to maintain a casino license in order to operate The Sands. The gaming licenses required to own and operate The Sands must be renewed in September 2004, and for each renewal the CCC must determine that GBHC and Holdings are financially stable. In order to be found "financially stable" under the NJCCA, GBHC and Holdings must demonstrate among other things, their ability to pay, exchange, or refinance debts that mature or otherwise become due and payable during the license term, or to otherwise manage such debts. If the CCC determines that Holdings may be unable to make the required payments pursuant to the Existing Notes or pay the principal when it becomes due in 2005, GBHC may be unable to obtain renewal of the casino license required to own and operate The Sands. GBHC's inability to obtain renewal of is casino license will have a material adverse effect on Holdings. Critical Accounting Policies and Estimates The Company's discussion and analysis of its results of operations and financial condition are based upon its condensed consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Estimates and assumptions are evaluated on an ongoing basis and are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from estimates. The impact and any associated risks related to estimates, assumptions, and accounting policies are discussed within Management's Discussion and Analysis of Results of Operations and Financial Condition, as well as in the Notes to the Condensed Consolidated Financial Statements, if applicable, where such estimates, assumptions, and accounting policies affect the Company's reported and expected financial results. The Company believes the following accounting policies are critical to its business operations and the understanding of results of operations and affect the more significant judgments and estimates used in the preparation of its condensed consolidated financial statements: Allowance for Doubtful Accounts - The Company maintains accounts receivable allowances for estimated losses resulting from the inability of its customers to make required payments. Additional allowances may be required if the financial condition of the Company's customers deteriorates. Commitments and Contingencies - Litigation - On an ongoing basis, the Company assesses the potential liabilities related to any lawsuits or claims brought against the Company. While it is typically very difficult to determine the timing and ultimate outcome of such actions, the Company uses its best judgment to determine if it is probable that it will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. In assessing probable losses, the Company makes estimates of the amount of insurance recoveries, if any. The Company accrues a liability when it believes a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation and potential insurance recovery, it is possible that certain matters may be resolved for amounts materially different from any provisions or disclosures that the Company has previously made. 12 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Impairment of Long-Lived Assets - The Company periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assumptions and estimates used in the determination of impairment losses, such as future cash flows and disposition costs, may affect the carrying value of long-lived assets and possible impairment expense in the Company's condensed consolidated financial statements. Self-Insurance - The Company retains the obligation for certain losses related to customer's claims of personal injuries incurred while on the Company property. The Company accrues for outstanding reported claims, claims that have been incurred but not reported and projected claims based upon management's estimates of the aggregate liability for uninsured claims using historical experience, an adjusting company's estimates and the estimated trends in claim values. Although management believes it has the ability to adequately project and record estimated claim payments, it is possible that actual results could differ significantly from the recorded liabilities. Allowance for Obligatory Investments - The Company maintains obligatory investment allowances for its investments made in satisfaction of its CRDA obligation. The obligatory investments may ultimately take the form of CRDA issued bonds, which bear a below market rate of interest, direct investments or donations. Management bases its reserves on the type of investments the obligation has taken or is expected to take. CRDA bonds bear interest at approximately one-third below market rates. Donations of The Sands' quarterly deposits to the CRDA have historically yielded a 51% future credit or refund of obligations. Therefore, management has reserved the predominant balance of its obligatory investments at between 33% and 49%. 13 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS Gaming Operations Information contained herein, regarding Atlantic City casinos other than The Sands, was obtained from reports filed with the Casino Control Commission. The following table sets forth certain unaudited financial and operating data relating to The Sands' and all other Atlantic City casinos' capacities, volumes of play, hold percentages and revenues: Three Months Ended March 31, ------------------------------ 2004 2003 --------------- ------------ (Dollars in Thousands) Units: (at end of period) Table Games - Sands 61 40 - Atlantic City (ex. Sands) 1,128 1,039 Slot Machines - Sands 2,201 2,295 - Atlantic City (ex. Sands) 39,720 36,131 Gross Wagering (1) Table Games - Sands $ 59,897 $ 45,171 - Atlantic City (ex. Sands) 1,782,104 1,519,996 Slot Machines - Sands 431,548 479,250 - Atlantic City (ex. Sands) 9,813,809 8,715,722 Hold Percentages (2) Table Games - Sands 15.41% 13.99% - Atlantic City (ex. Sands) 16.34% 16.65% Slot Machines - Sands (accrual basis) 8.09% 7.75% - Sands (cash basis) 8.34% 7.96% - Atlantic City (ex. Sands) (accrual basis) N/A N/A - Atlantic City (ex. Sands) (cash basis) 8.09% 8.02% Revenues (2) Table Games - Sands $ 9,233 $ 6,319 - Atlantic City (ex. Sands) 291,216 253,145 Slot Machines - Sands (accrual basis) 34,926 37,162 - Sands (cash basis) 36,010 38,132 - Atlantic City (ex. Sands) (accrual basis) N/A N/A - Atlantic City (ex. Sands) (cash basis) 793,840 699,039 Other - Sands 341 158 - Atlantic City (ex. Sands) 13,721 9,831 14 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (1) Gross wagering consists of the total value of chips purchased for table games (excluding poker) and keno wagering (the "Drop") and coins wagered in slot machines (the "Handle"). (2) Casino revenues consist of the portion of gross wagering that a casino retains and, as a percentage of gross wagering, is referred to as the "hold percentage." The Sands' hold percentages and revenues are reflected on an accrual basis. Comparable accrual basis data for the remainder of the Atlantic City gaming industry as a whole is not available; consequently, industry hold percentages and revenues are based on information available from the Commission. Patron Gaming Volume Information contained herein, regarding Atlantic City casinos other than The Sands, was obtained from reports filed with the Commission. Table game drop increased by $14.7 million (32.6%) during the three months ended March 31, 2004 compared with the same prior year period. By comparison, according to Commission reports, table game drop at all other Atlantic City casinos during the same period increased 17.2%. The Company's increase in table game drop is a direct result of an increase in the number of table games from 40 during the 2003 period to 61 during the 2004 period. The increase in the number of table games was the result of a change in business strategy, to balance the gaming experience between table games and slot machines. Table game hold percentage increased 1.4 percentage points to 15.4% for the three months ended March 31, 2004 compared to the same period last year. The 2004 table game hold percentage is slightly higher than expected. However, the increase over the prior year is primarily attributable to one high end patron winning approximately $1 million in March 2003. Aggregate gaming space at all other Atlantic City casinos increased by approximately 135,000 square feet (10.7%) at March 31, 2004 compared to March 31, 2003 primarily due to the Borgata opening in July 2003. The amount of gaming space at The Sands remained the same at approximately 78,000 square feet. Slot machine handle decreased $47.7 million (10.0%) during the three months ended March 31, 2004, compared with the same period of 2003. By comparison, the percentage increase in slot machine handle for all other Atlantic City casinos in the first three months of 2004 vs. the same period in 2003 was 12.6%. The Company's 2004 decrease in handle is primarily attributed to the effect of a new competitor that entered the Atlantic City marketplace in July 2003. This decrease in slot machine handle is offset slightly by an increase in hold percentage to 8.1% from 7.8% in the 2004 period compared to the 2003 period. The number of slot machines decreased 4.1% at The Sands to 2,201 at March 31, 2004 compared to March 31, 2003. On an industry-wide basis, excluding The Sands, the number of slot machines increased 9.9% in the first quarter of 2004 compared to the first quarter of 2003. 15 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The following table sets forth the changes in operating revenues and expenses (unaudited) for the three month period ended March 31, 2004 and 2003: Three Months Ended March 31, ----------------------------------------------- Increase (Decrease) 2004 2003 $ % ----------- ---------- ---------- ---------- (Dollars In Thousands) Revenues: Casino $ 44,500 $ 43,639 $ 861 1.97 Rooms 2,285 2,459 (174) (7.08) Food and Beverage 4,988 4,664 324 6.95 Other 930 883 47 5.32 Promotional Allowances 11,254 11,844 (590) (4.98) Expenses: Casino 30,331 31,886 (1,555) (4.88) Rooms 608 434 174 40.09 Food and Beverage 2,090 2,056 34 1.65 Other 697 604 93 15.40 General and Administrative 2,873 2,522 351 13.92 Depreciation and Amortization 4,073 3,731 342 9.17 Loss on disposal of assets - 4 (4) (100.00) Income/(loss) from Operations 777 (1,436) 2,213 154.00 Non-operating expense, net 3,650 2,806 844 30.08 Income Tax Provision 267 159 108 67.92 Revenues Overall casino revenues increased $861,000 for the three months ended March 31, 2004 compared to the same prior year period. The increase in casino revenue is a result of increased table game win of $3,100,000 offset by reduced slot win of $2,239,000. Room's revenue decreased $174,000 for the three months ended March 31, 2004 compared to the same prior year period as a result of decreased occupancy. The decrease in occupancy was primarily attributable to a reduction in promotional room nights. Food and beverage revenues increased $324,000 for the three months ended March 31, 2004 compared to the same prior year period. This increase is a direct result of a new casino bar ("Swingers") ($309,000), which opened in July 2003. 16 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Promotional Allowances Promotional allowances are comprised of (i) the estimated retail value of goods and services provided free of charge to casino customers under various marketing programs, (ii) the cash value of redeemable points earned under a customer loyalty program based on the amount of slot play and (iii) coin and cash coupons and discounts. As a percentage of casino revenues, promotional allowances decreased to 25.3% during the three months ended March 31, 2004 from 27.1% during the same period of 2003. The decrease in this ratio is directly attributable to the Company's strategy to continue to monitor the reinvestment in the casino customer based upon the competitiveness within the Atlantic City market. Departmental Expenses Casino expenses at The Sands decreased by $1.6 million for the three months ended March 1, 2004 compared to the same prior year period. The decrease in casino expenses is primarily due to the reduction of allocable expenses ($865,000) from other departments due to the reduction in complimentaries and other cost reductions. Inspection and licensing fees decreased $292,000 for the three months ended March 31, 2004 compared to the same prior year period. The decrease is due to a credit received from surplus NJCCC funds, caused by initial licensing and registration fees related to a newly opened Atlantic City Casino. Gaming revenue tax increased $119,000 as a result of increased casino revenues. Rooms expenses increased $174,000 for the three months ended March 31, 2004 compared to the same prior year period. The increases were due to a larger share of costs allocated to casino expenses ($292,000) as a result of decreased room complimentaries generated by casino promotions. Total complimentary room nights decreased by 5,906 or 15.3% over the same prior year period. Rooms payroll and benefits decreased $91,000 year to year due to a decrease in the number of rooms sold. Food and beverage expenses increased $34,000 for the three months ended March 31, 2004 compared to the same prior year period. The increases were due to increases in food and beverage cost of sales ($136,000) as a result of increased revenue. Other expenses increased $93,000 for the three months ended March 31, 2004, compared to the same prior year period as a result of an increase to entertainment expenses ($158,000) and a decrease in the allocation of entertainment complimentaries by casino operations ($106,000). General and Administrative Expenses General and administrative expenses increased $351,000 for the three months ended March 31, 2004, compared to the same period last year. The increases were due to lower allocable costs from general and administrative expenses to operating departments ($563,000). These were offset by decreases in payroll and benefits ($251,000) and property taxes ($95,000). 17 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Depreciation and Amortization, Including Provision for Obligatory Investments Depreciation and amortization expense increased $342,000 for the three month period ended March 31, 2004, compared to the same prior year period due to an increase in depreciation expense ($259,000) as a result of the continued investment in infrastructure and equipment during the current and preceding year. Also increased amortization of CRDA losses ($82,000) as a result of increased casino revenues contributed to the overall increase. Interest Income and Expense Interest income decreased by $77,000 during the three month period ended March 31, 2004, compared to the same prior year period. The decrease was due to smaller earnings on decreased cash reserves. Interest expense increased $56,000 during the three month period ended March 31, 2004, compared to the same period in 2003. The increase is due to a lower accrual of capitalized interest in 2004 ($28,000) compared to 2003 ($91,000). It is the Company's policy to capitalize interest on construction projects in excess of $250,000. Income Tax Provision Federal and State income tax benefits or provisions are based upon the results of operations for the current period and the estimated adjustments for income tax purposes of certain nondeductible expenses. Due to recurring losses, the Company has not recorded Federal income tax benefit or provision for the three months ended March 31, 2004. The State income tax provision increased $108,000 (67.9%) during the three months ended March 31, 2004 compared to the same prior year period. The increase is primarily due to the newly enacted Casino Net Income tax ($88,000) which did not effect the 2003 period. Increased revenues resulted in a $20,000 increase in the Alternative Minimum Assessment for 2004 compared to 2003. Inflation Management believes that, in the near term, modest inflation and increased competition within the gaming industry for qualified and experienced personnel will continue to cause increases in operating expenses, particularly labor and employee benefits costs. Seasonality Historically, The Sands' operations have been highly seasonal in nature, with the peak activity occurring from May to September. Consequently, the results of operations for the first and fourth quarters are traditionally less profitable than the other quarters of the fiscal year. In addition, The Sands' operations may fluctuate significantly due to a number of factors, including chance. Such seasonality and fluctuations may materially affect casino revenues and profitability. 18 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Form 10-Q and other materials filed or to be filed by Holdings, GB Property Funding or GBHC with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made by such companies) contains statements that are forward-looking, such as statements relating to future expansion plans, future construction costs and other business development activities including other capital spending, economic conditions, financing sources, competition and the effects of tax regulation and state regulations applicable to the gaming industry in general or Holdings, GB Property Funding and GBHC in particular. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of Holdings, GB Property Funding or GBHC. These risks and uncertainties include, but are not limited to, those relating to development and construction activities, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, activities of competitors and the presence of new or additional competition, fluctuations and changes in customer preference and attitudes, changes in federal or state tax laws or the administration of such laws and changes in gaming laws or regulations (including the legalization of gaming in certain jurisdictions). Risk Factors Related to the Business of The Company The Company's quarterly operating results are subject to fluctuations and seasonality, and if the Company fails to meet the expectations of securities analysts or investors, the Company's share price may decrease significantly. The Company's quarterly operating results are highly volatile and subject to unpredictable fluctuations due to unexpectedly high or low losses, changing customer tastes and trends, unpredictable patron gaming volume, the proportion of table game revenues to slot game revenues, weather and discretionary decisions by The Sands' patrons regarding frequency of visits and spending amounts. The Company's operating results for any given quarter may not meet analyst expectations or conform to the operating results of the Company's local, regional or national competitors. If the Company's operating results do not conform to such expectations our share price may be adversely affected. Conversely, favorable operating results in any given quarter may be followed by an unexpected downturn in subsequent quarters. GBHC may be unable to obtain renewal from the CCC of the casino license that is necessary to operate The Sands due to the outstanding debt of GB Holdings. Pursuant to New Jersey law, GBHC is required to maintain a casino license in order to operate The Sands. The gaming licenses required to own and operate The Sands must be renewed in September 2004, which requires that the CCC determine that GBHC and GB Holdings are financially stable. In order to be found "financially stable" under NJCCA, GBHC and GB Holdings must demonstrate among other things, their ability to pay, exchange, or refinance debts that mature or otherwise become due and payable during the license term, or to otherwise manage such debts. If the CCC determines during its license renewal process that GB Holdings is unable to make the required payments pursuant to the Existing Notes, or pay the principal when it becomes due in 2005, or refinance its debt, GBHC may be unable to obtain renewal of the casino license required to own and operate The Sands. GBHC's inability to obtain renewal of is casino license will have a material adverse effect on GB Holdings. 19 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company will need to increase capital expenditures to compete effectively. Capital expenditures, such as room refurbishments, amenity upgrades and new gaming equipment, are necessary from time to time to preserve the competitiveness of The Sands. The gaming industry market is very competitive and is expected to become more competitive in the future. If cash from operations is insufficient to provide for needed levels of capital expenditures, The Sands' competitive position could deteriorate if the Company is unable to borrow funds for such purposes. The Company may need to obtain financing for working capital purposes. A capital expenditure plan was recently approved by the Board of Directors of the Company, and management believes that cash generated from operations and cash reserves will be sufficient to meet the requirements of the plan. Based upon expected cash flow generated from operations, management determined that it would be prudent for the Company to obtain a line of credit to provide additional cash availability, to meet the Company's working capital needs, in the event that anticipated cash flow is less than expected or expenses exceed those anticipated. At the request of the Company, Ealing agreed to provide a revolving credit facility, secured by a first lien on all of the assets of the Company, under which the Company may borrow up to an aggregate amount of $10 million for general working capital purposes. Ealing's obligation to provide the financing pursuant to the commitment letter is subject to the negotiation and execution of a definitive loan and security agreements and related documents as well as certain customary conditions. However, there can be no assurance that the loan agreement with Ealing will be consummated, that if the loan agreement with Ealing is not consummated, the Company will be able to obtain financing from another lender on terms as or more favorable than the terms of the commitment letter, or whether the Company will need to borrow funds for working capital. If the Company fails to offer competitive products and services or maintain the loyalty of The Sands patrons, its business will be adversely affected. In addition to capital expenditures, the Company is required to anticipate the changing tastes of The Sands' patrons and offer both competitive and innovative products and services to ensure that repeat patrons return and new patrons visit The Sands. The demands of meeting the Company's debt service payments and the need to make capital expenditures limits the available cash to finance such products and services. In addition, the consequences of incorrect strategic decisions may be difficult or impossible to anticipate or correct in a timely manner. 20 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Increased state taxation of gaming and hospitality revenues could adversely affect the Company's results of operations. The casino industry represents a significant source of tax revenues to the various jurisdictions in which casinos operate. Gaming companies are currently subject to significant state and local taxes and fees in addition to normal federal and state corporate income taxes. For example, casinos in Atlantic City pay for licenses as well as special taxes to the city and state. New Jersey taxes annual gaming revenues at the rate of 8.0%. New Jersey also levies an annual investment alternative tax of 2.5% on annual gaming revenues in addition to normal federal and state income taxes. This 2.5% obligation, however, can be satisfied by purchasing certain bonds or making certain investments in the amount of 1.25% of annual gaming revenues. On July 3, 2002, the State of New Jersey passed the New Jersey Business Tax Reform Act, which, among other things, suspended the use of the New Jersey net operating loss carryforwards for two years and introduced a new alternative minimum assessment under the New Jersey corporate business tax based on gross receipts or gross profits. For the three months ended March 31, 2004 and 2003, there was a charge to income tax provision of $179,000 and $159,000, respectively, related to the impact of the New Jersey Business Tax Reform Act. On July 1, 2003, the State of New Jersey amended the New Jersey Casino Control Act (the "NJCCA") to impose various tax increases on Atlantic City casinos, including The Sands. Among other things, the amendments to the NJCCA include the following new tax provisions: (i) a new 4.25% tax on casino complimentaries, with proceeds deposited to the Casino Revenue Fund; (ii) an 8% tax on casino service industry multi-casino progressive slot machine revenue, with the proceeds deposited to the Casino Revenue Fund; (iii) a 7.5% tax on adjusted net income of licensed casinos (the "Casino Net Income Tax) in State fiscal years 2004 through 2006, with the proceeds deposited to the Casino Revenue Fund; (iv) a fee of $3.00 per day on each hotel room in a casino hotel facility that is occupied by a guest, for consideration or as a complimentary item, with the proceeds deposited into the Casino Revenue Fund in State fiscal years 2004 through 2006, and beginning in State fiscal year 2007 $2.00 of the fee deposited into the Casino Revenue Fund and $1.00 transferred to the CRDA; (v) an increase of the minimum casino hotel parking charge from $2 to $3, with $1.50 of the fee to be deposited into the Casino Revenue Fund in State fiscal years 2004 through 2006, and beginning in State fiscal year 2007, $0.50 to be deposited into the Casino Revenue Fund and $1.00 to be transferred to the CRDA for its purposes pursuant to law, and for use by the CRDA to post a bond for $30 million for deposit into the Casino Capital Construction Fund, which was also created by the July 1, 2003 Act; and (vi) the elimination of the deduction from casino licensee calculation of gross revenue for uncollectible gaming debt. These changes to the NJCCA, and the new taxes imposed on The Sands and other Atlantic City casinos, will reduce the Company's profitability. Future changes in New Jersey state taxation of casino gaming companies cannot be predicted and any such changes could adversely affect The Company's profitability. The Company's former use of Arthur Andersen LLP as its independent public accountants may pose risks to Parent and the Company and will limit your ability to seek potential recoveries from Arthur Andersen LLP related to their work. 21 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Arthur Andersen LLP, independent certified public accountants, were engaged as the principal accountants to audit the Company's consolidated financial statements until the Parent Company dismissed them on May 16, 2002 and engaged KPMG LLP. In May 2002, Arthur Andersen was convicted on a federal obstruction of justice charge. Some investors, including institutional investors, may choose not to invest in or hold securities of a company whose prior financial statements (or those of its predecessor entity) were audited by Arthur Andersen, which may serve to, among other things, suppress the price of the Company's securities. In addition, rules promulgated by the SEC require the Company to present its audited financial statements in various SEC filings, along with Arthur Andersen's consent to inclusion of its audit report in those filings. The SEC has provided temporary regulatory relief designed to allow companies that file reports with them to dispense with the requirement to file a consent of Arthur Andersen in certain circumstances. Notwithstanding the SEC's temporary regulatory relief, the inability of Arthur Andersen to provide its consent or to provide assurance services to the Company with regard to future SEC filings could negatively affect the Company's ability to, among other things, access capital markets. Any delay or inability to access capital markets as a result of this situation could have a material adverse impact on the business of the Company. The Company cannot assure you that it will be able to continue to rely on the temporary relief granted by the SEC. If the SEC no longer accepts financial statements audited by Arthur Andersen, requires audits of other financial statements or financial information or requires changes to financial statements previously audited by Arthur Andersen, this may affect the Company's ability to access the public capital markets in the future, unless the Company's current independent auditors or another independent accounting firm is able to audit the consolidated financial statements originally audited by Arthur Andersen in a timely manner. Any delay or inability to access the capital markets may have an adverse impact on the business of the Company. Energy price increases may adversely affect the Company's costs of operations and revenues of The Sands. The Sands uses significant amounts of electricity, natural gas and other forms of energy. While no shortages of energy have been experienced, substantial increases in the cost of forms of energy in the U.S. will negatively affect the Company's operating results. The extent of the impact is subject to the magnitude and duration of the energy price increases, but this impact could be material. In addition, higher energy and gasoline prices which affect The Sands' customers may result in reduced visitation to The Sands' property and a reduction in revenues. A downturn in general economic conditions may adversely affect the Company's results of operations. The Company's business operations are affected by international, national and local economic conditions. A recession or downturn in the general economy, or in a region constituting a significant source of customers for The Sands' property, could result in fewer customers visiting the Company's property and a reduction in spending by customers who do visit the Company's property, which would adversely affect the Company's revenues while some of its costs remain fixed, resulting in decreased earnings. A majority of The Sands' patrons are from automobile travel and bus tours. Higher gasoline prices could reduce automobile travel to The Sands' location and could increase bus fares to The Sands. In addition, adverse winter weather conditions could reduce automobile travel to The Sands' location and could reduce bus travel. Accordingly, the Company's business, assets, financial condition and results of operations could be adversely affected by a weakening of regional economic conditions and higher gasoline prices or adverse winter weather conditions. 22 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Acts of terrorism and the uncertainty of the outcome and duration of the activity in Iraq and elsewhere, as well as other factors affecting discretionary consumer spending, have impacted the gaming industry and may harm the Company's operating results and the Company's ability to insure against certain risks. The terrorist attacks of September 11, 2001 had an immediate impact on hotel and casino volume. The Sands hotel occupancy was down approximately ten percentage points during the week that followed the attacks. Bus passenger volume for The Sands was lower than normal, especially from those bus tours originating from the New York metropolitan area. There were approximately 22.5% less bus passengers at The Sands during September 2001 than during the same month in the prior year. These events, the potential for future terrorist attacks, the national and international responses to terrorist attacks and other acts of war or hostility have created many economic and political uncertainties which could adversely affect the Company's business and results of operations. Future acts of terror in the U.S. or an outbreak of hostilities involving the United States, may again reduce The Sands' guests' willingness to travel with the result that the Company's operations will suffer. The Company may incur losses that would not be covered by insurance and the cost of insurance will increase. Although the Company has agreed in the New Indenture governing the New Notes to maintain insurance customary and appropriate for its business, the Company cannot assure you that insurance will be available or adequate to cover all loss and damage to which the Company's business or the Company's assets might be subjected. In connection with insurance renewals subsequent to September 11, 2001, the insurance coverage for certain types of damages or occurrences has been diminished substantially and is unavailable at commercial rates. Consequently, the Company is self-insured for certain risks. The lack of insurance for certain types or levels of risk could expose the Company to significant losses in the event that an uninsured catastrophe occurred. Any losses the Company incurs that are not covered by insurance may decrease its future operating income, require it to find replacements or repairs for destroyed property and reduce the funds available for payments of its obligations on the Existing Notes. There are risks related to the creditworthiness of patrons of the casinos. The Sands is exposed to certain risks related to the creditworthiness of its patrons. Historically The Sands has extended credit on a discretionary basis to certain qualified patrons. For the three months ended March 31, 2004, gaming credit extended to Sands' table game patrons accounted for approximately 25.6% of overall table game wagering, and table game wagering accounted for approximately 12.2% of overall casino wagering during the period. At March 31, 2004, gaming receivables amounted to $8.5 million before an allowance for uncollectible gaming receivables of $4.9 million. There can be no assurance that defaults in the repayment of credit by patrons of The Sands would not have a material adverse effect on the results of operations of The Sands and, consequently the Company. 23 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company's success depends in part on the availability of qualified management and personnel and on the Company's ability to retain such employees. The quality of individuals hired for positions in the hotel and gaming operations will be critical to the success of the Company's business. It may be difficult to attract, retain and train qualified employees due to the competition for employees with other gaming companies and their facilities in the Company's jurisdiction and nationwide. The Borgata, a recently opened casino located in the marina district of Atlantic City has aggravated this problem. The Company cannot assure you that it will be successful in retaining current personnel or in hiring or retaining qualified personnel in the future. A failure to attract or retain qualified management and personnel at all levels or the loss of any of the Company or Operating's key executives could have a material adverse effect on the Company's financial condition and results of operations. Risk Factors Related to the Gaming Industry The gaming industry is highly competitive. The gaming industry is highly competitive and the Company's competitors may have greater resources than the Company. If other properties operate more successfully, if existing properties are enhanced or expanded, or if additional hotels and casinos are established in and around the location in which the Company conducts business, the Company may lose market share. In particular, expansion of gaming in or near the geographic area from which the Company attracts or expects to attract a significant number of customers could have a significant adverse effect on the Company's business, financial condition and results of operations. The Sands competes, and will in the future compete, with all forms of existing legalized gaming and with any new forms of gaming that may be legalized in the future. Additionally, the Company faces competition from all other types of entertainment. On July 3, 2003, The Borgata, a joint venture of Boyd Gaming Corporation and MGM Mirage, opened in the marina district of Atlantic City. The Borgata features a 40-story tower with 2,010 rooms and suites, as well as a 135,000 square-foot casino, restaurants, retail shops, a spa and pool, and entertainment venues. This project represents a significant increase to capacity in the market. In addition, other of the Company's competitors in Atlantic City have recently completed expansions of their hotels or have announced expansion projects. For example, Tropicana Atlantic City is constructing a 502-room hotel tower, a 25-room conference center, a 2,400 space parking garage, an expanded casino floor and a 200,000 square foot themed shopping, dining and entertainment complex called The Quarter. Tropicana intends to complete the project in the third quarter of 2004. Resorts is currently constructing a hotel room addition of approximately 400 rooms and is scheduled to open in the third quarter of 2004. The business of the Company may be adversely impacted (i) by the additional gaming and room capacity generated by this increased competition in Atlantic City and/or (ii) by other projects not yet announced in New Jersey or in other markets (e.g., Pennsylvania, Maryland, New York and Connecticut). 24 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Gaming is a regulated industry and changes in the law could have a material adverse effect on the Company's ability to conduct gaming. Gaming in New Jersey is regulated extensively by federal and state regulatory bodies, including the CCC and state and federal taxing, law enforcement and liquor control agencies. The ownership and operation of The Sands is subject to strict state regulation under the NJCCA. The Company has received the licenses, permits and authorizations required to operate The Sands. If the exchange of Existing Notes is not consummated and, as a result, the CCC determines during its license renewal process that Holdings is unable to make the required payments pursuant to the Existing Notes or pay the principal when it becomes due in 2005. GBHC may be unable to obtain renewal of the casino license required to own and operate The Sands. GBHC's inability to obtain renewal of its casino license would have a material adverse effect on the Company. Pending and enacted gaming legislation from neighboring States and New Jersey may harm The Sands. In the summer of 2003, the State of New Jersey considered approving video lottery terminals ("VLTs") at the racetracks in the state and on July 1, 2003, the NJCCA was amended to impose various new and increased taxes on casino license revenues. There is no guarantee that New Jersey will not consider approving VLTs in the future, and if VLTs are approved, it could adversely affect the Company's operations, and an increase in the gross gaming tax without a significant simultaneous increase in revenue would adversely affect the Company's results of operations. Recently, the casino industry, the CRDA and the New Jersey Sports and Exposition Authority have agreed to a plan regarding New Jersey video lottery terminals ("VLTs"). Although not final, under the plan, casinos will pay a total of $96 million over a period of four years, of which $10 million will fund, through project grants, North Jersey CRDA projects and $86 million will be paid to the New Jersey Sports and Exposition Authority who will then subsidize certain New Jersey horse tracks to increase purses and attract higher-quality races that would allow them to compete with horse tracks in neighboring states. In return, the race tracks and New Jersey have committed to postpone any attempts to install VLTs for at least four years. $52 million of the $86 million would be donated by the CRDA from the casinos' North Jersey obligations and $34 million would be paid by the casinos directly. It is currently estimated that The Sands current CRDA deposits for North Jersey projects are sufficient to fund The Sands proportionate obligations with respect to the $10 million and $52 million commitments. The Sands proportionate obligation with respect to the $34 million commitment is estimated to be approximately $1.4 million payable over a four year period. The Sands proportionate obligation with respect to the combined $10 million and $52 million commitment is estimated to be approximately $2.6 million payable over a four year period. The Sands also competes with legalized gaming from casinos located on Native American tribal lands. In October 2001, the New York State Legislature enacted a bill, which the governor signed, authorizing a total of six Indian casinos in the State of New York - three in Western New York and three in the Catskill Region - and approved the use of video lottery terminals at racetracks and authorized the participation of New York State in a multi-state lottery. On January 29, 2002, a lawsuit was commenced contesting the above legislation package on the grounds that certain of its provisions were adopted in violation of the State's constitution. The likely outcome of this lawsuit cannot be ascertained at this time. The implementation of VLTs and the outcome of this lawsuit could adversely affect visitation of The Sands from New York. 25 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Pennsylvania and Maryland are among the other states currently contemplating some form of gaming legislation. Legislative proposals introduced in Pennsylvania would potentially allow for a wide range of gaming activities, including riverboat gaming, slot machines at racetracks, video lottery terminals at liquor stores and the formation of a gaming commission. Maryland's proposed legislation would authorize video lottery terminals at some of Maryland's racing facilities. The results of the gubernatorial elections in Pennsylvania and Maryland in 2002 have also increased the likelihood of gaming legislation in such states. Neither Pennsylvania nor Maryland enacted any legalized gaming legislation in their respective legislative sessions during the three months ended March 31, 2004. Since The Sands' market is primarily a drive-to-market, legalized gambling in Pennsylvania or one or more states neighboring or within close proximity to New Jersey could have a material adverse effect on the Atlantic City gaming industry overall, including The Sands. Holders of the Company's securities are subject to the CCC and the NJCCA. The holders of the Company's common stock, par value $.01 per share ("Common Stock") and Existing Notes are subject to certain regulatory restrictions on ownership. While holders of publicly traded obligations such as the New Notes are generally not required to be investigated and found suitable to hold such securities, the CCC has the discretionary authority to (i) require holders of securities of corporations governed by New Jersey gaming law to file applications; (ii) investigate such holders; and (iii) require such holders to be found suitable or qualified to be an owner or operator of a gaming establishment. Pursuant to the regulations of the CCC such gaming corporations may be sanctioned, including the loss of its approvals, if, without prior approval of the CCC, it (i) pays to the unsuitable or unqualified person any dividend, interest or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable or unqualified person in connection with the securities; (iii) pays the unsuitable or unqualified person remuneration in any form; or (iv) makes any payments to the unsuitable or unqualified person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. If the Company is served with notice of disqualification of any holder, such holder will be prohibited by the NJCCA from receiving any payments on, or exercising any rights connected to, the Company's Common Stock or Existing Notes, as applicable. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss arising from changes in market rates and prices, such as interest rates and foreign currency exchange rates. The Company does not have securities subject to interest rate fluctuations and has not invested in derivative-based financial instruments. At March 31, 2004, the fair value of the Company's fixed rate debt was $88.1 million compared with its carrying amount of $110 million. 26 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Item 4. Controls and Procedures The Company's senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the "Exchange Act")) designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, as well as other key members of the Company's management, of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, to provide reasonable assurance that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. No change occurred in the Company's internal controls concerning financial reporting during the fiscal quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. 27 PART II: OTHER INFORMATION Item 6.(a) Exhibits 31.1 Chief Executive Officer's Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Chief Financial Officer's Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Chief Executive Officer's Certification, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 2002. 32.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 2002. Item 6.(b) Reports on Form 8-K During the quarter ended March 31, 2004, the Registrants filed one Current Report on Form 8-K: (Items 5 and 7) on January 13, 2004. SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlantic City, State of New Jersey on May 7, 2004. GB HOLDINGS, INC. GB PROPERTY FUNDING CORP. GREATE BAY HOTEL AND CASINO, INC. Registrants Date: May 7, 2004 /s/ Douglas S. Niethold ------------- ------------------------------------ Douglas S. Niethold Interim Vice President, Finance and Chief Financial Officer 28