10-Q 1 b400373_10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q (Mark One) [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2004 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to ______________________ Commission file number 33-69716 ---------------------------------------------------------- GB HOLDINGS, INC. -------------------------------------------------------------------------------- (Exact name of each Registrant as specified in its charter) DELAWARE 75-2502293 ------------------------------------------ --------------------------------- (States or other jurisdictions of (I.R.S. Employer incorporation or organization) Identification Nos.) C/O SANDS HOTEL & CASINO INDIANA AVENUE & BRIGHTON PARK ATLANTIC CITY, NEW JERSEY 08401 ---------------------------------------------------------- -------------------- (Address of principal executive offices) (Zip Code) (Registrants" telephone number, including area code): (609) 441-4633 -------------------------- (NOT APPLICABLE) -------------------------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report.) Indicate by check mark whether each of the Registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO __________ --- Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES X NO_______ --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date.

GB HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (UNAUDITED)

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)

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)

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. 4 GB HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes to condensed consolidated financial statements are an integral part of these consolidated financial statements. 5 GB HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. 6 GB HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of GB Holdings, Inc. and subsidiaries ("Holdings" or the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. In management's opinion, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the condensed consolidated financial position as of June 30, 2004 and the condensed consolidated results of operations for the three and six months ended June 30, 2004 and 2003 have been made. The results set forth in the condensed consolidated statement of operations for the three and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements were prepared following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America can be condensed or omitted. The Company is responsible for the unaudited condensed consolidated financial statements included in this document. As these are condensed consolidated financial statements, they should be read in conjunction with the consolidated financial statements and notes included in the Company's latest Form 10-K. (2) INCOME TAXES Federal and State income tax benefits or provisions are based upon the results of operations for the current period and the estimated adjustments for income tax purposes of certain nondeductible expenses. Due to recurring losses, the Company has not recorded a Federal or State income tax benefit for the three and six months ended June 30, 2004. Management is unable to determine that realization of the Company's deferred tax assets are more likely than not, and, thus has provided a valuation allowance for the entire amount The State income tax provision of $248,000 and $515,000 for the three and six months ended June 30, 2004, respectively, is comprised of applying the statutory alternative minimum assessment rate of 0.4% to gross receipts, as defined in the Business Tax Reform Act ($160,000 and $340,000, respectively) plus two quarterly installment payments of the Casino Income Tax ($88,000 and $175,000, respectively). (3) TRANSACTIONS WITH RELATED PARTIES The Company's rights to the trade name "Sands" (the "Trade Name") were derived from a license agreement with an unaffiliated third party. Amounts payable by the Company for these rights were equal to the amounts paid to the unaffiliated third party. The rights were assigned to the Company by High River Limited Partnership ("High River"), which obtained the rights under a certain agreement with the owner of the Trade Name to use the Trade Name as of September 29, 2000 through May 19, 2086 subject to termination rights for a fee after a certain minimum term. High River is an entity controlled by Carl C. Icahn (the Company's chairman and majority shareholder). High River received no payments for its assignment of these rights. 7 GB HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Payment is made directly to the owner of the Trade Name. Such charges amounted to $119,000 and $130,000, respectively, for the six months ended June 30, 2004 and 2003 and $66,000 and $71,000, respectively, for the three months ended June 30, 2004 and 2003. The Stratosphere Casino Hotel & Tower (the "Stratosphere"), an entity controlled by Carl C. Icahn, allocates a portion of certain executive salaries, including Richard P. Brown (the Company's chief executive officer), as well as charges for tax preparation to the Company. Charges incurred from the Stratosphere for the six months ended June 30, 2004 and 2003 were $215,000 and $108,000, respectively, and $109,000 and $42,000, respectively, for the three months ended June 30, 2004 and 2003. On February 28, 2003, the Company entered into a two year agreement with XO New Jersey, Inc. a long-distance phone carrier controlled by Carl C. Icahn. The agreement can be extended beyond the minimum two year term on a month-to-month basis. Charges incurred for the six months ended June 30, 2004 were $81,000 and $26,000, respectively. Such charges amounted to $40,000 and $26,000, respectively, for the three months ended June 30, 2004 and 2003. (4) LEGAL PROCEEDINGS Tax appeals on behalf of the Company and the City of Atlantic City challenging the amount of the Company's real property assessments for tax years 1996 through 2003 are pending before the NJ Tax Court. By letter dated January 23, 2004, Sheffield Enterprises, Inc. asserted potential claims against The Sands under the Lanham Act for permitting a show entitled The Main Event, to run at The Sands during 2001. Sheffield also asserts certain copyright infringement claims growing out of the Main Event performances. It has not yet been determined whether or not the claims made by Sheffield would, if adversely determined, materially impact the financial position or results of operations of the Company. The Company is a party in various legal proceedings with respect to the conduct of casino and hotel operations and has been receiving employee related claims. Although a possible range of losses cannot be estimated, in the opinion of management, based upon the advice of counsel, the Company does not expect settlement or resolution of these proceedings or claims to have a material adverse impact upon their consolidated financial position or results of operations, but the outcome of litigation and the resolution of claims is subject to uncertainties and no assurances can be given. The consolidated financial statements do not include any adjustments that might result from these uncertainties. (5) LOSS PER SHARE Statement of Financial Accounting Standards No. 128: "Earnings Per Share", requires, among other things, the disclosure of basic and diluted earnings per share for public companies. Since the capital structure of the Company is simple, in that no potentially dilutive securities were outstanding during the periods presented, basic and diluted loss per share are the same. Basic and diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. 8 GB HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (6) COMMITMENTS AND CONTINGENCIES Recently, the casino industry, the CRDA and the New Jersey Sports and Exposition Authority have agreed to a plan regarding New Jersey video lottery terminals ("VLTs"). Under the plan, casinos will pay a total of $96 million over a period of four years, of which $10 million will fund, through project grants, North Jersey CRDA projects and $86 million will be paid to the New Jersey Sports and Exposition Authority which will then subsidize certain New Jersey horse tracks to increase purses and attract higher-quality races that would allow them to compete with horse tracks in neighboring states. In return, the race tracks and New Jersey have committed to postpone any attempts to install VLTs for at least four years. $52 million of the $86 million would be donated by the CRDA from the casinos' North Jersey obligations and $34 million would be paid by the casinos directly. It is currently estimated that The Sands current CRDA deposits for North Jersey projects are sufficient to fund The Sands proportionate obligations with respect to the $10 million and $52 million commitments. The Sands proportionate obligation with respect to the $34 million commitment is estimated to be approximately $1.4 million payable over a four year period. The Sands proportionate obligation with respect to the combined $10 million and $52 million commitment is estimated to be approximately $2.6 million payable over a four year period. (7) SUBSEQUENT EVENT On July 22, 2004, Atlantic Coast Entertainment Holdings, Inc. ("Atlantic Holdings"), a subsidiary of the Company, consummated the Consent Solicitation and Offer to Exchange which it commenced and in which Atlantic Holdings offered to exchange its 3% Notes due 2008 for 11% Notes due 2005, issued by the Company. Pursuant to the Consent Solicitation and Offer to Exchange, an aggregate principal amount of $66,258,970 of 11% Notes, representing 60.2% of the outstanding 11% Notes, were tendered to Atlantic Holdings, on a dollar for dollar basis, in exchange for an aggregate principal amount of $66,258,970 of 3% Notes. At the election of the holders of a majority in principal amount of the outstanding 3% Notes, each $1,000 principal amount of 3% Notes is payable in or convertible into 65.909 shares of common stock, par value $.01 per share ("Atlantic Holdings Common Stock") of Atlantic Holdings, subject to adjustments for stock dividends, stock splits, recapitalizations and the like. Holders of the 11% Notes that tendered in the Consent Solicitation and Offer to Exchange also received their pro rata share of the aggregate consent fees ($6.6 million) at the rate of $100 per $1000 principal amount of the 11% Notes tendered, plus accrued interest ($2.3 million) on the 11% Notes tendered, which amounts were paid at the consummation of the transaction. As indicated in the Consent Solicitation and Offer to Exchange, an aggregate of 10,000,000 warrants were distributed on a pro rata basis to the shareholders of Holdings upon the consummation of the transaction. Such Warrants allow the holders to purchase, at an excercise price of $.01 per share, an aggregate of 2,750,000 shares of Atlantic Holdings' Common Stock and are only exercisable following the earlier of (a) either the 3% Notes being paid in cash or upon conversion, in whole or in part, into Atlantic Holdings Common Stock, (b) payment in full of the outstanding principal of the 11% Notes which have not been exchanged, and (c) a determination by a majority of the board of directors of Atlantic Holdings (including at least one independent director of Atlantic Holdings) that the Warrants may be exercised. An additional $1.3 million in legal and state transfer fees were expended at the consummation of the transaction. Also on July 22, in connection with the consummation of the Consent Solicitation and Offer to Exchange, in a series of transactions, GB Property Funding Corp. ("Property"), a Delaware corporation, and Greate Bay Hotel and Casino, Inc. ("Operating"), a New Jersey corporation, both wholly owned subsidiaries of Holdings, merged into Holdings, with Holdings as the surviving entity. All references to Holdings and Company refer to such entity as it existed following the consummation of those transactions and mergers. 9 GB HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) On July 23, 2004, the Board of Directors of Holdings authorized the filing of a request with the Securities and Exchange Commission and the American Stock Exchange to withdraw its common stock, par value $.01 per share (the "Common Stock"), from listing and registration on the American Stock Exchange (Ticker Symbol: GBH). On July 29, 2004, Holdings filed an application to voluntarily delist its common stock from the American Stock Exchange. 10 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements about the business, financial condition and prospects of GB Holdings, Inc. ("Holdings"), Atlantic Coast Entertainment Holdings, Inc. ("Atlantic Holdings") and ACE Gaming LLC ("ACE") collectively the "Company." The actual results could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties. Such risks and uncertainties are beyond management's ability to control and, in many cases, cannot be predicted by management. When used in this Quarterly Report on Form 10-Q, the words "believes", "estimates", "anticipates", "expects", "intends" and similar expressions as they relate to Holdings, Atlantic Holdings, ACE or its management are intended to identify forward-looking statements (see "Private Securities Litigation Reform Act" below). OVERVIEW Holdings is a Delaware corporation. In February 1994, Holdings acquired Greate Bay Hotel and Casino, Inc. ("Operating"), through a capital contribution by its then parent. Operating's principal business activity was its ownership of the Sands Casino Hotel (the "Sands"). As a result of the consummation of the transactions and mergers described below, The Sands is now owned by ACE, a New Jersey limited liability company and a wholly owned subsidiary of Atlantic Holdings. The Sands primarily generates revenues from gaming operations in its Atlantic City facility. Although The Sands' other business segments including rooms, entertainment, retail store, food and beverage operations also generate some cash sales, these revenues are nominal in comparison to the casino operations. The non-casino operations primarily support the casino operation by providing complimentary goods and services to deserving casino customers (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Promotional Allowances"). The Company competes in a capital intensive industry that requires continual reinvestment in its facility and technology. The Company faces a number of competitive challenges during fiscal 2004, including increased competition from the newly opened Borgata, increased competition from existing casinos that invested in capital improvements, and a corresponding increase in competition for both table game and slot machine players. On July 22, 2004, Atlantic Holdings consummated the Consent Solicitation and Offer to Exchange in which holders of an aggregate principal amount of $66,258,970 of 11% Notes tendered such notes for exchange on a dollar for dollar basis for 3% Notes and each holder that tendered received their pro rata share of the aggregate consent fees ($6.6 million) at the rate of $100 per $1,000 principal amount of the 11% Notes tendered, plus accrued interest ($2.3 million) on the 11% Notes tendered. Pursuant to the terms of the 3% Notes, such Notes are, at the election of the holders of a majority of the aggregate principal amount, either payable. in or convertible into an aggregate of 4,367,062 shares of Atlantic Holdings Common Stock, subject to adjustments for stock dividends, stock splits, recapitalizations and the like. Also, an aggregate of 10,000,000 warrants to purchase an aggregate of 2,750,000 shares of Atlantic Holdings Common Stock were distributed on a pro rata basis to the shareholders of Holdings upon the consummation of the transaction. Such Warrants allow the holders to purchase, at an exercise price of $.01 per share, an aggregate of 2,750,000 shares of Atlantic Holdings' Common Stock and are only exercisable upon following the earlier of (a) either the 3% Notes being paid in cash or upon conversion, in 11 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) whole or in part, into Atlantic Holdings Common Stock, (b) payment in full of the outstanding principal of the 11% Notes which have not been exchanged, and (c) a determination by a majority of the board of directors of Atlantic Holdings (including at least one independent director of Atlantic Holdings) that the Warrants may be exercised. Also on July 22, in connection with the consummation of the Consent Solicitation and Offer to Exchange, in a series of transactions, Property and Operating merged with Holdings. Pursuant to New Jersey law, the corporate owner of the Sands is required to maintain a casino license in order to operate The Sands. The gaming licenses required to own and operate The Sands must be renewed in 2004, which requires that the New Jersey Casino Control Commission ("CCC") determine that among other things, Atlantic Holdings and ACE are financially stable. In order to be found "financially stable" under the New Jersey Casino Control Act ("NJCCA"), Atlantic Holdings and ACE must demonstrate among other things, their ability to pay, exchange, or refinance debts that mature or otherwise become due and payable during the license term, or to otherwise manage such debts. During July 2004, The Sands filed a timely renewal application of its casino license for a four year term. The CCC will consider The Sands casino license renewal application on September 29, 2004. There has been no precedent of non-renewal of a casino license in this situation. In connection with the Consent Solicitation and Exchange Offer described above, holders of $66,258,970 of 11% Notes exchanged such notes for an equal principal amount of 3% Notes. As a result, $43,741,030 of principal amount of the 11% Notes remain outstanding and mature in September 2005. Holdings' ability to pay interest on such outstanding 11% Notes is dependent upon receipt of funds from Atlantic Holdings in amounts sufficient to make such interest payments, and such disbursements are subject to (i) a number of conditions including that such payment is required to be made prior to or at maturity of the 11% Notes and that at the time of such payment and after giving effect thereto, no event of default exists and no event that could result in an event of default has occurred or is incipient and (ii) Atlantic Holdings being able to make such payments. In addition, Holdings' ability to pay the principal amount of the remaining 11% Notes at maturity in September 2005 will depend upon its ability to refinance such Notes on favorable terms, or at all, or to derive sufficient funds from the sale of its Atlantic Holdings Common Stock or from a borrowing. If Holdings does not pay the principal due on the remaining 11% Notes at maturity it could result in among other things, the possibility of Holdings seeking bankruptcy protection. LIQUIDITY AND CAPITAL RESOURCES SUMMARY 12 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) During 2004, management anticipates making tax payments of approximately $1.1 million to the State of New Jersey. Management believes that cash flows generated from operations during 2004, as well as available cash reserves, will be sufficient to meet its operating plan. In the first quarter of 2004, the Board approved a capital expenditures program for 2004 under which Holdings and its subsidiaries anticipate making capital expenditures of up to $23.6 million to invest in and upgrade The Sands. Based upon expected cash flow generated from operations, management determined that it would be prudent for the Company to obtain a line of credit to provide additional cash availability, to meet the Company's working capital needs, in the event that anticipated cash flow is less than expected or expenses exceed those anticipated. At the request of the Company, Ealing Corp., a Nevada corporation and an affiliate of Carl C. Icahn (the Company's chairman and majority shareholder), agreed to provide a revolving credit facility, secured by a first lien on all of the assets of the Company, under which the Company may borrow up to an aggregate amount of $10 million for general working capital purposes. After receipt of Ealing's commitment, the Company contacted several other lenders and was able to obtain a term sheet, from an unaffiliated lender for financing its working capital needs and the Company then allowed the commitment from Ealing to expire. In the term sheet, the unaffiliated lender agreed to provide a revolving credit facility to the Company allowing the Company to borrow up to an aggregate principal amount of $10 million for working capital purposes, which shall mature 364 days following the execution of definitive documents, which is secured by a first lien on all of the assets of the Company, and has an interest rate of LIBOR plus 8% per annum. OPERATING ACTIVITIES At June 30, 2004, the Company had cash and cash equivalents of $30.3 million. The Company generated $3.8 million of net cash from operations during the six months ended June 30, 2004 compared to $3.5 million during the same prior year period. INVESTING ACTIVITIES Capital expenditures at The Sands for the six months ended June 30, 2004 amounted to approximately $7.0 million compared to $7.7 million in 2003. In order to enhance its competitive position in the market place, The Sands may determine to incur additional substantial costs and expenses to maintain, improve and expand its facilities and operations. Management has approval from its Board of Directors for a 2004 capital expenditure plan of up to $23.6 million, which includes a renovation of one floor of standard hotel rooms to suites, new slot machines, casino and hotel renovations as well as replacement and upgrades to infrastructure and technology. However, in order to avoid disruption of its operations during the peak summer season and based upon operating results and available cash, management may defer some slot machine replacements and casino renovations to the latter half of 2004 or beyond, thereby reducing capital expenditures for 2004. Accordingly, additional financing requirements could be reduced significantly. The Sands is required by the Casino Act to make certain quarterly deposits based on gross revenue with the Casino Reinvestment Development Authority ("CRDA") in lieu of a certain investment alternative tax. Deposits for the six months ended June 30, 2004 and 2003 amounted to $872,000 and $1.1 million, respectively. 13 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FINANCING ACTIVITIES There were no financing activities during the six months ended June 30, 2004. As of June 30, 2004, the only scheduled payment of long-term debt is the 11% Notes, which mature on September 29, 2005. During 2004, Management anticipates making its next scheduled interest payment on the 11% Notes of $2.4 million on September 29, 2004; since the anticipated exchange was consummated prior to September 29, 2004, holders that exchanged were entitled to payments for accrued interest at the time of the exchange. As noted above, Holdings' ability to pay interest is dependent upon the receipt of payments from Atlantic Holdings and its ability to pay the principal amount of the remaining 11% Notes at maturity in September 2005 will depend upon its ability to refinance such Notes on favorable terms or at all or to derive sufficient funds from the sale of its Atlantic Holdings Common Stock or from a borrowing. Pursuant to New Jersey law, the corporate owner of The Sands is required to maintain a casino license in order to operate The Sands. The gaming licenses required to own and operate The Sands must be renewed in 2004, which requires that the CCC determine that among other things, Atlantic Holdings and ACE are financially stable. In order to be found "financially stable" under NJCCA, Atlantic Holdings and ACE must demonstrate among other things, its ability to pay, exchange, or refinance debts that mature or otherwise become due and payable during the license term, or to otherwise manage such debts. During July 2004, the Sands filed a timely renewal application of its casino license for a four year term. The CCC will consider the Sands casino license renewal application on September 29, 2004. There has been no precedent of non-renewal of a casino license in this situation. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its results of operations and financial condition are based upon its condensed consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America ("USA GAAP"). The preparation of financial statements in conformity with USA GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Estimates and assumptions are evaluated on an ongoing basis and are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from estimates. The impact and any associated risks related to estimates, assumptions, and accounting policies are discussed within Management's Discussion and Analysis of Results of Operations and Financial Condition, as well as in the Notes to the Condensed Consolidated Financial Statements, if applicable, where such estimates, assumptions, and accounting policies affect the Company's reported and expected financial results. The Company believes the following accounting policies are critical to its business operations and the understanding of results of operations and affect the more significant judgments and estimates used in the preparation of its condensed consolidated financial statements: 14 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains accounts receivable allowances for estimated losses resulting from the inability of its customers to make required payments. Additional allowances may be required if the financial condition of the Company's customers deteriorates. COMMITMENTS AND CONTINGENCIES - Litigation - On an ongoing basis, the Company assesses the potential liabilities related to any lawsuits or claims brought against the Company. While it is typically very difficult to determine the timing and ultimate outcome of such actions, the Company uses its best judgment to determine if it is probable that it will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. In assessing probable losses, the Company makes estimates of the amount of insurance recoveries, if any. The Company accrues a liability when it believes a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation and potential insurance recovery, it is possible that certain matters may be resolved for amounts materially different from any provisions or disclosures that the Company has previously made. IMPAIRMENT OF LONG-LIVED ASSETS - The Company periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assumptions and estimates used in the determination of impairment losses, such as future cash flows and disposition costs, may affect the carrying value of long-lived assets and possible impairment expense in the Company's condensed consolidated financial statements. SELF-INSURANCE - The Company retains the obligation for certain losses related to customer's claims of personal injuries incurred while on the Company property as well as workers compensation claims and major medical claims for non-union employees. The Company accrues for outstanding reported claims, claims that have been incurred but not reported and projected claims based upon management's estimates of the aggregate liability for uninsured claims using historical experience, an adjusting company's estimates and the estimated trends in claim values. Although management believes it has the ability to adequately project and record estimated claim payments, it is possible that actual results could differ significantly from the recorded liabilities. ALLOWANCE FOR OBLIGATORY INVESTMENTS - The Company maintains obligatory investment allowances for its investments made in satisfaction of its CRDA obligation. The obligatory investments may ultimately take the form of CRDA issued bonds, which bear a below market rate of interest, direct investments or donations. Management bases its reserves on the type of investments the obligation has taken or is expected to take. CRDA bonds bear interest at approximately one-third below market rates. Donations of The Sands' quarterly deposits to the CRDA have historically yielded a 51% future credit or refund of obligations. Recently, however, CRDA donations have not yielded a specific future credit percentage. Certain donations have made the Sands eligible for a 100% return of existing investments under certain conditions. Other donations have little or no future credit value. Management has reserved the predominant balance of its obligatory investments at between 33% and 49%. 15 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS GAMING OPERATIONS Information contained herein, regarding Atlantic City casinos other than the Sands, was obtained from reports filed with the CCC. The following table sets forth certain unaudited financial and operating data relating to the Sands' and all other Atlantic City casinos' capacities, volumes of play, hold percentages and revenues:

------------------------------- (1) Gross wagering consists of the total value of chips purchased for table games (excluding poker) and keno wagering (the "Drop") and coins wagered in slot machines (the "Handle"). 16 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) (2) Casino revenues consist of the portion of gross wagering that a casino retains and, as a percentage of gross wagering, is referred to as the "hold percentage." The Sands' hold percentages and revenues are reflected on an accrual basis. Comparable accrual basis data for the remainder of the Atlantic City gaming industry as a whole is not available; consequently, industry hold percentages and revenues are based on information available from the Commission. PATRON GAMING VOLUME Information contained herein, regarding Atlantic City casinos other than the Sands, was obtained from reports filed with the Commission. For the three and six months ended June 30, 2004 the table game drop increased $6.6 million (12.4%) and $21.3 million (21.7%) compared to the comparable periods in 2003. These results are compared to the Atlantic City Industry table drop results, which increased $202.0 million (12.5%) and $464.1 million (14.8%) for the three months and six months ended June 30, 2004 respectively compared to the same periods in 2003. During these 2004 periods, the Borgata was in operation with no comparable operations during the same prior year periods. Despite the impact of a major new competitor in the Atlantic City market, the Company maintained its table game market share (3.3%) for the second quarter 2004 and increased its table game market share by 0.2 percentage points to 3.3% the first half of 2004 when compared to the same prior year periods. Table game hold percentage for the Company increased by 1.8 percentage points to 17.0% and 1.5 percentage points to 16.2% for the three and six month periods ended June 30, 2004, respectively, compared to the same periods in 2003. The number of table games in operation, as of June 30, 2004, was 75 compared to 61 at the same time in 2003. On an industry-wide basis, the number of table games increased by 170 units or 14.7% to 1,324 at June 30, 2004 compared to 2003. Slot machine handle for the Company decreased $32.8 million (6.4%) and $80.5 million (8.1%) for the three and six month periods ended June 30, 2004, respectively, compared to the same periods in 2003. By comparison, the percentage change in slot machine handle for all other Atlantic City casinos during these periods in 2004 compared to the same periods was 7.4% increase for the three month period and a 9.9% increase for the six month period. The Company's 2004 decrease in handle was primarily due to the competitive impact of Borgata on the Atlantic City market. The Borgata added 3,550 units of Atlantic City's highest daily win per unit slot machines, as measured over the first half of 2004. The Sands decrease in slot machine handle was offset by an increase in the hold percentage of 0.2 percentage points to 8.2% and 0.3 percentage points to 8.2% for the three and six month periods ended June 30, 2004 compared to the same periods in 2003. This positive variance in hold percentage was not enough to offset the decrease in slot machine handle and resulted in a decrease in Slot revenue of $1.7 million (4.2%) and $4.0 million (5.1%) for the three and six month periods ended June 30, 2004, respectively, compared to the periods in 2003. The number of slot machine units as of June 30, 2004 was 2,186 compared to 2,171 at the same time in 2003. On an industry-wide basis, the number of slot machines increased by 4,057 units or 11.3% to 40,121 at June 30, 2004 compared to 2003. 17 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table sets forth the changes in operating revenues and expenses (unaudited) for the three month and six month periods ended June 30, 2004 and 2003:

REVENUES Overall casino revenues increased $414,000 (0.8%) and $1.3 million (1.4%) for the three and six month periods ended June 30, 2004, respectively, compared to the same periods in 2003. The increase in casino revenues is attributable to the increases in table game revenue ($2.1 million) and other casino revenue ($53,000) offset by a decrease in slot machine revenue ($1.7 million) with the related changes in hold percentage. Room revenue decreased $180,000 (6.1%) and $354,000 (6.5%) for the three and six month periods ended June 30, 2004, respectively, compared to the same period in 2003. The decrease in room revenue is directly attributable to the decrease in room occupancy for the three and six months ended June 30, 2004, respectively, compared to the same period in 2003. The decrease in occupancy was primarily due to a reduction in promotional room nights. Food and Beverage revenues increased $286,000 (5.2%) and $610,000 (6.0%) for the three and six month periods ended June 30, 2004, respectively, compared to the same periods in 2003. These increases are directly attributable to the new casino bar ("Swingers") ($308,000 quarter-to-date and $622,000 year-to-date), which opened in July 2003. 18 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Other revenues decreased $57,000 (5.3%) and $10,000 (0.5%) for the three and six month periods ended June 30, 2004, respectively, compared to the same periods in 2003. The decrease during the three and six month periods is primarily attributable to a reduction in the people-mover monthly rental with Caesars Entertainment. The rent was lowered by $30,000 per month in July 2003, according to the lease. PROMOTIONAL ALLOWANCES Promotional allowances are comprised of (i) the estimated retail value of goods and services provided free of charge to casino customers under various marketing programs, (ii) the cash value of redeemable points earned under a customer loyalty program based on the amount of slot play and (iii) coin and cash coupons and discounts. The dollar amount of promotional allowances increased $1.2 million (8.8%) and $566,000 (2.3%) for the three and six month periods ended June 30, 2004, respectively, compared to the same periods in 2003. As a percentage of casino revenues, promotional allowances increased to 28.6% from 26.5% and 27.0 % from 26.8% for the three and six month periods ended June 30, 2004, respectively, compared to the same periods in 2003. The increase in this ratio is directly attributable to the increased casino revenues as a result of the Company's continued focus on its table game enhancement and refocus on the mid to high end slots. DEPARTMENTAL EXPENSES Casino expenses at the Sands decreased by $105,000 (0.3%) and $1.7 million (2.6%), respectively, for the three and six months ended June 30, 2004 compared to the same prior year period. The decrease in casino expenses is primarily due to a reduction of allocable costs to the casino department for overhead, marketing and complimentary expenses ($355,000 and $1.2 million, respectively, for the three and six months ended June 30, 2004 compared to the same prior year periods). Payroll expenses decreased ($209,000 and $231,000 for the three and six months ended June 30, 2004, respectively) due to the reduction in personnel. The provision for doubtful accounts was reduced by $204,000 and $379,000 for the three and six months ended June 30, 2004, respectively, as a result of less casino credit activity. Rooms expenses increased $128,000 (21.5%) and $302,000 (29.3%) for the three and six months ended June 30, 2004 compared to the same prior year period. The increased rooms expenses are almost entirely due to a reduction of allocable costs to the casino department for complimentary expenses ($209,000 and $501,000, respectively, for the three and six months ended June 30, 2004 compared to the same prior year periods) as a result of fewer complimentary promotional room nights in 2004 compared to 2003. These were offset slightly by favorable variances in payroll and benefits ($134,000 and $225,000, respectively, for the three and six months primarily ended June 30, 2004 compared to the same prior year period) due to reductions in staffing. Food and beverage expenses decreased $221,000 (9.1%) and $187,000 (4.2%), respectively, for the three and six months ended June 30, 2004 compared to the same prior year period. The decreases were primarily due to decreased payroll and benefits costs ($169,000 and $263,000 for the three and six months ended June 30, 2004, respectively, compared to the same prior year periods as a result of lower staffing levels). Also contributing to the decreased food and beverage expense were increases in allocable overhead and complimentary expense to the casino department ($73,000 and $126,000 for the three and six months ended June 30, 2004, respectively) and food and beverage cost of sales ($71,000 and $207,000 for the three and six months ended June 30, 2004, respectively), which were a result of increased sales. 19 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Other expenses decreased $106,000 (13.5%) and $13,000 (0.9%) for the three and six months ended June 30, 2004, compared to the same prior year periods. The decreased costs were due to an unfavorable variance in allocable costs to casino expense for complimentaries ($281,000 and $356,000 for the three and six months ended June 30, 2004, respectively). Decreased payroll and benefits costs also contributed favorably $133,000 and $299,000 for the three and six months ended June 30, 2004, respectively) due to reduced staffing. These were offset by increases in entertainment costs ($246,000 and $361,000 for the three and six months ended June 30, 2004, respectively) due to increased headline entertainment compared to the prior year periods. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased $266,000 (9.7%) and $617,000 (11.7%), respectively, for the three and six months ended June 30, 2004, compared to the same prior year periods. The increases were due to lower allocable costs for property overhead to the casino department ($480,000 and $1.0 million for the three and six months ended June 30, 2004, respectively) and the increased cost of electricity ($193,000 and $340,000 for the three and six months ended June 30, 2004, respectively, compared to the same prior year periods) due to increased energy costs. DEPRECIATION AND AMORTIZATION, INCLUDING PROVISION FOR OBLIGATORY INVESTMENTS Depreciation and amortization, including provision for obligatory investments, increased $70,000 (1.8%) and $412,000 (5.4%), respectively, for the three and six month periods ended June 30, 2004, compared to the same prior year periods due to an increase in depreciation expense ($140,000 and $399,000 for the three and six months ended June 30, 2004, respectively) as a result of the continued investment in infrastructure and equipment during the current and preceding year. INTEREST INCOME AND EXPENSE Interest income decreased by $55,000 (32.0%) and $133,000 (36.8%), respectively, during the three and six month periods ended June 30, 2004, compared to the same prior year periods. The decrease was due to smaller earnings on decreased cash reserves. Interest expense increased $42,000 and $99,000, respectively, during the three and six month periods ended June 30, 2004, compared to the same periods in 2003. The increase is due to a larger accrual of capitalized interest in 2003 compared to 2004 for both the quarterly and year-to-date comparison ($47,000 and $110,000,respectively, for the three and six months ended June 30, 2004 compared to the same prior year periods). 20 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) DEBT RESTRUCTURING COSTS Debt Restructuring Costs amounted to $1.1 million and $1.8 million, respectively, for the three and six month periods ended June 30, 2004, as a direct result of the Consent Solicitation and Offer to Exchange commenced by Atlantic Holdings. There were no similar costs incurred during the same periods in 2003. INCOME TAX PROVISION Federal and State income tax provisions are based upon the results of operations for the current period and the estimated adjustments for income tax purposes of certain nondeductible expenses. Due to recurring losses, the Company has not recorded Federal income tax for the six months ended June 30, 2004. The State income tax provision increased $64,000 (34.8%) and $172,000 (50.2%), respectively, for the three and six months ended June 30, 2004 compared to the same prior year periods is a result of the casino net income tax, which became effective in July 2003. INFLATION Management believes that, in the near term, modest inflation and increased competition within the gaming industry for qualified and experienced personnel will continue to cause increases in operating expenses, particularly labor and employee benefits costs. SEASONALITY Historically, the Sands' operations have been highly seasonal in nature, with the peak activity occurring from May to September. Consequently, the results of operations for the first and fourth quarters are traditionally less profitable than the other quarters of the fiscal year. In addition, the Sands' operations may fluctuate significantly due to a number of factors, including chance. Such seasonality and fluctuations may materially affect casino revenues and profitability. PRIVATE SECURITIES LITIGATION REFORM ACT The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Form 10-Q and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made by such companies) contains statements that are forward-looking, such as statements relating to future expansion plans, future construction costs and other business development activities including other capital spending, economic conditions, financing sources, competition and the effects of tax regulation and state regulations applicable to the gaming industry in general or Holdings in particular. Such forward-looking information involves important risks and uncertainties that 21 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of Holdings. These risks and uncertainties include, but are not limited to, those relating to development and construction activities, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, activities of competitors and the presence of new or additional competition, fluctuations and changes in customer preference and attitudes, changes in federal or state tax laws or the administration of such laws and changes in gaming laws or regulations (including the legalization of gaming in certain jurisdictions). RISK FACTORS RELATED TO THE BUSINESS OF THE COMPANY HOLDINGS MAY BE UNABLE TO PAY EITHER THE INTEREST ON THE 11% NOTES EITHER AT OR PRIOR TO MATURITY OR THE PRINCIPAL ON THE 11% NOTES AT MATURITY Holdings' ability to pay (i) interest on the 11% Notes is dependent upon the receipt of payments from Atlantic Holdings, which is subject to (A) a number of conditions, including that such payment is required to be made prior to or at maturity of the 11% Notes and that at the time of such payment and giving effect thereto, no event of default exists and no event that could result in an event of default has occurred or is incipient and (ii) the principal amount of the remaining 11% Notes at maturity in September 2005 will depend upon its ability to refinance such Notes on favorable terms or at all or to derive sufficient funds from the sale of its Atlantic Holdings Common Stock or from a borrowing. THE CORPORATE OWNER OF THE SANDS MAY BE UNABLE TO OBTAIN RENEWAL FROM THE CCC OF THE CASINO LICENSE THAT IS NECESSARY TO OPERATE THE SANDS DUE TO ITS OUTSTANDING DEBT. Pursuant to New Jersey law, the corporate owner of The Sands is required to maintain a casino license in order to operate The Sands. The gaming licenses required to own and operate The Sands must be renewed in 2004, which requires that the CCC determine that among other things, Atlantic Holdings and ACE are financially stable. In order to be found "financially stable" under NJCCA, Atlantic Holdings and ACE must demonstrate among other things, their ability to pay, exchange, or refinance debts that mature or otherwise become due and payable during the license term, or to otherwise manage such debts. During July 2004, the Sands filed a timely renewal application of its casino license for a four year term. The CCC will consider the Sands casino license renewal application on September 29, 2004. There has been no precedent of non-renewal of a casino license in this situation. THE COMPANY WILL NEED TO INCREASE CAPITAL EXPENDITURES TO COMPETE EFFECTIVELY. Capital expenditures, such as room refurbishments, amenity upgrades and new gaming equipment, are necessary from time to time to preserve the competitiveness of The Sands. The gaming industry market is very competitive and is expected to become more competitive in the future. If cash from operations is insufficient to provide for needed levels of capital expenditures, The Sands' competitive position could deteriorate if the Company is unable to borrow funds for such purposes. 22 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THE COMPANY MAY NEED TO OBTAIN FINANCING FOR WORKING CAPITAL PURPOSES. A capital expenditure plan was recently approved by the Board of Directors of the Company, and management believes that cash generated from operations and cash reserves will be sufficient to meet the requirements of the plan. Based upon expected cash flow generated from operations, management determined that it would be prudent for the Company to obtain a line of credit to provide additional cash availability, to meet the Company's working capital needs, in the event that anticipated cash flow is less than expected or expenses exceed those anticipated. At the request of the Company, Ealing Corp., a Nevada corporation and an affiliate of Carl C. Icahn (the Company's chairman and majority shareholder), agreed to provide a revolving credit facility, secured by a first lien on all of the assets of the Company, under which the Company may borrow up to an aggregate amount of $10 million for general working capital purposes. After receipt of Ealing's commitment, the Company contacted several other lenders and was able to obtain a term sheet, from an unaffiliated lender for financing its working capital needs and the Company then allowed the commitment from Ealing to expire. In the term sheet, the unaffiliated lender agreed to provide a revolving credit facility to the Company allowing the Company to borrow up to an aggregate principal amount of $10 million for working capital purposes, which shall mature 364 days following the execution of definitive documents, which is secured by a first lien on all of the assets of the Company, and has an interest rate of LIBOR plus 8% per annum. The revolving credit facility is subject to the execution of definitive documents and certain other conditions and the consummation of the loan facility is therefore not assured. IF THE COMPANY FAILS TO OFFER COMPETITIVE PRODUCTS AND SERVICES OR MAINTAIN THE LOYALTY OF THE SANDS PATRONS, ITS BUSINESS WILL BE ADVERSELY AFFECTED. In addition to capital expenditures, the Company is required to anticipate the changing tastes of The Sands' patrons and offer both competitive and innovative products and services to ensure that repeat patrons return and new patrons visit The Sands. The demands of meeting the Company's debt service payments and the need to make capital expenditures limits the available cash to finance such products and services. In addition, the consequences of incorrect strategic decisions may be difficult or impossible to anticipate or correct in a timely manner. THE COMPANY'S QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND SEASONALITY. The Company's quarterly operating results are highly volatile and subject to unpredictable fluctuations due to unexpectedly high or low losses, changing customer tastes and trends, unpredictable patron gaming volume, the proportion of table game revenues to slot game revenues, weather and discretionary decisions by The Sands' patrons regarding frequency of visits and spending amounts. The Company's operating results for any given quarter may not meet expectations or conform to the operating results of the Company's local, regional or national competitors. If the Company's operating results do not conform to such expectations our share price may be adversely affected. Conversely, favorable operating results in any given quarter may be followed by an unexpected downturn in subsequent quarters. 23 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INCREASED STATE TAXATION OF GAMING AND HOSPITALITY REVENUES COULD ADVERSELY AFFECT THE COMPANY'S RESULTS OF OPERATIONS. The casino industry represents a significant source of tax revenues to the various jurisdictions in which casinos operate. Gaming companies are currently subject to significant state and local taxes and fees in addition to normal federal and state corporate income taxes. For example, casinos in Atlantic City pay for licenses as well as special taxes to the city and state. New Jersey taxes annual gaming revenues at the rate of 8.0%. New Jersey also levies an annual investment alternative tax of 2.5% on annual gaming revenues in addition to normal federal and state income taxes. This 2.5% obligation, however, can be satisfied by purchasing certain bonds or making certain investments in the amount of 1.25% of annual gaming revenues. On July 3, 2002, the State of New Jersey passed the New Jersey Business Tax Reform Act, which, among other things, suspended the use of the New Jersey net operating loss carryforwards for two years and introduced a new alternative minimum assessment under the New Jersey corporate business tax based on gross receipts or gross profits. For the six months ended June 30, 2004 and 2003, there was a charge to income tax provision of $340,000 and $343,000, respectively, related to the impact of the New Jersey Business Tax Reform Act. On July 1, 2003, the State of New Jersey amended the New Jersey Casino Control Act (the "NJCCA") to impose various tax increases on Atlantic City casinos, including The Sands. Among other things, the amendments to the NJCCA include the following new tax provisions: (i) a new 4.25% tax on casino complimentaries, with proceeds deposited to the Casino Revenue Fund; (ii) an 8% tax on casino service industry multi-casino progressive slot machine revenue, with the proceeds deposited to the Casino Revenue Fund; (iii) a 7.5% tax on adjusted net income of licensed casinos (the "Casino Net Income Tax) in State fiscal years 2004 through 2006, with the proceeds deposited to the Casino Revenue Fund; (iv) a fee of $3.00 per day on each hotel room in a casino hotel facility that is occupied by a guest, for consideration or as a complimentary item, with the proceeds deposited into the Casino Revenue Fund in State fiscal years 2004 through 2006, and beginning in State fiscal year 2007 $2.00 of the fee deposited into the Casino Revenue Fund and $1.00 transferred to the CRDA; (v) an increase of the minimum casino hotel parking charge from $2 to $3, with $1.50 of the fee to be deposited into the Casino Revenue Fund in State fiscal years 2004 through 2006, and beginning in State fiscal year 2007, $0.50 to be deposited into the Casino Revenue Fund and $1.00 to be transferred to the CRDA for its purposes pursuant to law, and for use by the CRDA to post a bond for $30 million for deposit into the Casino Capital Construction Fund, which was also created by the July 1, 2003 Act; and (vi) the elimination of the deduction from casino licensee calculation of gross revenue for uncollectible gaming debt. These changes to the NJCCA, and the new taxes imposed on The Sands and other Atlantic City casinos, will reduce the Company's profitability. Future changes in New Jersey state taxation of casino gaming companies cannot be predicted and any such changes could adversely affect the Company's profitability. THE COMPANY'S FORMER USE OF ARTHUR ANDERSEN LLP AS ITS INDEPENDENT PUBLIC ACCOUNTANTS MAY POSE RISKS TO PARENT AND THE COMPANY AND WILL LIMIT YOUR ABILITY TO SEEK POTENTIAL RECOVERIES FROM ARTHUR ANDERSEN LLP RELATED TO THEIR WORK. Arthur Andersen LLP, independent certified public accountants, were engaged as the principal accountants to audit the Company's consolidated financial statements until the Parent Company dismissed them on May 16, 2002 and 24 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) engaged KPMG LLP. In May 2002, Arthur Andersen was convicted on a federal obstruction of justice charge. Some investors, including institutional investors, may choose not to invest in or hold securities of a company whose prior financial statements (or those of its predecessor entity) were audited by Arthur Andersen, which may serve to, among other things, suppress the price of the Company's securities. In addition, rules promulgated by the SEC require the Company to present its audited financial statements in various SEC filings, along with Arthur Andersen's consent to inclusion of its audit report in those filings. The SEC has provided temporary regulatory relief designed to allow companies that file reports with them to dispense with the requirement to file a consent of Arthur Andersen in certain circumstances. Notwithstanding the SEC's temporary regulatory relief, the inability of Arthur Andersen to provide its consent or to provide assurance services to the Company with regard to future SEC filings could negatively affect the Company's ability to, among other things, access capital markets. Any delay or inability to access capital markets as a result of this situation could have a material adverse impact on the business of the Company. The Company cannot assure you that it will be able to continue to rely on the temporary relief granted by the SEC. If the SEC no longer accepts financial statements audited by Arthur Andersen, requires audits of other financial statements or financial information or requires changes to financial statements previously audited by Arthur Andersen, this may affect the Company's ability to access the public capital markets in the future, unless the Company's current independent auditors or another independent accounting firm is able to audit the consolidated financial statements originally audited by Arthur Andersen in a timely manner. Any delay or inability to access the capital markets may have an adverse impact on the business of the Company. ENERGY PRICE INCREASES MAY ADVERSELY AFFECT THE COMPANY'S COSTS OF OPERATIONS AND REVENUES OF THE SANDS. The Sands uses significant amounts of electricity, natural gas and other forms of energy. While no shortages of energy have been experienced, substantial increases in the cost of forms of energy in the U.S. will negatively affect the Company's operating results. The extent of the impact is subject to the magnitude and duration of the energy price increases, but this impact could be material. In addition, higher energy and gasoline prices which affect The Sands' customers may result in reduced visitation to The Sands' property and a reduction in revenues. A DOWNTURN IN GENERAL ECONOMIC CONDITIONS MAY ADVERSELY AFFECT THE COMPANY'S RESULTS OF OPERATIONS. The Company's business operations are affected by international, national and local economic conditions. A recession or downturn in the general economy, or in a region constituting a significant source of customers for The Sands' property, could result in fewer customers visiting the Company's property and a reduction in spending by customers who do visit the Company's property, which would adversely affect the Company's revenues while some of its costs remain fixed, resulting in decreased earnings. A majority of The Sands' patrons are from automobile travel and bus tours. Higher gasoline prices could reduce automobile travel to The Sands' location and could increase bus fares to The Sands. In addition, adverse winter weather conditions could reduce automobile travel to The Sands' location and could reduce bus travel. Accordingly, the Company's business, assets, financial condition and results of operations could be adversely affected by a weakening of regional economic conditions and higher gasoline prices or adverse winter weather conditions. 25 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ACTS OF TERRORISM AND THE UNCERTAINTY OF THE OUTCOME AND DURATION OF THE ACTIVITY IN IRAQ AND ELSEWHERE, AS WELL AS OTHER FACTORS AFFECTING DISCRETIONARY CONSUMER SPENDING, HAVE IMPACTED THE GAMING INDUSTRY AND MAY HARM THE COMPANY'S OPERATING RESULTS AND THE COMPANY'S ABILITY TO INSURE AGAINST CERTAIN RISKS. The terrorist attacks of September 11, 2001 had an immediate impact on hotel and casino volume. The Sands hotel occupancy was down approximately ten percentage points during the week that followed the attacks. Bus passenger volume for The Sands was lower than normal, especially from those bus tours originating from the New York metropolitan area. There were approximately 22.5% less bus passengers at The Sands during September 2001 than during the same month in the prior year. These events, the potential for future terrorist attacks, the national and international responses to terrorist attacks and other acts of war or hostility have created many economic and political uncertainties which could adversely affect the Company's business and results of operations. Future acts of terror in the U.S. or an outbreak of hostilities involving the United States, may again reduce The Sands' guests' willingness to travel with the result that the Company's operations will suffer. THE COMPANY MAY INCUR LOSSES THAT WOULD NOT BE COVERED BY INSURANCE AND THE COST OF INSURANCE WILL INCREASE. Although Atlantic Holdings, a wholly owned subsidiary of Holdings, has agreed in the Indenture governing its 3% Notes to maintain insurance customary and appropriate for its business, the Company cannot assure you that insurance will be available or adequate to cover all loss and damage to which the Company's business or the Company's assets might be subjected. In connection with insurance renewals subsequent to September 11, 2001, the insurance coverage for certain types of damages or occurrences have been diminished substantially and are unavailable at commercial rates. Consequently, the Company is self-insured for certain risks. The lack of insurance for certain types or levels of risk could expose the Company to significant losses in the event that an uninsured catastrophe occurred. Any losses the Company incurs that are not covered by insurance may decrease future operating income, require it to find replacements or repairs for destroyed property and reduce the funds available for the principal and interest payments to service its debt. THERE ARE RISKS RELATED TO THE CREDITWORTHINESS OF PATRONS OF THE CASINOS. The Sands is exposed to certain risks related to the creditworthiness of its patrons. Historically The Sands has extended credit on a discretionary basis to certain qualified patrons. For the six months ended June 30, 2004, gaming credit extended to Sands' table game patrons accounted for approximately 24.7% of overall table game wagering, and table game wagering accounted for approximately 11.6% of overall casino wagering during the period. At June 30, 2004, gaming receivables amounted to $9.5 million before an allowance for uncollectible gaming receivables of $5.6 million. There can be no assurance that defaults in the repayment of credit by patrons of The Sands would not have a material adverse effect on the results of operations of The Sands and, consequently the Company. 26 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THE COMPANY'S SUCCESS DEPENDS IN PART ON THE AVAILABILITY OF QUALIFIED MANAGEMENT AND PERSONNEL AND ON THE COMPANY'S ABILITY TO RETAIN SUCH EMPLOYEES. The quality of individuals hired for positions in the hotel and gaming operations will be critical to the success of the Company's business. It may be difficult to attract, retain and train qualified employees due to the competition for employees with other gaming companies and their facilities in the Company's jurisdiction and nationwide. The Borgata, a recently opened casino located in the marina district of Atlantic City has aggravated this problem. The Company cannot assure you that it will be successful in retaining current personnel or in hiring or retaining qualified personnel in the future. A failure to attract or retain qualified management and personnel at all levels or the loss of any of the Company key executives could have a material adverse effect on the Company's financial condition and results of operations. RISK FACTORS RELATED TO THE GAMING INDUSTRY THE GAMING INDUSTRY IS HIGHLY COMPETITIVE. The gaming industry is highly competitive and the Company's competitors may have greater resources than the Company. If other properties operate more successfully, if existing properties are enhanced or expanded, or if additional hotels and casinos are established in and around the location in which the Company conducts business, the Company may lose market share. In particular, expansion of gaming in or near the geographic area from which the Company attracts or expects to attract a significant number of customers could have a significant adverse effect on the Company's business, financial condition and results of operations. The Sands competes, and will in the future compete, with all forms of existing legalized gaming and with any new forms of gaming that may be legalized in the future. Additionally, the Company faces competition from all other types of entertainment. On July 3, 2003, The Borgata, a joint venture of Boyd Gaming Corporation and MGM Mirage, opened in the marina district of Atlantic City. The Borgata features a 40-story tower with 2,010 rooms and suites, as well as a 135,000 square-foot casino, restaurants, retail shops, a spa and pool, and entertainment venues. This project represents a significant increase to capacity in the market. Additionally, the Borgata announced expansion plans that include additional gaming and retail space. Construction is expected to commence in 2005. In addition, other competitors of the Company in Atlantic City have recently completed expansions of their hotels or have announced expansion projects. For example, Tropicana Atlantic City is constructing a 502-room hotel tower, a 25-room conference center, a 2,400 space parking garage, an expanded casino floor and a 200,000 square foot themed shopping, dining and entertainment complex called The Quarter. Tropicana intends to complete the project in the third quarter of 2004. Resorts recently completed a hotel room addition of approximately 400 rooms. The business of the Company may be adversely impacted (i) by the additional gaming and room capacity generated by this increased competition in Atlantic City and/or (ii) by other projects not yet announced in New Jersey or in other markets (e.g., Pennsylvania, Maryland, New York and Connecticut). 27 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) GAMING IS A REGULATED INDUSTRY AND CHANGES IN THE LAW COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S ABILITY TO CONDUCT GAMING. Gaming in New Jersey is regulated extensively by federal and state regulatory bodies, including the CCC and state and federal taxing, law enforcement and liquor control agencies. The ownership and operation of The Sands is subject to strict state regulation under the NJCCA. The Company has received the licenses, permits and authorizations required to operate The Sands. PENDING AND ENACTED GAMING LEGISLATION FROM NEIGHBORING STATES AND NEW JERSEY MAY HARM THE SANDS. In the summer of 2003, the State of New Jersey considered approving video lottery terminals ("VLTs") at the racetracks in the state and on July 1, 2003, the NJCCA was amended to impose various new and increased taxes on casino license revenues. There is no guarantee that New Jersey will not consider approving VLTs in the future, and if VLTs are approved, it could adversely affect the Company's operations, and an increase in the gross gaming tax without a significant simultaneous increase in revenue would adversely affect the Company's results of operations. Recently, the casino industry, the CRDA and the New Jersey Sports and Exposition Authority have agreed to a plan regarding New Jersey video lottery terminals ("VLTs"). Under the plan, casinos will pay a total of $96 million over a period of four years, of which $10 million will fund, through project grants, North Jersey CRDA projects and $86 million will be paid to the New Jersey Sports and Exposition Authority who will then subsidize certain New Jersey horse tracks to increase purses and attract higher-quality races that would allow them to compete with horse tracks in neighboring states. In return, the race tracks and New Jersey have committed to postpone any attempts to install VLTs for at least four years. $52 million of the $86 million would be donated by the CRDA from the casinos' North Jersey obligations and $34 million would be paid by the casinos directly. It is currently estimated that The Sands current CRDA deposits for North Jersey projects are sufficient to fund The Sands proportionate obligations with respect to the $10 million and $52 million commitments. The Sands proportionate obligation with respect to the $34 million commitment is estimated to be approximately $1.4 million payable over a four year period. The Sands proportionate obligation with respect to the combined $10 million and $52 million commitment is estimated to be approximately $2.6 million payable over a four year period. The Sands also competes with legalized gaming from casinos located on Native American tribal lands. In October 2001, the New York State Legislature enacted a bill, which the governor signed, authorizing a total of six Indian casinos in the State of New York - three in Western New York and three in the Catskill Region - and approved the use of video lottery terminals at racetracks and authorized the participation of New York State in a multi-state lottery. On January 29, 2002, a lawsuit was commenced contesting the above legislation package on the grounds that certain of its provisions were adopted in violation of the State's constitution. The likely outcome of this lawsuit cannot be ascertained at this time. The implementation of VLTs and the outcome of this lawsuit could adversely affect visitation of The Sands from New York. 28 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Pennsylvania legislature passed and the governor signed a bill in July 2004 that will allow for up to 60,000 slot machines to operate at eight authorized race tracks and four stand alone slot parlors. The first of these slot machines are expected to be operational during 2005. Maryland is among the other states currently contemplating some form of gaming legislation. Maryland's proposed legislation would authorize video lottery terminals at some of Maryland's racing facilities. Maryland was unable to enact any legalized gaming legislation in their legislative sessions during the six months ended June 30, 2004. Since The Sands' market is primarily a drive-to-market, legalized gambling in Pennsylvania or one or more states neighboring or within close proximity to New Jersey could have a material adverse effect on the Atlantic City gaming industry overall, including The Sands. HOLDERS OF THE COMPANY'S SECURITIES ARE SUBJECT TO THE CCC AND THE NJCCA. The holders of the Company's common stock, par value $.01 per share ("Common Stock") and 11% Notes are subject to certain regulatory restrictions on ownership. While holders of publicly traded obligations such as the 3% Notes are generally not required to be investigated and found suitable to hold such securities, the CCC has the discretionary authority to (i) require holders of securities of corporations governed by New Jersey gaming law to file applications; (ii) investigate such holders; and (iii) require such holders to be found suitable or qualified to be an owner or operator of a gaming establishment. Pursuant to the regulations of the CCC such gaming corporations may be sanctioned, including the loss of its approvals, if, without prior approval of the CCC, it (i) pays to the unsuitable or unqualified person any dividend, interest or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable or unqualified person in connection with the securities; (iii) pays the unsuitable or unqualified person remuneration in any form; or (iv) makes any payments to the unsuitable or unqualified person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. If the Company is served with notice of disqualification of any holder, such holder will be prohibited by the NJCCA from receiving any payments on, or exercising any rights connected to, the Company's Common Stock or 3% Notes, as applicable. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss arising from changes in market rates and prices, such as interest rates and foreign currency exchange rates. The Company does not have securities subject to interest rate fluctuations and has not invested in derivative-based financial instruments. At April 16, 2004, the last full trading day prior to the delisting of 11% Notes from trading on the American Stock Exchange, the fair value of the Company's fixed rate debt was $89.1 million compared with its carrying amount of $110 million. ITEM 4. CONTROLS AND PROCEDURES The Company's senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the "Exchange Act")) designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. 29 GB HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, as well as other key members of the Company's management, of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, to provide reasonable assurance that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. No change occurred in the Company's internal controls concerning financial reporting during the fiscal quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. 30 PART II: OTHER INFORMATION --------------------------- ITEM 6.(A) EXHIBITS 31.1 Chief Executive Officer's Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Chief Financial Officer's Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Chief Executive Officer's Certification, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 2002. 32.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 2002. ITEM 6.(B) REPORTS ON FORM 8-K During the quarter ended June 30, 2004, the Registrant filed one Current Report on Form 8-K: (Items 5 and 7) on April 22, 2004. SIGNATURES ---------- Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlantic City, State of New Jersey on August 13, 2004. GB HOLDINGS, INC. Registrant Date: August 13, 2004 /s/ Denise Barton -------------------------------- ----------------------------- Denise Barton Chief Financial Officer 31 PART II: OTHER INFORMATION ---------------------------- ITEM 6.(A) EXHIBITS 31.1 Chief Executive Officer's Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Chief Financial Officer's Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Chief Executive Officer's Certification, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 2002. 32.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 2002. ITEM 6.(B) REPORTS ON FORM 8-K During the quarter ended June 30, 2004, the Registrants filed one Current Report on Form 8-K: (Items 5 and 7) on April 22, 2004. SIGNATURES ---------- Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlantic City, State of New Jersey on August 13, 2004. GB HOLDINGS, INC. Registrant Date: August 13, 2004 -------------------------------- -------------------------------- Denise Barton Chief Financial Officer 32

GREATE BAY HOTEL & CASINO INC 10-Q