10-Q

10-Q 1 y12129e10vq.htm FORM 10-Q 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended June 30, 2005

or

o		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 333-110484

ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		54-2131349
(State or other jurisdiction of (incorporation or organization)		(I.R.S. Employer Identification No.)

C/o Sands Hotel & Casino Indiana Avenue & Brighton Park Atlantic City, New Jersey (Address of registrant’s principal executive offices)		08401 (Zip Code)

(609) 441-4633

(Registrant’s telephone number, including area code)

Indicate by check mark whether each of the registrant (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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.


Registrant	Class	Outstanding at August 17, 2005

Atlantic Coast Entertainment Holdings, Inc.	Common stock, $.01 par value	6,916,778 shares

TABLE OF CONTENTS


		Page

Part I	FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Combined Financial Statements		3
	Condensed Combined Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004		3
	Condensed Combined Statements of Operations for the three months ended June 30, 2005 and June 30, 2004 (unaudited)		4
	Condensed Combined Statements of Operations for the six months ended June 30, 2005 and June 30, 2004 (unaudited)		5
	Condensed Combined Statements of Shareholders’ Equity for the year ended December 31, 2004 and six months ended June 30, 2005 (unaudited)		6
	Condensed Combined Statements of Cash Flows for the six months ended June 30, 2005 and June 30, 2004 (unaudited)		7
	Notes to Condensed Combined Financial Statements (unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19
Item 4.	Controls and Procedures		19

Part II	OTHER INFORMATION
Item 5.	Submission of Matters to a Vote of Security Holders		20
Item 6.	Exhibits		20
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

PART I. FINANCIAL INFORMATION


Item 1.	*UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS*

ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY

CONDENSED COMBINED BALANCE SHEETS


			As of			As of
			June 30, 2005			December 31, 2004

			(Unaudited)
			(In thousands, except share data)
ASSETS
Current Assets:
	Cash and cash equivalents		$	14,207		$	12,756
	Accounts receivable, net			4,371			5,100
	Other current assets			10,471			7,533

		Total Current Assets		29,049			25,389

	Property and Equipment, net			165,455			171,640

	Obligatory investments, net			12,390			11,647
	Deferred financing costs and other assets			4,775			8,113

		Total Other Assets		17,165			19,760

TOTAL ASSETS			$	211,669		$	216,789


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
	Line of credit		$	3,000		$	—
	Accounts payable-trade			5,070			6,710
	Accrued expenses			8,088			7,428
	Accrued payroll and related expenses			7,649			6,818
	Accounts payable-related party			813			371
	Current portion of capital lease obligation			317			248

		Total Current Liabilities		24,937			21,575

Long-Term Liabilities:
	Long-term debt, less current portion			37,459			66,259
	Capital lease obligations, less current portion			411			432
	Other			5,248			4,920

		Total Long-Term Liabilities		43,118			71,611

Total Liabilities				68,055			93,186

Commitments and Contingencies
Shareholders’ Equity:
	Common stock; $.01 par value share; 20,000,000 shares authorized; 6,912,023 and 2,882,938 shares outstanding			69			29
	Additional paid-in capital			187,226			126,550
	Warrants outstanding			9,813			43,587
	Accumulated deficit			(53,494	)		(46,563	)

		Total Shareholders’ Equity		143,614			123,603

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			$	211,669		$	216,789

See notes to condensed combined financial statements.

ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY

CONDENSED COMBINED STATEMENTS OF OPERATIONS


			Three Months			Three Months
			Ended			Ended
			June 30, 2005			June 30, 2004

			(Unaudited)
			(In thousands, except share
			data)
REVENUES:
	Casino		$	37,377		$	41,112
	Hotel			2,890			2,780
	Food and beverage			5,415			5,800
	Other			886			1,020

		Gross Revenues		46,568			50,712
	Less promotional allowances			5,645			6,142

		Net Revenues		40,923			44,570

COSTS AND EXPENSES:
	Casino			12,195			12,937
	Hotel			1,189			734
	Food and beverage			1,884			2,067
	Other operating expenses			250			211
	Selling, general and administrative			22,224			22,835
	Depreciation and amortization			3,881			3,660
	Provision for obligatory investments			(25	)		219
	Gain on sale of assets			(1	)		(31	)

		Total Costs And Expenses		41,597			42,632

INCOME (LOSS) FROM OPERATIONS				(674	)		1,938

OTHER INCOME (EXPENSE):
	Interest income			147			87
	Interest expense			(3,333	)		(3,144	)
	Debt restructuring costs			—			(1,129	)

		Total other expense, net		(3,186	)		(4,186	)

LOSS BEFORE INCOME TAXES				(3,860	)		(2,248	)
Provision for income taxes				251			245

NET LOSS			$	(4,111	)	$	(2,493	)

Basic/diluted loss per common share			$	(0.85	)	$	(0.86	)

Weighted average common shares outstanding				4,831,853			2,882,938

See notes to condensed combined financial statements.

ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY

CONDENSED COMBINED STATEMENTS OF OPERATIONS


			Six Months			Six Months
			Ended			Ended
			June 30, 2005			June 30, 2004

			(Unaudited)
			(In thousands, except share
			data)
REVENUES:
	Casino		$	74,718		$	79,231
	Hotel			5,184			5,068
	Food and beverage			10,281			10,790
	Other			1,693			1,947

	Gross Revenues			91,876			97,036
	Less promotional allowances			10,988			11,476

		Net Revenues		80,888			85,560

COSTS AND EXPENSES:
	Casino			24,022			25,151
	Hotel			1,892			1,389
	Food and beverage			3,450			4,094
	Other operating expenses			459			414
	Selling, general and administrative			45,088			43,852
	Depreciation and amortization			7,907			7,226
	Provision for obligatory investments			213			587
	Gain on sale of assets			(5	)		(31	)

		Total Costs And Expenses		83,026			82,682

INCOME (LOSS) FROM OPERATIONS				(2,138	)		2,878

OTHER INCOME (EXPENSE):
	Interest income			254			158
	Interest expense			(4,526	)		(6,334	)
	Debt restructuring costs			(23	)		(1,839	)

		Total other expense, net		(4,295	)		(8,015	)

LOSS BEFORE INCOME TAXES				(6,433	)		(5,137	)
Provision for income taxes				498			512

NET LOSS			$	(6,931	)	$	(5,649	)

Basic/diluted loss per common share			$	(1.79	)	$	(1.96	)

Weighted average common shares outstanding				3,862,779			2,882,938

See notes to condensed combined financial statements.

ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY

CONDENSED COMBINED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)


					Additional
	Common				Paid-In						Accumulated
	Shares		Amount		Capital			Warrants			Deficit			Total

	(In thousands, except share amounts)
BALANCE, December 31, 2004		2,882,938	$	29	$	126,550		$	43,587		$	(46,563	)	$	123,603
Conversion of 3% notes		1,898,181		19		29,500									29,519
Exercise of warrants		2,130,904		21		33,774			(33,774	)					21
Return of capital to GB Holdings						(2,598	)								(2,598	)
Net Loss												(6,931	)		(6,931	)

BALANCE, June 30, 2005		6,912,023	$	69	$	187,226		$	9,813		$	(53,494	)	$	143,614

See notes to condensed combined financial statements.

ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY

CONDENSED COMBINED STATEMENTS OF CASH FLOWS


		Six Months			Six Months
		Ended			Ended
		June 30, 2005			June 30, 2004

		(Unaudited)
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(6,931	)	$	(5,649	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			7,907			7,226
(Gain) Loss on sale or disposal of assets			(5	)		(31	)
Provision for obligatory investments			213			587
Changes in operating assets and liabilities:
	Accounts receivable, net		729			(2	)
	Other assets		297			1,102
	Accounts payable — trade		(1,640	)		(2,374	)
	Accrued expenses		1,491			2,788
	Other Liabilities		1,047			154

	Net Cash Provided By Operating Activities		3,108			3,801

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment			(1,473	)		(6,190	)
Purchase of obligatory investments			(1,094	)		(1,072	)
Cash proceeds from sale of obligatory investments			137			209
Cash proceeds from sale of property and equipment			5			31

	Net Cash Used In Investing Activities		(2,425	)		(7,022	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing on line of credit			3,000			—
Increase in related party payables			442			4,100
Proceeds from exercised warrants			21			—
Payments on capital lease obligation			(97	)		—
Return of capital of GB Holdings, Inc.			(2,598	)		—

	Net Cash Provided by Financing Activities		768			4,100

	Net increase in cash and cash equivalents		1,451			879
	Cash and cash equivalents — beginning of period		12,756			16,904

	Cash And Cash Equivalents — End of Period	$	14,207		$	17,783

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
	Cash paid for interest	$	219		$	6,050

	Cash paid for income taxes	$	517		$	603

	Interest capitalized	$	5		$	101

	Exercise of warrants	$	33,774		$	—

	Purchase of equipment with capital lease	$	145		$	—

	Conversion of notes payable and accrued interest to common stock	$	29,519		$	—

See notes to condensed combined financial statements.

ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

(Unaudited)


NOTE 1.	THE COMPANY

Atlantic Coast Entertainment Holdings, Inc. (“Atlantic Holdings” or the “Company”) is a Delaware corporation formed in October 2003 as a wholly-owned subsidiary of Greate Bay Hotel and Casino, Inc. (“GBHC”) which was a wholly-owned subsidiary of GB Holdings, Inc (“GB Holdings”). Until July 22, 2004, GBHC was the owner and operator of The Sands Hotel and Casino in Atlantic City, New Jersey (“The Sands”). ACE Gaming LLC (“ACE”), a New Jersey limited liability company and a wholly-owned subsidiary of Atlantic Holdings was formed in November 2003. ACE is a single member LLC with Atlantic Holdings as its sole member. In connection with a transaction (the “Transaction”) which was consummated in July 2004, substantially all of the assets of GB Holdings, including The Sands, and certain subsidiaries were transferred to Atlantic Holdings and subsequently to ACE.

Our 3% secured notes due 2008 guaranteed by ACE (the “notes”), are convertible into 65.90909 shares of our common stock for each $1,000 of principal amount of notes and related accrued interest. On May 17, 2005, American Real Estate Partners, L.P., (“AREP”), which owned an aggregate principal amount of $63.9 million of our notes elected to convert an aggregate of $28.8 million in principal amount of the notes into 1,898,181 shares of our common stock, pursuant to the terms of the indenture governing the notes. AREP is a publicly traded master limited partnership. Carl C. Icahn, through affiliates, owns approximately 90.0% of its depositary units and 86.5% of its preferred units and all of the capital stock of AREP’s general partner, American Property Investors, Inc.

Pursuant to the terms of a warrant agreement for warrants issued in connection with the Transaction and the election to convert the notes, holders of our warrants may exercise their warrants to purchase 0.275 shares of our common stock for each warrant that they own, at an exercise price of $0.01 per share of our common stock. The Company entered into an agreement with American Stock Transfer and Trust Company, as of May 17, 2005 to facilitate this exchange.

On May 17, 2005, we received notice from American Stock Transfer and Trust Company that affiliates of Mr. Icahn, including AREP, exercised their warrants for an aggregate of 2,130,904 shares of our common stock. As a result of the exercise of warrants and the conversion of a portion of the notes owned by AREP, affiliates of Mr. Icahn, including AREP, owned an aggregate of 4,029,085 shares of our common stock, representing approximately 58.3% of our outstanding common stock. GB Holdings, Inc. owned the remaining approximate 41.7% of our outstanding common stock. On June 30, 2005, AREP purchased from Mr. Icahn’s affiliates the shares of our common stock owned by them. After the conversion of notes by AREP, it continues to own approximately $35.1 million in principal amount of the notes. If AREP elects to convert its remaining notes, AREP would then own approximately 6.34 million shares of our common stock, representing approximately 63.4% of our outstanding common stock, on a fully diluted basis including both shares owned by GB Holdings and shares issuable upon exercise of the remaining outstanding warrants. To the extent that warrants are not exercised, the percentage of our common stock owned by AREP and GB Holdings on a fully diluted basis, would increase. Our board of directors has the right to limit the term of the warrants.


NOTE 2.	BASIS OF PRESENTATION

The condensed combined financial statements were prepared following the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain notes or other financial information that are normally required by GAAP (U.S. generally accepted accounting principles) can be condensed or omitted. These condensed combined financial statements should be read in conjunction with the combined financial statements and notes thereto included in the Company’s annual report on Form 10-K/A for the year ended December 31, 2004.

ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS — (Continued)

Because GB Holdings controlled the operations and business of the Company prior to the Transaction and the Company and GB Holdings remain under common control for accounting purposes after the Transaction, the accompanying combined financial statements have been prepared as a reorganization of businesses under common control in a manner similar to a pooling-of-interests. Accordingly, the assets and liabilities transferred to the Company have been recognized at historical amounts. The transfer of assets has been accounted for as an exchange of net assets between entities under common control, whereby the entity receiving the assets shall initially recognize the assets and liabilities transferred at their historical carrying amount in the accounts of the transferring entity at the date of transfer. No gain or loss was recorded relating to the transfer. The combined financial statements for the six month period ended June 30, 2004 present the results of the Company and its subsidiary as if the Company had been in existence throughout the period from January 1, 2004 to December 31, 2004 and as if the prior operations were transferred to the Company from GB Holdings as of the earliest date presented.

In addition, the combined financial statements for periods up to December 31, 2004 include certain assets and liabilities and the results related to assets and liabilities historically associated with the operations that were not transferred to the Company and were retained by GB Holdings in connection with the Transaction. The assets and liabilities retained by GB Holdings consisted of the following, as of July 22, 2004 (in thousands):


Current assets, primarily prepayments	$	266
Long-term debt, current portion	$	43,741
Note payable related party	$	21,900
Accrued interest	$	2,984

In connection with the Transaction in addition to the assets and liabilities related to the operations of The Sands, GB Holdings also transferred $16.9 million in cash to Atlantic Holdings.

In preparing the combined financial statements, the assets and liabilities, revenues and expenses of the operations prior to the Transaction are reflected in the accompanying combined financial statements.

In management’s opinion, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the condensed combined financial position as of June 30, 2005 and the condensed combined results of operations for the three and six months ended June 30, 2005 and 2004 have been made. The results set forth in the condensed combined statement of operations for the six months ended June 30, 2005 are not necessarily indicative of the results to be expected for the full year.


	*PRINCIPLES OF COMBINATION*

The condensed combined financial statements include the accounts of Atlantic Holdings and ACE. All significant intercompany transactions and balances have been eliminated in combination.


NOTE 3.	RELATED PARTY TRANSACTIONS

The Company has entered into an intercompany services arrangement with American Casino & Entertainment Properties LLC (“ACEP”), which is controlled by affiliates of Carl C. Icahn, whereby ACEP provides management and consulting services. The Company is billed based upon an allocation of salaries plus an overhead charge of 15% of the salary allocation plus reimbursement of reasonable out-of-pocket expenses. For the three and six months ended June 30, 2005, the Company was billed approximately $179,000 and $315,000, respectively. For the three and six months ended June 30, 2004, the Company was billed approximately $67,000 and $116,000, respectively.

The Company has entered into an agreement with XO Communications, Inc., a long-distance phone carrier, an entity affiliated with Mr. Icahn. Payments for such charges incurred for the three months ended June 30, 2005 and 2004 amounted to $44,000 and $40,000, respectively, and $84,000, and $81,000 for the six months ended June 30, 2005 and 2004, respectively. The agreement was extended in June 2005 through April 2007.

In connection with the Transaction, GB Holdings, Atlantic Holdings and ACE entered into a Contribution Agreement, pursuant to which, Atlantic Holdings paid approximately $200,000 and $2.6 million

ATLANTIC COAST ENTERTAINMENT HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS — (Continued)

to GB Holdings for the three and six months ended June 30, 2005, respectively, of which approximately $2.4 million was for interest on the 11% Notes due 2005 (the “GB Holdings 11% Notes”) which were not previously exchanged for our notes. Additionally, the Company agreed to pay to GB Holdings an amount equal to GB Holdings’ normal, ordinary course operating expenses (including legal and accounting costs, directors’ and officers’ insurance premiums, and fees for SEC filings) not to exceed in the aggregate $250,000 in any twelve month period, subject to a number of conditions.

As of June 30, 2005 and December 31, 2004, the Company owed approximately $813,000 and $371,000, respectively, to related parties. This payable is primarily related to the intercompany services arrangement with ACEP.


NOTE 4.	LINE OF CREDIT

On November 12, 2004, the Company entered into a Loan and Security Agreement (the “Loan Agreement”), by and among Atlantic Holdings, as borrower, ACE, as guarantor, and Fortress Credit Corp., as lender, and certain related ancillary documents, pursuant to which, Fortress agreed to make available to Atlantic Holdings a senior secured revolving credit line providing for working capital loans of up to $10 million to be used for working capital purposes in the operation of The Sands.

All borrowings under the Loan Agreement are payable in full by no later than the day immediately prior to the one-year anniversary of the Loan Agreement, or on any earlier date on which the borrowings are required to be paid in full, by acceleration or otherwise, pursuant to the Loan Agreement.

The borrower and guarantor on the Loan Agreement are required to comply with certain financial covenants. As of June 30, 2005, the Company had outstanding borrowings of $3.0 million under the Loan Agreement and was in compliance with these covenants.


NOTE 5.	LEGAL PROCEEDINGS

Tax appeals challenging the amount of ACE’s real property assessments for tax years 1996 through 2005 are pending. A trial was conducted from May through July 2005 for the tax years 1996 through 1999. A ruling from the New Jersey Tax Court is expected to be issued at the end of 2005. A trial for the tax years 2000 through 2003 is expected to commence subsequent to that ruling.


Item 2.	*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 Atlantic Coast Entertainment Holdings, Inc. (“Atlantic Holdings”) and ACE Gaming, LLC (“ACE” and collectively with Atlantic Holdings 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 Atlantic Holdings, ACE or its management are intended to identify forward-looking statements (see “Private Securities Litigation Reform Act” below).

OVERVIEW

Pursuant to the terms of a warrant agreement for warrants issued in connection with the Transaction and the election to convert the notes, holders of our warrants may exercise their warrants to purchase 0.275 shares of our common stock for each warrant that they own, at an exercise price of $0.1 per share of our common stock. The Company entered into an agreement with American Stock Transfer and Trust Company, as of May 17, 2005 to facilitate this exchange.

Because GB Holdings controlled the operations and business of the Company prior to the Transaction and the Company and GB Holdings remain under common control for accounting purposes after the

Transaction, the accompanying combined financial statements have been prepared as a reorganization of businesses under common control in a manner similar to a pooling-of-interests. The transfer of assets has been accounted for as an exchange of net assets between entities under common control, whereby the entity receiving the assets initially recognizes the assets and liabilities transferred at their historical carrying amount in the accounts of the transferring entity at the date of transfer. No gain or loss was recorded relating to the transfer. The combined results of operations discussed below for each of the three and six month periods ended June 30, 2004 present the results of Atlantic Holdings and subsidiary as if the Company had been in existence throughout the period from January 1, 2004 to June 30, 2004 and as if the prior operations were transferred to the Company from GB Holdings as of the earliest date presented.

RESULTS OF OPERATIONS

The Company primarily generates revenues from gaming operations at The Sands located in Atlantic City, New Jersey. Although the Company’s other business activities, including hotel, entertainment, retail store, food and beverage operations, also generate revenues, these revenues are nominal in comparison to revenues generated by the gaming operations. The non-gaming operations primarily support the gaming operation by providing complimentary goods and services to gaming customers. The Company competes in a capital intensive industry that requires continual reinvestment in its facilities and technology.

The Company faces a number of competitive challenges during fiscal 2005, including increased competition from other existing casinos that invested in capital improvements, and a corresponding increase in competition for both table game and slot machine players.

We currently offer gaming, hotel, dining and entertainment at The Sands. The following table provides certain summary information for The Sands:

Number of

Casino

Hotel

Number of

Square Footage

Rooms

Slots

Table Games

82,000

620

2,161

We use certain key measurements to evaluate operating revenue. Casino revenue measurements include “table games drop” and “slot coin-in” as volume measurements which are the amounts wagered by patrons. “Win” or “hold” percentage represents the percentage of drop or coin-in that is won by the casino and recorded as casino revenue. Hotel revenue measurements include hotel occupancy rate, which is the average percentage of available hotel rooms occupied during a period, and average daily room rate, which is the average price of occupied rooms per day. Food and beverage revenue measurements include number of covers, which is the number of guest checks, and the average check amount.


	*THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED*

JUNE 30, 2004


			Three Months Ended
			June 30,

			2005			2004		% Change

			(in millions)
INCOME STATEMENT DATA:
Revenues:
	Casino		$	37.4		$	41.1		(9.1	)%
	Hotel			2.9			2.8		4.0	%
	Food and beverage			5.4			5.8		(6.6	)%
	Other			0.9			1.0		(13.1	)%

		Gross revenues		46.6			50.7		(8.2	)%
Less promotional allowances				5.7			6.1		(8.1	)%

		Net revenues		40.9			44.6		(8.2	)%
Costs and expenses:
	Casino			12.2			12.9		(5.7	)%
	Hotel			1.2			0.7		62.0	%
	Food and beverage			1.9			2.1		(8.9	)%
	Other operating expenses			0.2			0.2		18.5	%
	Selling, general and administrative			22.2			22.8		(2.7	)%
	Depreciation and amortization			3.9			3.7		6.0	%
	Provision for obligatory investments			0.0			0.2		111.4	%

		Total costs and expenses		41.6			42.6		(2.5	)%

Income (loss) from operations			$	(0.7	)	$	2.0		(134.8	)%


	Gross Revenues

Gross revenues decreased 8.2% to $46.6 million for the three months ended June 30, 2005 from $50.7 million for the three months ended June 30, 2004. This decrease was primarily due to reduced casino revenues, as discussed below.


	Casino Revenues

Casino revenues decreased 9.1% to $37.4 million for the three months ended June 30, 2005 from $41.1 million for the three months ended June 30, 2004, of which slot machine revenues were $28.0 million and table games revenues were $9.0 million for the three months ended June 30, 2005 compared to $30.6 million and $10.2 million, respectively, for the three months ended June 30, 2004. The decrease in casino revenue was a result of decreased slot win of $2.6 million and decreased table game win of $1.1 million. Slot machine coin-in decreased 16.4% to $402.7 million for the three months ended June 30, 2005 from $481.9 million for the three months ended June 30, 2004. The decrease in coin-in was primarily attributable to increased competition. Table games drop increased 15.3% to $65.4 million for the three months ended June 30, 2005 from $56.7 million for the three months ended June 30, 2004, despite a highly competitive Atlantic City market. The Company’s increase in table games drop was a result of an increase in the number of table games over the prior year, which included games that the Company believes are favored by players. The table games hold percentage decreased 4.1 percentage points to 13.8% for the three months ended June 30, 2005 from the three months ended June 30, 2004.


	Non-Casino Revenues

Hotel revenues increased 4.0% to $2.9 million for the three months ended June 30, 2005 from $2.8 million for the three months ended June 30, 2004. This increase was primarily due to an increase in occupancy and in the average daily room rate from $56.63 for the three months ended June 30, 2004 to $58.74 for the three months ended June 30, 2005 or 3.7%. The increase in the average daily room rate was primarily attributable to an increase in group sales.

Food and beverage revenues decreased 6.6% to $5.4 million for the three months ended June 30, 2005 from $5.8 million for the three months ended June 30, 2004. This decrease was due to a decrease in covers, especially in the high-volume Boardwalk Buffet.

Other revenues, which consist primarily of entertainment revenues, decreased 13.1% to $886,000 for the three months ended June 30, 2005 from $1.0 million for the three months ended June 30, 2004. This decrease was due to less entertainment revenue as a result of reduced ticket prices.


	Promotional Allowances

Promotional allowances are comprised of the estimated retail value of goods and services provided to casino customers under various marketing programs. As a percentage of casino revenues, promotional allowances increased to 15.1% for the three months ended June 30, 2005 from 14.9% for the three months ended June 30, 2004. This increase was attributable to the Company’s efforts to retain casino gaming market share due to the competitiveness within the Atlantic City market.


	Operating Expenses

Casino expenses decreased by 5.7% to $12.2 million for the three months ended June 30, 2005 from $12.9 million for the three months ended June 30, 2004. The decrease in casino expenses was primarily due to reduced gaming taxes as a result of lower casino revenues.

Hotel expenses increased 62.0% to $1.2 million for the three months ended June 30, 2005 from $734,000 for the three months ended June 30, 2004. The increase was primarily due to increased labor and supply costs as a result of the increase in occupancy.

Food and beverage expenses decreased 8.9% to $1.9 million for the three months ended June 30, 2005 from $2.1 million for the three months ended June 30, 2004. The decrease was primarily due to lower food costs as a result of reduced food and beverage revenue.

Other operating expenses increased 18.5% to $250,000 for the three months ended June 30, 2005 from $211,000 for the three months ended June 30, 2004. The increase was primarily due to increased payroll and related expenses as a result of increased benefit costs, which were partially offset by reduced entertainer fees.

Selling, general, and administrative expenses decreased 2.7% to $22.2 million for the three months ended June 30, 2005 from $22.8 million for the three months ended June 30, 2004. The decrease was due to reduced real estate taxes due to lower assessments, reduced payroll and related expenses due to labor efficiencies and reduced advertising costs.


	Interest Expense

Interest expense in 2005 is primarily due to the accrual of interest on $37.5 million principal amount of notes, the remaining principal outstanding after the conversion of notes by AREP, at an interest rate of 3% plus interest on the outstanding borrowings under the revolving credit facility and the amortization of debt costs associated with the 3% Notes.


	*SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004*


			Six Months Ended June 30,

			2005			2004		% Change

			(in millions)
INCOME STATEMENT DATA:
Revenues:
	Casino		$	74.7		$	79.2		(5.7	)%
	Hotel			5.2			5.1		(2.3	)%
	Food and beverage			10.3			10.8		(4.7	)%
	Other			1.7			1.9		(13.0	)%

		Gross revenues		91.9			97.0		(5.3	)%
Less promotional allowances				11.0			11.4		(4.3	)%

		Net revenues		80.9			85.6		(5.5	)%
Costs and expenses:
	Casino			24.0			25.2		(4.5	)%
	Hotel			1.9			1.4		36.2	%
	Food and beverage			3.4			4.1		(15.7	)%
	Other operating expenses			0.5			0.4		10.9	%
	Selling, general and administrative			45.1			43.8		2.8	%
	Depreciation and amortization			7.9			7.2		9.4	%
	Provision for obligatory investments			0.2			0.6		83.9	%

		Total costs and expenses		83.0			82.7		0.4	%

Income (loss) from operations			$	(2.1	)	$	2.9		(174.3	)%


	Gross Revenues

Gross revenues decreased 5.3% to $91.9 million for the six months ended June 30, 2005 from $97.0 million for the six months ended June 30, 2004. This decrease was primarily due to a decrease in casino revenues, as discussed below.


	Casino Revenues

Casino revenues decreased 5.7% to $74.7 million for the six months ended June 30, 2005 from $79.2 million for the six months ended June 30, 2004. Slot machine revenues were $54.4 million and table games revenues were $19.7 million for the six months ended June 30, 2005 compared to $59.1 million and $19.4 million, respectively, for the six months ended June 30, 2004. The decrease in casino revenue was a result of decreased slot win of $4.8 million, partially offset by increased table game win of $250,000. Slot machine coin-in decreased 12.0% to $803.5 million for the six months ended June 30, 2005 from $913.4 million for the six months ended June 30, 2004. The decrease in coin-in was primarily attributable to the increased competition. Table games drop increased 4.9% to $125.5 million for the six months ended June 30, 2005 from $116.6 million for the six months ended June 30, 2004, despite a highly competitive Atlantic City market. The Company’s increase in table games drop was a result of an increase in the number of table games at The Sands over the prior year, which included games that the Company believes are favored by players. The table games hold percentage decreased 0.5 percentage points to 15.7% for the six months ended June 30, 2005.


	Non-Casino Revenues

Hotel revenues increased 2.3% to $5.2 million, for the six months ended June 30, 2005 from $5.1 million for the six months ended June 30, 2004. This increase was primarily due to an increase in occupancy and in the average daily room rate from $55.11, for the six months ended June 30, 2004, to $55.86, for the six months ended June 30, 2005, or 1.4%. The increase in the average daily room rate was primarily attributable to an increase in group sales.

Food and beverage revenues decreased 4.7% to $10.3 million for the six months ended June 30, 2005 from $10.8 million for the six months ended June 30, 2004. This decrease was due to a decrease in covers, especially in the high-volume Boardwalk Buffet.

Other revenues decreased 13.0% to $1.7 million for the six months ended June 30, 2005 from $1.9 million for the six months ended June 30, 2004. This decrease was due to lower entertainment revenue as a result of reduced ticket prices.


	Promotional Allowances

Promotional allowances are comprised of the estimated retail value of goods and services provided to casino customers under various marketing programs. As a percentage of casino revenues, promotional allowances increased to 14.7% for the six months ended June 30, 2005 from 14.5% for the six months ended June 30, 2004. This increase was attributable to the Company’s efforts to retain casino gaming market share due to the competitiveness within the Atlantic City market.


	Operating Expenses

Casino expenses decreased by 4.5% to $24.0 million for the six months ended June 30, 2005 from $25.2 million for the six months ended June 30, 2004. The decrease in casino expenses was primarily due to reduced gaming taxes as a result of lower gaming revenues. Reduced payroll and related expenses, due to labor efficiencies, also contributed to the reduction in casino expenses.

Hotel expenses increased 36.2% to $1.9 million for the six months ended June 30, 2005 from $1.4 million for the six months ended June 30, 2004. The increase was primarily due to an increase in labor and supply costs due to increased occupancy.

Food and beverage expenses decreased 15.7% to $3.4 million for the six months ended June 30, 2005 from $4.1 million for the six months ended June 30, 2004. The decrease was primarily due to lower food costs as a result of reduced food and beverage revenue.

Other operating expenses increased 10.9% to $459,000 for the six months ended June 30, 2005 from $414,000 for the six months ended June 30, 2004. The increase was primarily due to increased payroll and related expenses as a result of increased benefit costs and were partially offset by reduced entertainer fees.

Selling, general, and administrative expenses increased 2.8% to $45.1 million for the six months ended June 30, 2005 from $43.8 million for the six months ended June 30, 2004. The increase was due to increased legal and accounting fees for administrative and corporate matters. Direct mail expense increased due to marketing programs aimed at retaining and expanding market share.


	Interest Expense

FINANCIAL CONDITION


	*Liquidity And Capital Resources*

Our primary source of cash is from the operation of The Sands. At June 30, 2005, we had cash and cash equivalents of $14.2 million. For the six months ended June 30, 2005, net cash provided by operating activities totaled approximately $3.1 million compared to approximately $3.8 million for the six months ended June 30, 2004. In addition to cash from operations, cash is available to Atlantic Coast, if necessary, under our senior secured revolving credit facility. The senior secured revolving credit facility allows for borrowings of up to $10.0 million, subject to us complying with financial and other covenants. At June 30, 2005, we had outstanding borrowings under the senior credit facility of $3.0 million and availability $7.0 million, subject to continuing compliance with existing covenant restrictions. All borrowings under the Loan Agreement are payable in full by no later than November 12, 2005 or any earlier date on which the Loans are required to be paid in full, by acceleration or otherwise, pursuant to the Loan Agreement. We are currently negotiating with our lender to extend the term of the revolving credit facility.

Our primary use of cash is for capital spending. Capital spending for Atlantic Coast was approximately $1.6 million and $6.2 million, respectively, for the six months ended June 30, 2005 and 2004. We estimate our capital expenditures for 2005 will not exceed $7.0 million, which we anticipate will include primarily information technology infrastructure upgrades. The remainder of our capital spending estimate for 2005 will be for upgrades or maintenance to our existing assets. We also need to repay borrowing under the credit line if we do not obtain an extension or refinancing. We believe operating cash flows and borrowings available under the senior secured revolving credit facility will be adequate to meet our anticipated future requirements for working capital, currently projected capital spending for 2005 and scheduled interest payments under the senior secured revolving credit facility, lease payments and other indebtedness at least through the next twelve months. Our estimates of our reasonable anticipated liquidity needs may not be accurate and new business developments may not or other unforeseen events may occur, resulting in the need to raise additional funds

We are currently exploring various plans for potential expansion of our facilities and improvements to our existing facilities. If we decide to expand and improve the facilities, the Company will be required to obtain additional financing since internally generated funds and amounts available for borrowing under our existing credit facility would not be sufficient. Additional financing could include equity or debt financings, or some combination of both. The Company may not be able to obtain the required consents or additional financing.

We are required by the Casino Control Commission to make certain quarterly deposits based on gross revenue with the Casino Reinvestment Development Authority in lieu of a certain investment alternative tax. Deposits for the six months ended June 30, 2005 amounted to $1.1 million compared to $0.9 million from the six months ended June 30, 2004.

Atlantic Coast has $37.5 million principal amount of the notes that mature on July 22, 2008. Accrued interest on the 3% Notes was approximately $1.1 million at June 30, 2005. Interest is payable at maturity of the notes.

Atlantic Coast’s senior secured revolving credit facility allows for borrowings of up to $10.0 million. Loans made under the senior secured revolving facility will mature and the commitments under them will terminate in November 2005 or any earlier date on which the borrowings are required to be paid in full, by acceleration or otherwise, pursuant to the Loan Agreement. Interest accrues at a fixed rate to be set monthly which is equal to one month LIBOR (but not less than 1.5%), plus 8% per annum. At June 30, 2005, there were $3.0 million in borrowings outstanding under the facility. The facility requires the maintenance of the following financial covenants; (1) a minimum EBITDA (as defined in the Loan Agreement) of $12.5 million, which is measured and confirmed as of the twelve month period ended each respective January 1, April 1, July 1 and October 1 of each year and (2) a Minimum Leverage Ratio of Total Debt to EBITDA, as measured and confirmed on a trailing twelve month basis to exceed 6.25:1.

Borrowings under the credit facilities are secured by a first lien and security interest on all of Atlantic Holdings’ and its subsidiary’s personal property and a first mortgage on The Sands. The notes are also secured by a lien on the same collateral as secures the credit facility. The liens with respect to the notes are subordinated to the liens with respect to the credit facility.


	*Contractual Obligations*

The following table summarizes contractual obligations and commitments to make future payments under certain contracts, including long-term debt obligations, and capital leases at June 30, 2005.


		Payments Due by Period

				Less than
Contractual Obligations and Commitments		Total		1 Year		1-3 Years		4-5 Years		After 5 Years

		(In thousands)
Line of Credit		$	3,000	$	3,000	$	—	$	—	$	—
Long-Term debt			37,459		—		—		37,459		—
Capital lease obligations			728		317		393		18		—
Obligatory Contributions:
	VLT Agreement		2,860		953		1,907		—		—
	CRDA obligation		4,709		84		157		3,319		1,149
Operating Leases:
	Madison House		15,326		1,899		3,996		3,996		5,435
	Equipment		76		76		—		—		—

Total cash obligations		$	64,158	$	6,329	$	6,453	$	44,792	$	6,584

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 Atlantic Holdings 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 Atlantic Holdings in particular. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of Atlantic 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).

TRENDS AND OTHER UNCERTAINTIES


	•	The Sands must maintain its casino license in order to operate.

	•	The Company may need to increase capital expenditures to compete effectively and may not have the ability to do so.

	•	If the Company fails to offer competitive products and services or maintain the loyalty of The Sands’ patrons, its business will be adversely affected.


	•	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.

	•	Increased state taxation of gaming and hospitality revenues could adversely affect the Company’s results of operations.

	•	Energy price increases may adversely affect the Company’s costs of operations and revenues of The Sands.

	•	A downturn in general economic conditions may adversely affect the Company’s results of operations.

	•	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 Company may incur losses that would not be covered by insurance and the cost of insurance will increase.

	•	There are risks related to the creditworthiness of patrons of the casinos.

	•	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 gaming industry is highly competitive.

	•	Pending and enacted gaming legislation from neighboring States and New Jersey may harm The Sands.

	•	Holders of Atlantic Holdings Common Stock, Warrants, and 3% Notes are subject to the CCC and the NJCCA.

	•	The Company depends on short-term borrowings and can not be certain that funds will continue to be available.


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.


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-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (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 SEC’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 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 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, process, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

During the quarter ended June 30, 2005, there were no changes in our internal controls over financial reporting that materially affected, or are likely to affect, our internal controls over financial reporting.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

PART II. OTHER INFORMATION


Item 5.	*SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS*

On May 20, 2005, by the written consent of the holders of a majority of the shares of our outstanding common stock, the following persons were elected to constitute our entire board of directors: Michael Ashner, Jack G. Wasserman, James L. Nelson and William Leidesdorf.


Item 6.	*EXHIBITS*


	10.1*			Employment Agreement by and between Atlantic Coast Entertainment Holdings, Inc. and George Toth dated April 1, 2005.
	31.1			Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2			Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1			Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act 2002.
	32.2			Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act 2002.


	*	Filed as an exhibit to Atlantic Holdings’ Current Report on Form 8-K filed with the SEC on April 27, 2005 and incorporated herein by reference.

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.


	ATLANTIC COAST ENTERTAINMENT
	HOLDINGS, INC.

	/s/ Denise Barton

	Denise Barton
	Chief Financial Officer

Date: September 15, 2005

EXHIBITS INDEX


Exhibit
No.		Description

	10.1*	Employment Agreement by and between Atlantic Coast Entertainment Holdings, Inc. and George Toth dated April 1, 2005.
	31.1	Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act 2002.
	32.2	Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act 2002.


*	Filed as an exhibit to Atlantic Holdings’ Current Report on Form 8-K filed with the SEC on April 27, 2005 and incorporated herein by reference.

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