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EX-31.2 - SECTION 302 CFO CERTIFICATION - COLONY RESORTS LVH ACQUISITIONS LLCsection302cfocertificate.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - COLONY RESORTS LVH ACQUISITIONS LLCsection302ceocertificate.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - COLONY RESORTS LVH ACQUISITIONS LLCsection906ceocertificate.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - COLONY RESORTS LVH ACQUISITIONS LLCsection906cfocertificate.htm
 

 

10-Q 1 d10q.htm FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549  


FORM 10-Q 


 

 x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

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 000-50635  


COLONY RESORTS LVH ACQUISITIONS, LLC

(Exact Name of Registrant as Specified in its Charter)  


 

 

 

 

NEVADA

 

41-2120123

(State or Other Jurisdiction

of Incorporation)

 

(I.R.S. Employer

Identification Number)

 

 

3000 PARADISE ROAD

LAS VEGAS, NEVADA

 

89109

(Address of Principal Executive Offices)

 

(Zip Code)

702-732-5111

(Registrant’s Telephone Number, Including Area Code)  


Indicate by check mark whether the Registrant (1) has filed all reports required 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ¨    No  ¨

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨

Accelerated filer  ¨

Non-accelerated filer x   (Do not check if a smaller reporting company)

 Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of May 6, 2011 there were 1.5 Class A Membership Units outstanding and there were 1,500,000 Class B Membership Units outstanding.


 


 

 

 

PART I.  FINANCIAL INFORMATION

ITEM I.  FINANCIAL STATEMENTS

 

 

COLONY RESORTS LVH ACQUISITIONS, LLC

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

 

 

 

 

 

COLONY RESORTS LVH ACQUISITIONS, LLC

 

 

 

UNAUDITED CONDENSED INTERIM FINANCIAL  STATEMENTS:

 

 

 

 

 

 

 

CONDENSED BALANCE SHEETS

1

 

 

 

 

 

 

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

2

 

 

 

 

 

 

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

3

 

 

 

 

 

 

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

4

 

 

 

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

10

 

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

17

 

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

18

 

 

 

 

PART II.

OTHER INFORMATION

19

 

 

 

 

ITEM 6.

EXHIBITS

19

 

 

 

 

SIGNATURES

 

21

                                                                       

 


 
 

 

 

COLONY RESORTS LVH ACQUISITIONS, LLC

CONDENSED BALANCE SHEETS

(in thousands)

 

CONDENSED

 

March 31, 2011

 

December 31, 2010*

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and equivalents

 

$         7,593

 

$      10,474

 

Restricted cash

 

14,949

 

6,935

 

Accounts receivable, net of allowance for doubtful

     accounts of $6,269 at March 31, 2011 and $6,417 at

     December 31, 2010

 

9,369

 

8,382

 

Inventories

 

2,481

 

2,465

 

Prepaid expenses and other current assets

 

2,736

 

3,959

 

Total current assets

 

37,128

 

32,215

 

PROPERTY AND EQUIPMENT, NET

 

309,941

 

313,325

 

RESTRICTED CASH

 

6,690

 

6,690

 

OTHER ASSETS, NET

 

2,537

 

2,861

 

Total assets

 

$    356,296

 

$    355,091

 

 

 

 

 

 

 

Liabilities and Members’ Equity

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Current portion of other long-term debt

 

$          792

 

$          611

 

Accounts payable

 

7,343

 

8,167

 

Accrued expenses

 

26,961

 

24,312

 

Due to affiliates

 

330

 

1,862

 

Total current liabilities

 

35,426

 

34,952

 

DEFERRED INTEREST

 

8,461

 

5,212

 

TERM LOAN

 

230,000

 

230,000

 

PORTION OF TERM LOAN FUNDED BY AFFILIATE

 

22,000

 

22,000

 

OTHER LONG-TERM DEBT

 

129

 

222

 

LONG TERM DEPOSITS

 

61

 

63

 

Total liabilities

 

296,077

 

292,449

 

COMMITMENTS AND CONTINGENCIES (Note 8)

 

 

 

 

 

REDEEMABLE MEMBERS’ EQUITY

 

61,800

 

61,800

 

MEMBERS’ (DEFICIT)/EQUITY

 

(1,581)

 

842

 

Total liabilities and members’ equity

 

$     356,296

 

$    355,091

 

 

 

 

 

 

 

___________

*Condensed from audited financial statements.

 

See notes to the unaudited condensed financial statements.

 

 

- 1 -


 

 

COLONY RESORTS LVH ACQUISITIONS, LLC

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except unit data)

 

 

 

For the three months ended March 31, 2011

 

For the three months ended March 31, 2010

 

Revenues:

 

 

 

 

 

 

Casino

 

$          14,801

 

$       19,638

 

 

Rooms

 

23,520

 

20,796

 

 

Food and beverage

 

17,091

 

16,053

 

 

Other revenue

 

2,376

 

 3,524

 

 

Total revenue

 

57,788

 

60,011

 

 

Less: promotional allowances

 

(5,786)

 

 (6,057)

 

 

Net revenues

 

52,002

 

 53,954

 

 

Expenses:

 

 

 

 

 

 

Casino

 

13,233

 

15,031

 

 

Rooms

 

7,636

 

7,264

 

 

Food and beverage

 

11,974

 

10,951

 

 

Other expense

 

1,015

 

1,917

 

 

General and administrative

 

12,961

 

12,848

 

 

Depreciation and amortization

 

4,916

 

 4,919

 

 

Total expense

 

51,735

 

 52,930

 

 

Operating income

 

267

 

1,024

 

 

Interest expense

 

3,584

 

 3,085

 

 

Net loss

 

$         (3,317)

 

 $      (2,061)

 

 

 

 

 

 

 

 

 

Net loss allocation

 

 

 

 

 

 

Allocable to Class A

 

-

 

                  -

 

 

Allocable to Class B

 

$         (3,317)

 

$       (2,061)

 

 

Basic weighted average Class A membership units outstanding

 

1.50

 

1.50

 

 

Basic weighted average Class B membership units outstanding

 

1,500,000.00

 

1,500,000.00

 

 

Diluted weighted average membership units outstanding

 

1,500,001.50

 

1,500,001.50

 

 

Net loss per Class A membership unit-basic

 

$          (2.21)

 

$         (1.37)

 

 

Net loss per Class B membership unit-basic

 

$          (2.21)

 

$         (1.37)

 

 

Per membership unit-diluted

 

$          (2.21)

 

$         (1.37)

 

 

 

See notes to the unaudited condensed financial statements.

 

 

- 2 -


 

 

COLONY RESORTS LVH ACQUISITIONS, LLC

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

For the three months ended March 31, 2011

 

For the three months ended March 31, 2010

 

 CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 Net loss

 

$         (3,317)

 

$      (2,061)

 

 Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:

 

 

 

 

 

 Depreciation and amortization

 

4,916

 

4,919

 

 Valuation change in interest rate cap agreement

 

40

 

-

 

 Amortization of deferred financing costs

 

285

 

214

 

 Provision for doubtful accounts

 

281

 

(191)

 

 Stock based compensation

 

27

 

53

 

 Changes in operating assets and liabilities:

 

 

 

 

 

 Accounts receivable

 

(1,269)

 

(1,572)

 

 Inventories

 

(17)

 

(82)

 

 Prepaid expenses and other current assets

 

1,223

 

523

 

 Other assets

 

(2)

 

(106)

 

 Accounts payable

 

(824)

 

(2,478)

 

 Accrued expenses

 

3,517

 

(1,105)

 

 Deferred interest

 

3,249

 

-

 

 Due from/to affiliates

 

(1,531)

 

(1,373)

 

 Long term deposits

 

(2)

 

(10)

 

 Net cash provided by/(used in) operating activities

 

6,576

 

(3,269)

 

 CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 Additions to property and equipment

 

(1,387)

 

(696)

 

 Increase in restricted cash

 

(8,014)

 

(1,737)

 

 Net cash used in investing activities

 

(9,401)

 

(2,433)

 

 CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 Repayment of other long-term debt

 

(56)

 

-

 

 Decrease in cash and equivalents

 

(2,881)

 

(5,702)

 

 Cash and equivalents at beginning of year

 

10,474

 

13,901

 

 Cash and equivalents at end of period

 

$         7,593

 

$         8,199

 

 

 

 

 

 

 

 Supplemental Cash Flow Disclosure:

 

 

 

 

 

 Cash paid for interest

 

$                4

 

$         2,907

 

 Acquisition of gaming assets with seller financing

 

$            145

 

$                -

 

 Non Cash Transaction:

 

 

 

 

 

 Reduction of base jackpot liability

 

$            867

 

$                -

 

 

 

 

 

 

 

See notes to the unaudited condensed financial statements.

 

 

 

 

 

- 3 -


 
 

COLONY RESORTS LVH ACQUISITIONS, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

 

1.  ORGANIZATION AND BASIS OF PRESENTATION

Colony Resorts LVH Acquisitions, LLC, a Nevada limited liability company (the “Company”), was formed under the laws of the State of Nevada on December 18, 2003.  The Company owns and operates the Las Vegas Hilton, a casino resort located in Las Vegas, Nevada (the “Hotel”).  The Company licenses from HLT Existing Franchise Holding LLC (“Hilton”) the right to use the name “Hilton” and to participate in Hilton’s reservation system and Hilton’s HHonors Programs™.

The Company’s members consist of  (1) Colony Resorts LVH Holdings, LLC (“Holdings”), which is a wholly owned subsidiary of Colony Investors VI, L.P. (“Colony VI”), a discrete investment fund managed by an affiliate of Colony Capital LLC, (2) Colony Resorts LVH Co-Investment Partners, L.P. (“Co-Investment Partners”), (3) Colony Resorts LVH Coinvestment Voteco, LLC (“Coinvestment Voteco”) and (4) Colony Resorts LVH Voteco, LLC (“Voteco”), each of which purchased Class A or Class B Membership Units on June 18, 2004 in connection with the equity financing described in Note 5, (5) WH/LVH Managers Voteco, LLC (“Whitehall Voteco”) which acquired certain Class A Membership Units from Co-Investment Voteco on July 19, 2006 and (6) Nicholas L. Ribis (“Mr. Ribis”) who acquired certain Class A and Class B Membership Units from Voteco and Holdings, respectively, on November 21, 2006.

Prior to June 18, 2004, the Company had conducted no business other than in connection with the execution of the Purchase and Sale Agreement, relating to the acquisition of substantially all of the assets and certain liabilities of LVH Corporation, a Nevada corporation (“LVH”) (the “Acquisition”). LVH was a wholly owned subsidiary of Caesars Entertainment, Inc., formerly Park Place Entertainment Corporation (“Caesars”) that prior to the Acquisition operated the Hotel. Commencing June 18, 2004, the operations, assets and liabilities of the Hotel are included in the Company’s financial statements.

Interim Financial Statements

The accompanying condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods have been made. The results for the three-months ended March 31, 2011, are not necessarily indicative of results to be expected for the full fiscal year.

These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2010, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Use of Estimates

The preparation of the unaudited condensed financial statements in accordance with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses; including related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates those estimates, including those related to asset impairments, accruals for slot and table game marketing points, compensation and related benefits, revenue recognition, allowance for doubtful accounts, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

- 4 -


 

 

 

COLONY RESORTS LVH ACQUISITIONS, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

Recent Accounting Pronouncements

 

In April, 2010, the FASB released an Accounting Standards Update (ASC Topic 924) addressing the issue of accounting for casino jackpots.  The update addressed the issue of the accounting diversity regarding the accrual of a jackpot liability for base jackpots.  The pronouncement required a liability to be recorded at the time the entity has the obligation to pay the jackpot and applied to both base and progressive jackpots.  The update was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010.  The Company adopted the guidance as of January 1, 2011.  The adoption reduced the Company’s current liabilities by approximately $867,000.  There was an offset to the accumulated deficit account for a like amount.  There was no effect on the results of operations or cash flows. 

2.  GOING CONCERN

The accompanying financial statements are prepared assuming that the Company will continue as a going concern and contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business.

 

As shown in the financial statements, the Company generated net losses of $3.3 million for the quarter ended March 31, 2011 and $2.1 million for the quarter ended March 31, 2010.  The Company had an accumulated deficit at March 31, 2011.

 

The conditions and events described above raise substantial doubt about the Company’s ability to continue as a going concern.  The accompanying financial statements do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amount of classification of liabilities that may result should the Company be unable to continue as a going concern.

 

3. TERM LOAN

 

On May 11, 2006, the Company entered into a Loan Agreement with Goldman Sachs Commercial Mortgage Capital, L.P. (the “Term Loan”).  The Term Loan was for an initial principal amount of $209.2 million and for an initial term of two years.  The Company has drawn an additional $40.8 million against the Term Loan, the maximum funding of the Term Loan.  Covenants under the Term Loan restrict the Company’s future borrowing capacity.  The loan had an original two-year term and three, one-year extensions. 

On August 14, 2009, the Company executed the First Amendment to the Term Loan which extended the loan until June 1, 2011. The Company was required to 1) pay an initial principal payment of $15 million, 2) pay an extension fee of $1.175 million, 3) pay an exit fee of $75,000 for the initial principal payment, 4) purchase an interest rate cap at a cost of $37,500, and 5) pay any out-of-pocket expenses incurred by the lender. On October 30, 2009 the Company was required to pay an additional principal payment of $5.0 million and an exit fee of $25,000 for the additional principal payment. Interest on the loan was based on LIBOR plus 2.9% with a minimum LIBOR rate of 1.5%.  Interest incremented to LIBOR plus 3.5% from July 2009 through May 2010 and increased to LIBOR plus 4.0% from June 2010 through May 2011.

On July 1, 2010 the Company stopped making interest payments on the Term Loan.  The Company accrued interest at a default rate of 5% on the unpaid balance.  The Company also incurred a 5% late charge on the accrued interest.  The accrued amount totaled $1.1 million and was included in interest expense for the three months ended September 30, 2010.  On July 30, 2010 the Company entered into the Second Amendment to the Term Loan which, among other things, forgave the default interest and accrued late charges.  The $1.1 million forgiveness of default interest was later reversed and is reflected on the statements of operations in the quarter ended September 30, 2010.

The Second Amendment to the Term Loan extended the loan until December 31, 2012 and provided the Company with additional loan advances of $22 million.  Concurrently, a Participation Agreement was

 

- 5 -


 

 

 

COLONY RESORTS LVH ACQUISITIONS, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

executed between LVH Finance LLC (Participant), an affiliate of the Company, and Goldman Sachs Mortgage Company wherein the Participant funded the $22 million principal advance to the Company.  No interest or any fees are to accrue or be paid to the Participant by the Company.  The Company received an initial advance on July 30, 2010 of $6.7 million offset by $3.1 million in accrued interest and $0.8 million in closing and loan costs which included an interest rate cap in the amount of $124,000.  The remaining funding of the advance, $15.3 million, was funded on August 20, 2010 and was partially offset by $1.2 million in lender fees. The Second Amendment to the Term Loan provides that interest on the Term Loan will be based on LIBOR plus a 4% spread with a minimum LIBOR rate of 1.5%.  The spread will increase 0.5% beginning in July 2011 and will increment 0.5% every six months to a maximum of 5.5%.  The Company can, if needed, defer making interest payments to a maximum of $10 million. As of March 31, 2011, the Company has elected to defer $8.5 million in interest payments.  The Second Amendment to the Term Loan provides for additional liquidity to be provided by the Company’s members.  Members of the Company are required to make capital contributions, if necessary, up to a maximum of $20 million. 

 

4.  RELATED PARTY TRANSACTIONS

The Company entered into a Services Agreement, Joint Services Agreement and Joint Marketing Agreement with Resorts International Hotel, Inc. (“Resorts”) then an affiliate of the Company (through common control) on June 18, 2004.  On April 25, 2005, the Joint Services Agreement and the Joint Marketing Agreement were amended and restated to add RIH Resorts, LLC, an affiliate of the Company (through common control), as a party to the agreements.  These agreements provide for an initial term of three years with automatic one year renewal periods.  The agreements provide that the Company and Resorts will cooperatively develop and implement joint services and marketing programs.

 

The Company provides and/or receives services from affiliated companies.  The total net value of services received from the affiliated companies was approximately $399,812 for the three months ended March 31, 2011 and $466,413 for the three months ended March 31, 2010.

On July 30th, 2010 the Company entered into an agreement with its lender to provide additional advances which were funded by an affiliate.  The terms of the agreement are reflected in Note 3 – Long-Term Debt.

5.  REDEEMABLE MEMBERS’ INTERESTS

In connection with the closing of the Acquisition, the Company, Voteco, Co-Investment Voteco, Co-Investment Partners and Holdings entered into a Sale Right Agreement, dated June 18, 2004 (the “Sale Right Agreement”).   Pursuant to the terms of Co-Investment Partners’ partnership agreement, at any time after May 23, 2008, Whitehall (a limited partner in Co-Investment Partners and an affiliate of Goldman Sachs Commercial Mortgage Company, the lender under the new Term Loan) has the right to request that Co-Investment Partners purchase all of Whitehall’s interest in Co-Investment Partners at a purchase price determined by Whitehall.  Pursuant to the Sale Right Agreement, upon receiving notice from Whitehall that it has exercised the sale right the Company must, within forty-five days elect to either (i) purchase that portion of the Class B Membership Units which represent Whitehall’s interest in Co-Investment Partners or (ii) sell the Company in its entirety.  If the Company elects not to redeem the Class B Membership Units, it must appoint Goldman Sachs & Co. as its sole and exclusive agent for a period of one year to seek to sell the Company at a price extrapolated from the price Whitehall established for its interest in Co-Investment Partners.  The Sale Right Agreement further provides that on June 18, 2010, if the Company has not been sold pursuant to sale right above or otherwise, the Company shall appoint Goldman Sachs & Co. as its sole agent to seek to sell the Company at the best price obtainable unless Whitehall and Co-Investment Partners both agree not to sell the Company or to postpone such sale.  For purposes of the diluted membership unit calculation, it is assumed that the redemption of Whitehall’s interest or sale of the property will be consummated at fair value.  To date, Whitehall has chosen not to exercise its sale right and Goldman Sachs & Co. has declined to serve as the sole agent to seek the sale of the Company.

 

 

- 6 -


 

 

 

COLONY RESORTS LVH ACQUISITIONS, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

6.  MEMBERSHIP INTERESTS 

In connection with and immediately prior to the Acquisition, the Company issued Class A Membership Units (“Class A Units”) to Co-Investment Voteco and Voteco on a pro rata basis in proportion to the equity contributions made by each entity.  In addition, the Company issued Class B Membership Units (“Class B Units” and together with the Class A Units, the “Membership Units”) to Co-Investment Partners and to Holdings, on a pro rata basis in proportion to the equity contributions made by each entity.  All of these entities are existing affiliates of the Company.  Pursuant to the Company’s Operating Agreement (“Operating Agreement”) and following receipt of all required approvals from the Nevada Gaming Commission, Co-Investment Voteco transferred certain Class A Units to Whitehall Voteco, and as a result, Whitehall Voteco joined the Company as a member and became a party to the Operating Agreement effective July 19, 2006.  Pursuant to an Option Agreement between Mr. Ribis, Voteco and Holdings, Mr. Ribis exercised options to acquire Class A Units and Class B Units directly from Voteco and Holdings, respectively, and as a result, Mr. Ribis joined the Company as a member and became a party to the Operating Agreement effective November 21, 2006. 

As of March 31, 2011, Voteco owns 0.585 Class A Units, Co-Investment Voteco owns 0.30 Class A Units, Whitehall Voteco owns 0.60 Class A Units and Mr. Ribis owns 0.015 Class A Units.  In addition, as of March 31, 2011, Holdings owns 585,000 Class B Units, Co-Investment Partners owns 900,000 Class B Units and Mr. Ribis owns 15,000 Class B Units.  Pursuant to the Operating Agreement, holders of Class A Units are entitled to one vote per unit in all matters to be voted on by voting members of the Company.  Holders of Class B Units are not entitled to vote, except as otherwise expressly required by law.

At the time of the closing of the Acquisition, a Transfer Restriction Agreement was executed by and among Thomas J. Barrack, Jr. (“Mr. Barrack”), Mr. Ribis, Co-Investment Partners and Co-Investment Voteco (the “Co-Investment Transfer Restriction Agreement”) and a Transfer Restriction Agreement was executed by and among Mr. Barrack, Voteco and Holdings (the “Voteco Transfer Restriction Agreement”).  At the time of the transfer of certain Class A Units to Whitehall Voteco from Co-Investment Voteco, a Transfer Restriction Agreement was executed by and among Stuart Rothenberg (“Mr. Rothenberg”), Brahm Cramer (“Mr. Cramer”) and Jonathan Langer (“Mr. Langer”) and together with Mr. Rothenberg and Mr. Cramer, the “Whitehall Voteco Members”, Whitehall Voteco and Co-Investment Partners (the “Whitehall Voteco Transfer Restriction Agreement”).  As of March 9, 2009, Mr. Rothenberg resigned from Whitehall Voteco.  As of March 11, 2009, Mr. Cramer resigned as a manager of Whitehall Voteco.  As of December 31, 2009, Mr Langer resigned as a manager of Whitehall Voteco. 

The Company’s Class A Units issued to Co-Investment Voteco are subject to the Co-Investment Transfer Restriction Agreement, which provides, among other things, that:

·         Co-Investment Partners has the right to acquire Class A Units from Co-Investment Voteco on each occasion that Class B Units held by Co-Investment Partners would be transferred to a proposed purchaser who, in connection with such proposed sale, has obtained all licenses, permits, registrations, authorizations, consents, waivers, orders, findings of suitability or other approvals required to be obtained from, and has made all findings, notices or declarations required to be made with, all gaming authorities under all applicable gaming laws;

·         A specific purchase price, as determined in accordance with the Co-Investment Transfer Restriction Agreement, will be paid to acquire the Class A Units from Coinvestment Voteco; and

·         Co-Investment Voteco will not transfer ownership of Class A Units owned by it except pursuant to such option of Co-Investment Partners.

The Company’s Class A Units issued to Voteco are subject to the Voteco Transfer Restriction Agreement, which provides, among other things, that:

·         Holdings has the right to acquire Class A Units from Voteco on each occasion that Class B Units held by Holdings would be transferred to a proposed purchaser who, in connection with such proposed sale, has obtained all licenses, permits, registrations, authorizations, consents, waivers, orders, findings of suitability or other approvals required to be obtained from, and has made all findings, notices or declarations required to be made with, all gaming authorities under all applicable gaming laws;

 

- 7 -


 

 

 

COLONY RESORTS LVH ACQUISITIONS, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

·         A specific purchase price, as determined in accordance with the Voteco Transfer Restriction Agreement, will be paid to acquire the Class A Units from Voteco; and

·         Voteco will not transfer ownership of Class A Units owned by it except pursuant to such option of Holdings.

The Company’s Class A Units issued to Whitehall Voteco are subject to the Whitehall Voteco Transfer Restriction Agreement, which provides, among other things, that:

·         Co-Investment Partners has the right to acquire Class A Units from Whitehall Voteco on each occasion that Class B Units held by Co-Investment Partners would be transferred to a proposed purchaser who, in connection with such proposed sale, has obtained all licenses, permits, registrations, authorizations, consents, waivers, orders, findings of suitability or other approvals required to be obtained from, and has made all findings, notices or declarations required to be made with, all gaming authorities under all applicable gaming laws;

·         A specific purchase price, as determined in accordance with the Whitehall Voteco Transfer Restriction Agreement, will be paid to acquire the Class A Units from Whitehall Voteco; and

·         Whitehall Voteco will not transfer ownership of Class A Units owned by it except pursuant to such option of Co-Investment Partners.

It is currently anticipated that any future holders of the Company’s Membership Units will become a party to the Operating Agreement.

7.  2004 INCENTIVE PLAN

In connection with the acquisition of the Hotel, the Company’s board and members approved the Company’s 2004 Incentive Plan (the “Plan”).  As of June 18, 2004, the Company had a total of 0.167 Class A Units and 166,667 Class B units reserved for issuance under the Plan.  The Plan was amended by the board on May 16, 2006 in order to (1) comply with Section 409A of the Internal Revenue Code of 1986, as amended from time to time, and (2) eliminate the provision that excludes the value attributable to the Development Parcels (as defined in the Plan).

 

Subsequent to the closing of the acquisition of the Hotel, the Company granted 0.167 options of Class A Units and 166,667 options of Class B Units to certain executives, in accordance with the Plan.  The options have a 10 year life, vest over three years and have an exercise price of $100 per unit in both classes which was equal to, or greater than, the fair market value of the membership units at the date of grant.  As a result of the amendment on May 16, 2006 which eliminated the exclusion of the value of the Development Parcels (as defined in the Plan), the options increased in value.

Effective January 1, 2006, the Company adopted the provisions of  Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123(R)) (ASC Topic 718 and 505) requiring that compensation cost relating to share-based payment transactions be recognized in the financial statements.  The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s estimated requisite service period (generally the vesting period of equity award) on a straight-line basis.  Estimates are revised if key elements of the options change.  The cumulative effect on compensation cost as a result of changes to key elements or forfeiture estimates are recognized in the period of the change.  The amendment on May 16, 2006 triggered a revaluation of the options.  The increase in value was recorded on a straight-line basis over the remaining vesting period of the options. 

Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No.25), and related interpretations.  The Company adopted SFAS No. 123(R) using the modified prospective method and accordingly, financial statement amounts for prior periods presented in the Form 10-K have not been restated to reflect the fair value method of recognizing compensation cost relating to these options.

 

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COLONY RESORTS LVH ACQUISITIONS, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

The fair value of the option awards is estimated on the date of grant using an appraisal of the value of the Company and its membership units.  In September 2009 the number of options available for distribution was increased by the Company’s Board.  During 2009 the board of directors authorized and issued an additional 0.167 Class A Membership Units and an additional 16,667 Class B Membership Units. 

There was approximately $26,601 and $53,202 of compensation cost related to the 16,667 options recognized in general and administrative expenses for the three months ended March 31, 2011 and March 31, 2010, respectively.  The estimated fair value of the options at the date of grant was $19.15 per membership unit and was computed using the Black-Scholes-Merton option pricing model with the following weighted average assumptions: risk free interest rate of 3.66%; no expected dividend yields; and expected vesting periods of 36 months.  The following table sets forth the assumptions used to determine compensation cost for these options consistent with the requirements of ASC Topic 718.

Weighted-average assumptions:

Model

 

Black-Scholes

Number of options

 

16,667 options

Membership unit price

 

$100

Exercise unit price

 

$100

Dividend Yield

 

N/A

Volatility

 

5%

Risk-Free rate

 

3.66%

Valuation Date

 

September 29, 2009

Expiration Date

 

September 29, 2012

 

8.  COMMITMENTS AND CONTINGENCIES

 
Letters of Credit

 

Beginning in 2005 and annually thereafter, the Company was required to deliver irrevocable standby letters of credit in connection with its workers’ compensation insurance policies issued by its insurance carriers. In March 2009, the Company changed credit card processors, which required the Company to deliver an irrevocable standby letter of credit to the new processing bank. The letters of credit are secured by certificates of deposits in the same notional amounts as the corresponding letters of credit. The initial expiration dates of these letters of credit are for one year and are automatically extended for 90 days from their expiration date unless the issuing bank notifies the Company sixty days prior to such expiration dates that the letters of credit will not be renewed. As of March 31, 2011 and December 31, 2010, the certificates of deposit which secure the letters of credit totaled $3,325,000 and are included in restricted cash. As of March 31, 2011 and December 31, 2010, there were no amounts outstanding on the letters of credit.

 
Litigation

In the normal course of business, the Company is subject to various litigation, claims and assessments.  The Company is not currently a party to any material litigation and, it is not aware of any material action, suit or proceeding against it that has been threatened by any person.

Sales and Use Tax on Complimentary Meals

In March 2008, the Nevada Supreme Court ruled, in the matter captioned Sparks Nugget, Inc. vs. The State of Nevada Ex Rel. Department of Taxation, that food and non-alcoholic beverages purchased for use in providing complimentary meals to customers and to employees was exempt from sales and use tax. In July 2008, the Court denied the State’s motion for rehearing. For the three year period ended February 2008, the Company paid use tax on these items and has filed for refunds for the periods March 2005 through February 2008.  The amount subject to these refunds, excluding interest, is approximately $1.1 million. As of March 31, 2011, the Company had not recorded a receivable related to this matter.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements relating to future events and future performance of the Company within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding the Company’s expectations, beliefs, intentions or future strategies that are signified by the words “expects,” “anticipates,” “intends,” “believes” or similar language. Actual results could differ materially from those anticipated in such forward-looking statements.

 

All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any forward-looking statements. The Company cautions investors that its business and financial performance are subject to substantial risks and uncertainties.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial statements, the related notes to financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and the unaudited interim condensed financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

Overview

 

The following discussion of the Company’s results of operations compares the three months ended March 31, 2011 to the three months ended March 31, 2010.

 

Casino revenue is derived primarily from patrons wagering on slot machines, table games and other gaming activities. Table games generally include Blackjack or Twenty One, Craps, Baccarat and Roulette. Other gaming activities include the Race and Sports Book. Casino revenue is defined as the win from gaming activities, computed as the difference between gaming wins and losses, not the total amounts wagered. “Table game volume,” “table game drop” (terms which are used interchangeably), and “slot handle” are casino industry specific terms that are used to identify the amount wagered by patrons for a casino table game or slot machine, respectively. “Table game hold” and “slot hold” represent the percentage of the total amount wagered by patrons that the casino has won. Hold is derived by dividing the amount won by the casino by the amount wagered by patrons. Casino revenue is recognized at the end of each gaming day.

 

Casino revenues vary from time to time due to general economic conditions, popularity of entertainment offerings, table game hold, slot hold, and occupancy percentages in the hotels. Casino revenues also vary depending upon the amount of gaming activity as well as variations in the odds for different games of chance. The Hotel also uses technology, such as cashless wagering on slot machines, to increase revenues and/or decrease expenses. Casino revenues, room revenues, food and beverage revenues and other revenues vary due to general economic conditions and competition.

 

Room revenue is derived from rooms and suites rented to guests. “Average daily rate” is an industry specific term used to define the average amount of revenue per rented room per day. “Occupancy percentage” defines the total percentage of rooms occupied, and is computed by dividing the number of rooms occupied by the total number of rooms available. Room revenue is recognized at the time the room is provided to the guest.

 

Food and beverage revenues are derived from food and beverage sales in the food outlets of the Hotel, including restaurants, room service and banquets. Food and beverage revenue is recognized at the time the food and/or beverage is provided to the guest.

 

Other revenue includes retail sales, entertainment sales, telephone and other miscellaneous income at the Hotel. Such revenue is recognized at the time the goods or services are provided to the guest.

 

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Summary Financial Information

 

The Hotel offers hotel, gaming, dining, entertainment, retail and spa amenities at one location in Las Vegas and under one operating segment.  Approximately 26% of the Hotel’s gross revenue is derived from gaming, while 41% is derived from room revenue.  Room revenue is significant because of the Hotel’s location next to the Las Vegas Convention Center and its related emphasis on the group, convention, and trade show business.

 

The following table summarizes the Hotel’s results of operations (in thousands):

 

 

 

Three Months Ended March 31,

 

 

2011

 

2010

Net revenues

 

$      52,002

 

$   53,954

Operating income

 

$           267

 

$     1,024

Net loss

 

$     (3,317)

 

$  (2,061)

 

Comparison of the Three Months Ended March 31, 2011 with the Three Months Ended March 31, 2010

 

     Revenue Information

 

The breakdown of the Property’s net revenue is as follows (dollars in thousands):

 

 

 

Three Months Ended March 31,

 

 

2011

 

2010

 

Percent
Change

Casino

 

$       14,801

 

$    19,638

 

(24.6)%

Rooms

 

23,520

 

20,796

 

13.1%

Food and beverage

 

17,091

 

16,053

 

6.5%

Other revenue

 

2,376

 

3,524

 

(32.6%)

 

 

57,788

 

60,011

 

(3.7)%

Less- promotional allowances

 

(5,786)

 

(6,057)

 

(4.5)%

 

 

 

 

 

 

 

Total net revenues

 

$       52,002

 

$    53,954

 

(3.6)%

 

 Casino

Casino revenue decreased $4.8 million, or 24.6%, to $14.8 million for the quarter ended March 31, 2011, compared to $19.6 million for the quarter ended March 31, 2010. The decrease in casino revenue was primarily due to an unfavorable hold variance in table games, and a decrease in slot drop and race and sports book wagers for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010.  The downturn in the economy has reduced the amount wagered by slot guests during the first quarter ended March 31, 2011 compared to the first quarter ended March 31, 2010.  The race and sports book volume was lower due to certain race and sports book guests who wagered significant amounts in the quarter ended March 31, 2010 did not wager comparable amounts during the quarter ended March 31, 2011. 

The Casino operating department margin was 10.6% for the quarter ended March 31, 2011 compared to an operating department margin of 23.5% for the quarter ended March 31, 2010. The decrease in operating efficiency was primarily a result of relatively fixed labor and benefits compared with lower revenues for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010.

Rooms

For the quarter ended March 31, 2011, room revenue was $23.5 million, an increase of $2.7 million from the quarter ended March 31, 2010. The increase is primarily attributable to a favorable increase in average daily rate (ADR) for the quarter ended March 31, 2011 compared to ADR for the quarter ended March 31, 2010. 

The Room operating department margin increased to 67.5% for the three months ended March 31, 2011 compared to 65.1% for the three months ended March 31, 2010.  The increase in operating margin was primarily a result of relatively fixed labor and benefits compared with higher revenues.

 

 

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Food and Beverage

Food and beverage revenue for the quarter ended March 31, 2011 was $17.1 million which was relatively unchanged compared to $16.1 million for the quarter ended March 31, 2010. The slight increase in revenue was primarily due to a higher convention-related business during the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010.

Food and beverage operating margins decreased from 31.8% during the quarter ended March 31, 2010 to 29.9% during the quarter ended March 31, 2011.  Reduced margins are the result of higher food and beverage cost of sales for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010. 

Other

Other revenue includes retail sales, entertainment sales and miscellaneous income. Other revenue was approximately $2.4 million for the quarter ended March 31, 2011 compared to $3.5 million for the quarter ended March 31, 2010.  The decrease was primarily due to lower entertainment revenue and convention room block performance revenue for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010.  Entertainment revenue is lower due to a shift in our business model.  The Company currently contracts more four-wall acts as opposed to contracting directly with the headliners. 

 

Operating Cost and Expense Information

 

The breakdown of the Property’s operating costs and expenses is as follows (dollars in thousands):

 

 

 

 

Three Months Ended March 31,

 

 

2011

 

2010

 

Percent
Change

Casino

 

$    13,233

 

$       15,031

 

(12.0) %

Rooms

 

7,636

 

7,264

 

5.1 %

Food and beverage

 

11,974

 

10,951

 

9.3 %

Other expense

 

1,015

 

1,917

 

(47.1) %

General and administrative

 

12,961

 

12,848

 

0.9 %

Depreciation and amortization

 

4,916

 

4,919

 

(0.1) %

 

 

 

 

 

 

 

Total

 

$     51,735

 

$      52,930

 

(2.3) %

 

Operating Expenses

Operating expenses decreased $1.2 million for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010.  The decrease is primarily due to reduced casino and general marketing expenses and also lower gaming taxes due to lower gaming revenue quarter over quarter.

Depreciation and amortization was relatively flat for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010.  

Interest Expense

For the quarter ended March 31, 2011, interest expense totaled $3.6 million. For the quarter ended March 31, 2010, interest expense totaled $3.1 million.   The increase was due to a higher interest rate spread for the months in the quarter ended March 31, 2011 compared to the months in the quarter ended March 31, 2010.

Liquidity and Capital Resources

Cash flows of the Company for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 consisted of the following:

Cash Flow - Operating Activities

Cash flow provided by operations was $6.6 million for the three months ended March 31, 2011 compared to cash flow used in operations of $3.3 million for the three months ended March 31, 2010 an increase of $9.8 million.  The increase in operating cash flow was primarily from the deferral of interest and the increase in accrued expenses for the first quarter of 2011 compared to the first quarter of 2010.

 

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As of March 31, 2011, the Company had cash and equivalents of $7.6 million of which $3.4 million was cash in the casino to fund daily casino operations. For the remainder of 2011, the Company anticipates that cash requirements will exceed cash expected to be generated from operations.  The Company is evaluating a range of financial and strategic alternatives to address its cash requirements.

 

Cash Flows - Investing Activities

For the quarter ended March 31, 2011, the Company expended approximately $1.4 million on capital projects for the three months and expects to spend nominal amounts on capital expenditure projects for the remainder of 2011.  Any additional 2011 capital expenditure projects will be financed from existing cash balances and 2011 operating cash flow. 

The Company also restricted $8.0 million of cash.  Restrictions on cash balances are due to term loan requirements, gaming regulations and restrictions imposed by certain vendors.

Cash Flows - Financing Activities

The Company expended $56 thousand during the three months ended March 31, 2011 to reduce long-term debt other than the term loan.  The Term Loan has a balance of $252 million and no additional funding is available. 

Interest on the Term Loan accrues at a rate of one month LIBOR plus 4.0%.  The LIBOR rate has a minimum of 1.5%.  The Term Loan provides for no amortization during the term. The Term Loan is collateralized by a first priority deed of trust on the Hotel.

Pursuant to the terms of the Term Loan, the Company purchased an interest rate cap with LIBOR strike rate of 5.75% for the first two years of the Term Loan and an interest rate cap with LIBOR strike rate of 6.25% for any extension periods.  The value of the interest rate cap as of March 31, 2011 was $15,681.

The Term Loan had an original expiration date of May 10, 2008.  Upon the satisfaction of certain conditions, the Term Loan provided for three, one year extensions.  The Company exercised the first extension option in 2008.  On August 14, 2009 the Company and Goldman Sachs Mortgage Company (the Lender) executed the First Amendment to Loan Agreement and Omnibus Loan Modification Agreement.  The agreement extended the Term Loan due date for two years.  Also as part of the loan modification, the Company was required to obtain a new extension rate cap agreement, pay an extension fee and out-of-pocket expenses incurred by the lender and meet certain debt yield benchmarks.  The Company paid $20 million in principal during 2009 as part of the negotiated extension. 

The Company entered into a Second Amendment to the Loan Agreement dated July 30, 2010.  The modified loan increased the principal amount of the loan by $22 million subject to terms and conditions of the Loan Agreement.  Concurrent to the funding, a participation agreement was executed with LVH Finance, LLC (the “Participant”) whereby the Participant funded the $22 million principal.  The Second Amendment extended the due date of the term loan to December 31, 2012 and calls for interest to be paid at LIBOR plus 4.0% through June 2011.  The LIBOR spread increases at 0.5% increments at six month intervals.  The LIBOR rate has a floor of 1.5%.  No interest is to accrue on the $22 million additional funding.  The loan now has a due date of December, 2012.

Other Factors Affecting Liquidity

 

Covenants under the term loan restrict the Company’s future borrowing capacity. However, subject to certain conditions, the term loan does permit the Company to incur additional debt to fund working capital. If circumstances warrant, the Company may seek to obtain a working capital line of credit.

The Company's independent registered public accounting firm included an explanatory paragraph that expresses substantial doubt as to the Company's ability to continue as a going concern in their audit reports contained in this Annual Report on Form 10-K for the year ended December 31, 2010.  The Company cannot provide any assurance that it will in fact operate its business profitably, maintain existing financings, or obtain sufficient financing in the future to sustain its business in the event the Company is not successful in its efforts to generate sufficient revenue and operating cash flow.

The Company’s ability to continue as a going concern will be determined by its ability to obtain additional funding or restructure or negotiate waivers on the Company’s existing indebtedness and to generate sufficient revenue to cover operating expenses.  The accompanying condensed financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should the Company be unable to continue in existence.

 

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The Company is evaluating a range of financial and strategic alternatives in addressing trends in the Company’s operating results and financial position.  These alternatives include refinancing, restructuring the Company’s financial obligations or the infusion of capital by ownership.

Contractual Obligation and Other Commitments

The following table summarizes the Company’s contractual obligations and commitments (amount in thousands):

 

 

 

Payments Due by Period

 

 

 

 Less than 1 Year

 

 1-3 Years

 

 3-5 Years

 

 More than 5 Years

 

 Total

 

 

 (In Thousands)

 Long-Term Debt Obligation

 

 

 

 

 

 

 

 

 

      Term Loan (a)

 

 $            -

 

 $    252,000

 

  $        -

 

  $        -

 

 $  252,000

      Variable interest payments (b)

 

         13,513

 

        11,500

 

          -

 

          -

 

        25,013

      Slot machine purchase (c)

 

792

 

129

 

          -

 

          -

 

        921

 Contractual Obligations

 

 

 

 

 

 

 

 

 

 

       Employment agreements (d)

 

           2,115

 

           742

 

         -

 

          -

 

          2,857

       Licensing agreement (e)

 

               -

 

              -

 

          -

 

          -

 

              -

       Operating leases(f)

 

              324

 

              278

 

          -

 

          -

 

             602

 

 

 

 

 

 

 

 

 

 

 

 

 

 $      16,744

 

 $    264,649

 

  $       -

 

  $        -

 

 $  281,393


(a)

The Term Loan, with an initial funding of $209,200,000 originated May 11, 2006.  The Company has drawn an additional $42.8 million under the Term Loan and had an outstanding balance of $252,000,000.  The loan had an original two-year term and three, one-year extensions.  The Term Loan was extended twice with the Lender requiring the Company to make $20 million in principal payments, pay certain fees, purchase an interest rate cap and pay out-of-pocket expenses of the Lender.  The Company defaulted on its June 1, 2010 interest payment.  The default was cured on July 30, 2010 when the Company entered into a loan modification agreement.  The agreement had the Lender advance the Company $22 million and provided for a due date of December 31, 2012.   Interest accrues at LIBOR plus 4.0% with a LIBOR floor of 1.5%.  The spread increases 0.5% every six months beginning July 2011 up to a maximum of 5.5%.  A Participation Agreement was executed simultaneously regarding the $22 million additional funding.  The Participation Agreement which is between LVH Finance LLC, an affiliate, and the Lender does not allow for interest or fees to be accrued on the $22 million principal.

(b)

Based on the LIBOR floor of 1.5% plus 4.0% for the first three months of year one, LIBOR floor of 1.5% plus 4.5% for the second nine months of year one, and LIBOR floor of 1.5% plus 5.0% for the first three months of year two and LIBOR floor of 1.5% plus 5.5% for the last six months of year two.

(c)

Principal due based on variable monthly payments dependent on specified percentages of drop or win on the related slot machines. 

(d)

The Company is party to employment agreements with 13 of its senior executives, with terms of one to three years.

(e)

The Company signed a new agreement with Hilton commencing January 1, 2009.  The agreement expires December 31, 2015 and allows the Hotel to use the Hilton name, advertise on the Hilton Hotels website, and utilize the Hilton reservation system and other Hilton amenities.  In exchange, the Hotel is required to make certain capital improvements and will pay varying percentage fees of Food and Beverage Revenue (as defined in the agreement) and Hotel Revenue (as defined in the agreement) and also is obligated to participate in the “HHonors Program TM” reward program.  For the year ending December 31, 2011 and subsequent years the Company will expense 1% of defined Food and Beverage revenue and 5.25% of defined Hotel Revenue in accordance with this agreement. For the three months ended March 31, 2011, $1.5 million was expensed in accordance with this agreement.

(f)

The Company is party to operating leases for office and telephone equipment with original terms of three to five years.

 

 

Off-Balance Sheet Arrangements

The Company is not currently subject to any off-balance sheet arrangements which it believes will have a material adverse impact on its financial condition.

 

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Debt Instruments

The following table provides information about the Company’s long-term debt at March 31, 2011 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Maturity Date

 

Face Amount

 

Carrying Value

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Term Loan

 

December, 2012

 

$      252,000

 

$     252,000

 

$    214,200

 

The Term Loan originated May 11, 2006 and had an initial principal amount of $209.2 million with interest accruing at a rate of one month LIBOR plus 2.9%.  The Company extended the loan effective August 2009.  As part of the extension agreement, the Company was required to make principal payments totaling $20 million, pay fees totaling $1.5 million, purchase an interest rate cap and pay out-of-pocket expenses to the Lender. 

On July 30, 2010, the Company executed a Loan Modification Agreement which extended the due date of the term loan to December 31, 2012, provided for $22 million in additional borrowings and cured default interest that accrued from June 1, 2010.  See Note 3 for additional requirements of the Loan Modification Agreement. 

Litigation Contingencies and Available Resources

In the normal course of business, the Company is subject to various litigation, claims and assessments. The Company is not currently a party to any material litigation and it is not aware of any material action, suit or proceedings against it that has been threatened by any person.

Critical Accounting Policies

Significant Accounting Policies and Estimates

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States. Certain of its accounting policies, including the determination of slot club promotion liability, the estimated useful lives assigned to its assets, asset impairment, insurance reserves, and allowance for doubtful accounts require that it apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. The Company’s judgments are based on its historical experience, terms of existing contracts, observance of trends in the gaming industry and information available from other outside sources. There can be no assurance that actual results will not differ from the Company’s estimates. To provide an understanding of the methodology the Company applies, its significant accounting policies and basis of presentation are discussed below, as well as where appropriate in this discussion and analysis and in the notes to the Company’s financial statements.

Player Reward Promotions

The Company’s player reward program allows customers to redeem points earned from their gaming activity for cash and complimentary food, beverage, rooms, entertainment and merchandise.  At the time redeemed, the retail value of complimentaries is recorded as revenue with a corresponding offsetting amount included in promotional allowances.  The cost associated with complimentary food, beverage, rooms, entertainment and merchandise redeemed is recorded in casino costs and expenses.  The Company also records a liability for the estimated cost of the outstanding points that it believes will ultimately be redeemed.  

Self-Insurance Reserve

The Company is self insured up to certain stop loss amounts for workers’ compensation and guest liability claims. In estimating this accrual, the Company considers historical loss experience and makes judgments about the expected levels of costs per claim. The Company believes its estimates of future liability are reasonable based upon its methodology; however, changes in accident frequency and severity and other factors could materially affect the estimate for this liability.

Derivative Investments and Hedging Activities

The Company seeks to manage its market risk, including interest rate risk associated with variable rate borrowings, through balancing fixed-rate and variable-rate borrowings with the use of derivative financial instruments. The Company accounts for derivative financial instruments in accordance with Accounting Standards Codification Topic 815. The fair value of derivative financial instruments are recognized as assets or liabilities at each balance sheet date, with changes in fair value affecting net income (loss) or comprehensive income (loss) as applicable. The Company’s current interest rate swaps do not qualify for hedge accounting.  Accordingly, changes in the fair value of the interest rate swaps are presented as an increase (decrease) in fair value of swaps in the accompanying Statements of Operations.

 

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Allowance for Doubtful Accounting Reserves

The Company’s receivables balances relate primarily to its hotel and casino operations. The Company reserves an estimated amount for receivables that may not be collected. The Company estimates the allowance for doubtful accounts by applying standard reserve percentages to aged account balances under a specific dollar amount and specifically analyzing the collectability of each account with a balance over the specified dollar amount, based on the age of the account, the customer’s financial condition, collection history and any other known information.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, while costs of normal repairs and maintenance are charged to expense as incurred.

 

Recent Accounting Pronouncements

 

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements” an amendment to ASC Topic 820, “Fair Value Measurements and Disclosures.”  This amendment requires an entity to: (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and settlements.  ASU No. 2010-06 is effective for the Company for interim and annual reporting beginning after December 15, 2009, with one new disclosure effective after December 15, 2010. The Company has adopted this ASU in full with respect to the interim period ended March 31, 2010, and the adoption did not have a significant impact on the Company’s financial positions, results of operations, cash flows or disclosure.

 

In April, 2010, the FASB released an Accounting Standards Update (ASC Topic 924) addressing the issue of accounting for casino jackpots.  The update addressed the issue of the accounting diversity regarding the accrual of a jackpot liability for base jackpots.  The pronouncement required a liability to be recorded at the time the entity has the obligation to pay the jackpot and applied to both base and progressive jackpots.  The update was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010.  The Company adopted the guidance as of January 1, 2011.  The adoption reduced the Company’s current liabilities by approximately $867,000.  There was an offset to the accumulated deficit account for a like amount.  There was no effect on the results of operations, cash flows, or disclosures. 

A variety of proposed or otherwise potential accounting standards are currently under review and study by standard-setting organizations and certain regulatory agencies.  Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, that the implementation of any such proposed or revised standards would have on our unaudited Condensed Financial Statements.

 

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk of loss from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices.  The Company’s primary exposure to market risk is interest rate risk associated with its variable rate long-term debt.   If LIBOR were to increase 100 basis points and there were no additional borrowings, interest expense would increase approximately $2.3 million annually.  The Company attempts to manage its interest rate risk by entering into interest rate cap agreements.  The Company does not hold or issue financial instruments for trading purposes and does not enter into derivative transactions that would be considered speculative positions.  The derivative financial instruments consist exclusively of interest rate cap agreements.  Differentials resulting from these agreements are recorded on an accrual basis as an adjustment to interest expenses.

To manage counterparty credit risk in interest rate cap agreements, the Company only enters into agreements with highly rated institutions that can be expected to perform under terms of such agreements.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Our management, including our Executive Vice President of Finance and our Chief Executive Officer and General Manager, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13(a) – 15(e) and 15(d) – 15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on this evaluation, our principal executive and principal financial officers concluded our disclosure controls and procedures are effective in alerting them in a timely manner to material information required to be included in our SEC reports. There has been no change in our internal control over financial  reporting (as defined in Rules 13(a) – 15(e) and 15(d) – 15(e) under the Securities Exchange Act of 1934, as amended) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial  reporting.

 

 

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PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

 

EXHIBIT NUMBER

 

2.1

Purchase and Sale Agreement, dated as of December 24, 2003, by and among Colony Resorts LVH Acquisitions, LLC, LVH Corporation and Caesars Entertainment Corporation*

3.1

Articles of Organization, dated as of December 18, 2003, for Colony Resorts LVH Acquisitions, LLC*

3.2

Operating Agreement, dated as of December 22, 2003, for Colony Resorts LVH Acquisitions, LLC*

3.3

Amended and Restated Operating Agreement, dated June 18, 2004, for Colony Resorts LVH Acquisitions, LLC+

3.4

Amendment No. 1 to the Amended and Restated Operating Agreement, dated July 23, 2004, for Colony Resorts LVH Acquisitions, LLC****

3.5

Amendment to Articles of Organization, dated June 25, 2004, for Colony Resorts LVH Acquisitions, LLC******

10.1

Deposit Escrow Agreement, dated as of December 24, 2003, by and among LVH Corporation, Colony Resorts LVH Acquisitions, LLC and Nevada Title Company*

10.2

Coinvestment Transfer Restriction Agreement, dated June 18, 2004, by and among Mr. Barrack, Mr. Ribis, Co-Investment Partners and Coinvestment Voteco+

10.3

Transfer Restriction Agreement, dated June 18, 2004, by and among Mr. Barrack, Holdings and Voteco+

10.4

Employment Agreement, dated as of March 9, 2004, by and between Colony Resorts LVH Acquisitions, LLC and Rodolfo Prieto*

10.5

Employment Agreement, dated as of March 9, 2004, by and between Colony Resorts LVH Acquisitions, LLC and Robert Schaffhauser*

10.6

Employment Agreement, dated as of March 9, 2004, by and between Colony Resorts LVH Acquisitions, LLC and Kenneth Ciancimino*

10.7

Letter Agreement, dated as of March 10, 2004, by and between Colony Resorts LVH Acquisitions, LLC and Rodolfo Prieto*

10.8

Letter Agreement, dated as of March 10, 2004, by and between Colony Resorts LVH Acquisitions, LLC and Robert Schaffhauser*

10.9

Letter Agreement, dated as of March 10, 2004, by and between Colony Resorts LVH Acquisitions, LLC and Kenneth Ciancimino*

10.10

Employment Agreement, dated as of May 17, 2004, by and between Colony Resorts LVH Acquisitions, LLC and Gonzalo De Varona.***

10.11

Employment Agreement, dated as of April 12, 2004, by and between Colony Resorts LVH Acquisitions, LLC and Robert Stewart.***

10.12

Vice Chairman Agreement, dated June 18, 2004, between Colony Resorts LVH Acquisitions, LLC and Nicholas L. Ribis.****

10.13

Colony Resorts LVH Acquisitions, LLC 2004 Incentive Plan****

10.14

Loan Agreement, dated June 18, 2004, by and between Colony Resorts LVH Acquisition, LLC and Archon Financial, L.P.+

10.15

Sale Right Agreement, dated June 18, 2004, by and among Colony Resorts LVH Acquisitions, LLC, Colony Resorts LVH Holdings, LLC, Colony Resorts LVH Coinvestment Voteco, LLC, Colony Resorts LVH Voteco, LLC and Colony Resorts LVH Co-Investment Partners, L.P.****

10.16

Services Agreement, dated June 18, 2004, between Colony Resorts LVH Acquisitions, LLC and Resorts International Hotel and Casino, Inc.****

10.17

Joint Marketing Agreement, by and between Colony Resorts LVH Acquisitions, LLC and Resorts International Hotel, Inc.****

10.18

Joint Services Agreement, by and between Colony Resorts LVH Acquisitions, LLC and Resorts International Hotel, Inc.****

10.19

Employment Agreement, dated as of May 11, 2003, between LVH Corporation and Thomas Page.****

10.20

Addendum to Employment Agreement, dated as of June 22, 2004, by and between Colony Resorts LVH Acquisitions, LLC and Thomas Page.****

10.21

Addendum to Employment Agreement, dated as of April 28, 2006, by and between Colony Resorts LVH Acquisitions, LLC and Robert Schaffhauser ++

10.22

Addendum to Employment Agreement, dated as of April 28, 2006, by and between Colony Resorts LVH Acquisitions, LLC and Ken Ciancimino ++

10.23

Loan Agreement dated as of May 11, 2006, between Colony Resorts LVH Acquisitions, LLC and Goldman Sachs Commercial Mortgage Capital, L.P. +++

10.24

First Amendment to the Colony Resorts LVH Acquisitions, LLC 2004 Incentive Plan ++++

10.25

Amended and Restated Joint Services Agreement, dated as of April 26, 2005 by and between Colony Resorts LVH Acquisitions, LLC and Resorts International Hotel, Inc. +++++

10.26

Amended and Restated Joint Marketing Agreement, dated as of April 26, 2006 by and between Colony Resorts LVH Acquisitions, LLC and Resorts International Hotel, Inc. +++++

10.27

Employment Agreement dated as of October 15, 2007 by and between Colony Resorts LVH  Acquisition, LLC and Joseph DeRosa ++++++

10.28

Amended and Restated License Agreement dated as of January 1, 2009 by and between Colony Resorts LVH Acquisitions, LLC and HLT Existing Franchise Holding, LLC+++++++

10.29

Second Addendum to Employment Agreement dated as of December 8, 2008 by and between Colony Resorts LVH Acquisitions, LLC and Robert E. Schaffhauser++++++++

10.30

Second Addendum to Employment Agreement dated as of December 8, 2008 by and between Colony Resorts LVH Acquisitions, LLC and Kenneth M. Ciancimino++++++++

10.31

First Amendment to Loan Agreement and Omnibus Loan Modification Agreement between Colony Resorts LVH Acquisitions, LLC. And Goldman Sachs Mortgage Company (incorporated by reference to 8-K filed August 19, 2009)

10.32

Employment Agreement dated as of September 8, 2009 by and between Colony Resorts LVH Acquisitions, LLC and David Monahan (incorporated by reference to 8-K filed September 14, 2009)

10.33

Second Amendment to Loan Agreement and Omnibus Loan Modification Agreement, Dated July 30, 2010 by and between Colony Resorts LVH Acquisitions, LLC and Goldman Sachs Mortgage Company ###

10.34

First Amendment to Second Amended and Restated Joint Services Agreement dated as of May 14, 2010 by and among Resorts International Hotel, Inc., Colony Resorts LVH Acquisitions, LLC and Resorts International Holdings, LLC.####

14.1

Code of Ethics*******

31.1

Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

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METHOD OF FILING

*

Incorporated by reference to the Registrant’s Form 10, filed March 15, 2004 (File Number 0-50635).

**

Incorporated by reference to the Registrant’s Amendment No. 1 to Form 10, filed April 26, 2004 (File Number 0-50635).

***

Incorporated by reference to the Registrant’s Post-Effective Amendment No. 1 to Form 10, filed June 17, 2004 (File Number 0-50635).

+

Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, filed June 28, 2004 (File Number 0-50635).

****

Incorporated by reference to Registrant’s Post-Effective Amendment No. 2 to Form 10 filed August 13, 2004 (File Number 0-50635).

*****

Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed August 23, 2004 (File Number 0-50635).

******

Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q/A filed September 9, 2004 (File Number 0-50635).

******

Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed November 15, 2004 (File Number 0-50635).

*******

Incorporated by reference to Registrant’s Annual Report on Form 10-K filed March 31, 2005 (File Number 000-50635)

++

Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed August 14, 2006.

+++

Incorporated by reference to Registrant’s Current Report on Form 8-K, filed May 19, 2006.

++++

Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed November 14, 2006

+++++

Incorporated by reference to Registrant’s Annual Report on Form 10-K filed March 30, 2007 (File Number 000-50635)

+++++++

Incorporate by reference to Registrant’s Current Report on Form 8-K filed January 5, 2009

++++++++

Incorporated by reference to Registrant’s Annual Report on Form 10-K filed March 26, 2009 (File Number 000-50635)

#

    Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed May 14, 2010 (File Number 000-50635)

##

    Incorporated by reference to Registrant’s Report Form 8-K filed September 14, 2009 (File Number 000-50635)

###

    Incorporated by reference to Registrant’s Report Form 8-K filed August 5, 2010 (File Number 000-50635)

####

Incorporated by reference to Registrant’s Annual Report on Form 10_K filed March 25, 2011 (File Number 000-50635)

 

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SIGNATURES

Pursuant to the requirements 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.

 

 

 

 

 

 

 

 

COLONY RESORTS LVH ACQUISITIONS, LLC

 

 

 

Date:  May 6, 2011

 

By:

 

/s/ David Monahan

 

 

 

 

 

David Monahan

 

 

 

 

 

Chief Executive Officer and General Manager

 

 

 

 

Date:  May 6, 2011

 

By:

 

/s/ Robert Schaffhauser

 

 

 

 

 

Robert Schaffhauser

 

 

 

 

 

Executive Vice President of Finance

 

 

 

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