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EX-31.1 - EXHIBIT 31.1 - American Casino & Entertainment Properties LLCv310436_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark one)

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

 

For the quarterly period ended March 31, 2012

 

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: 000-52975

 

American Casino & Entertainment Properties LLC

(Exact name of registrant as specified in its charter)

 

Delaware   20-0573058
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
2000 Las Vegas Boulevard South    
Las Vegas, NV   89104
(Address of principal executive offices)   (Zip code)

 

(702) 380-7777

(Registrant's telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether 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 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x

 

Indicate by check mark 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.

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 ¨ No x

 

 
 

 

TABLE OF CONTENTS

 

      Page
Part I   Financial Information 1
       
  Item 1. Unaudited Condensed Consolidated Financial Statements 1
       
    Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011 1
       
    Condensed Consolidated Statements of Operations (unaudited) for the Three months ended March 31, 2012 and March 31, 2011 2
       
    Condensed Consolidated Statements of Cash Flows (unaudited) for the Three months ended March 31, 2012 and March 31, 2011 3
       
    Condensed Consolidated Statement of Members’ Equity (unaudited) for the Three months ended March 31, 2012 4
       
    Notes to Condensed Consolidated Financial Statements (unaudited) 5
       
  Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations 10
       
  Item 3.   Quantitative and Qualitative Disclosures About Market Risk 15
       
  Item 4.   Controls and Procedures 16
       
Part II   Other Information 17
       
  Item 6.   Exhibits 17

 

i
 

 

PART I-FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Consolidated Financial Statements.

 

AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   As of  As of
   March 31, 2012  December 31, 2011
   (Unaudited)   
   (In thousands)
Assets          
Current Assets:          
Cash and cash equivalents  $88,404   $74,201 
Investments-restricted   211    211 
Accounts receivable, net   4,039    4,280 
Accounts receivable, net - related party   7    196 
Other current assets   12,535    11,462 
Total Current Assets   105,196    90,350 
Property and equipment, net   1,109,291    1,111,787 
Debt issuance costs, net   1,875    2,055 
Intangible and other assets   17,360    17,837 
Total Assets  $1,233,722   $1,222,029 
           
Liabilities and Members' Equity          
Current Liabilities:          
Accounts payable  $4,879   $4,730 
Accrued expenses   26,903    16,429 
Accounts payable and accrued expenses - related party   19    13 
Accrued payroll and related expenses   12,711    11,431 
Current portion of capital lease obligations   293    289 
Total Current Liabilities   44,805    32,892 
           
Long-Term Liabilities:          
Long-term debt, net of unamortized discount   343,575    342,353 
Capital lease obligations, less current portion   1,554    1,630 
Total Long-Term Liabilities   345,129    343,983 
           
Total Liabilities   389,934    376,875 
           
Commitments and Contingencies          
           
Members' Equity:          
Members' Equity   843,788    845,154 
Total Members' Equity   843,788    845,154 
Total Liabilities and Members' Equity  $1,233,722   $1,222,029 

 

See notes to condensed consolidated financial statements.

 

1
 

 

AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Three months ended March 31,
   2012  2011
   (Unaudited)
   (In thousands)
Revenues:          
Casino  $54,003   $53,213 
Hotel   15,603    15,180 
Food and beverage   16,508    16,824 
Tower, retail, entertainment and other   7,660    7,436 
Gross revenues   93,774    92,653 
Less promotional allowances   6,625    6,238 
Net revenues   87,149    86,415 
           
Costs And Expenses:          
Casino   16,794    16,935 
Hotel   8,201    8,373 
Food and beverage   12,367    12,426 
Other operating expenses   2,817    3,186 
Selling, general and administrative   28,425    28,772 
Depreciation and amortization   8,652    11,042 
(Gain) loss on disposal of assets   (42)   10 
Management fee - related party   250    319 
Total costs and expenses   77,464    81,063 
           
Income From Operations   9,685    5,352 
           
Other Income (Expense):          
Interest expense   (11,051)   (11,586)
Total other expense, net   (11,051)   (11,586)
           
Net Loss  $(1,366)  $(6,234)

 

See notes to condensed consolidated financial statements.

 

2
 

 

AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Three months ended March 31,
   2012  2011
   (Unaudited)
   (In thousands)
Cash Flows From Operating Activities:          
Net loss  $(1,366)  $(6,234)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Depreciation and amortization   8,652    11,042 
Amortization of debt issuance and debt discount costs   1,402    1,299 
(Gain) loss on disposal of assets   (42)   10 
Changes in operating assets and liabilities:          
Accounts receivable, net   241    (278)
Other assets   (1,051)   (1,767)
Accounts payable and accrued expenses   11,481    11,760 
Related party activity, net   195    (34)
Net Cash Provided by Operating Activities   19,512    15,798 
           
Cash Flows From Investing Activities:          
Acquisition of property and equipment   (5,282)   (2,989)
Proceeds from sale of property and equipment   45    21 
Net Cash Used in Investing Activities   (5,237)   (2,968)
           
Cash Flows From Financing Activities:          
Payments on capital lease obligation   (72)   (68)
Net Cash Used in Financing Activities   (72)   (68)
           
Net increase in cash and cash equivalents   14,203    12,762 
Cash and cash equivalents - beginning of period   74,201    85,311 
Cash and cash equivalents - end of period  $88,404   $98,073 
           
Supplemental Disclosures of Cash Flow Information:          
           
Cash paid during the period for interest, net of amounts capitalized  $33   $37 
           
Supplemental Disclosures of Non-Cash Items:          
           
Accrued capital expenditures  $422   $218 

 

See notes to condensed consolidated financial statements.

 

3
 

 

AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC

CONDENSED CONSOLIDATED STATEMENT OF MEMBERS’ EQUITY

(Unaudited)

(In thousands)

  

   Class A
Equity
  Class B
Equity
  Total Equity
Balances at December 31, 2011  $—     $845,154   $845,154 
Net loss   —      (1,366)   (1,366)
Balances at March 31, 2012  $—     $843,788   $843,788 

 

See notes to condensed consolidated financial statements.

 

4
 

 

AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC

NOTES TO Condensed CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. The Company

 

American Casino & Entertainment Properties LLC, or ACEP, was formed in Delaware on December 29, 2003. As used in this Quarterly Report on Form 10-Q, the terms “ACEP”, “company”, “we”, “our”, “ours”, and “us” refer to American Casino & Entertainment Properties LLC and its subsidiaries, unless the context suggests otherwise. ACEP owns and operates the Stratosphere Casino Hotel & Tower, or the Stratosphere, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder in Las Vegas, Nevada, and the Aquarius Casino Resort, or the Aquarius, in Laughlin, Nevada.

 

On April 22, 2007, American Entertainment Properties Corp., or AEP, our former direct parent, entered into a Membership Interest Purchase Agreement, or the Agreement, with W2007/ACEP Holdings, LLC, or Holdings, an affiliate of Whitehall Street Real Estate Funds, or Whitehall, a series of real estate investment funds affiliated with Goldman, Sachs & Co., to sell all of our issued and outstanding membership interests to Holdings, for approximately $1.3 billion. Pursuant to the Assignment and Assumption Agreement, dated December 4, 2007, between Holdings and W2007/ACEP Managers Voteco, LLC, or Voteco, Holdings assigned all of its rights, obligations and interests under the Agreement to Voteco. Voteco’s acquisition of ACEP, or the Acquisition, closed at a purchase price of $1.2 billion on February 20, 2008.

 

On February 23, 2010, ACEP and ACEP Finance Corp., or ACEP Finance and, together with ACEP, the Issuers, completed an exchange offer registered with the Securities and Exchange Commission, or SEC, in which the Issuers issued approximately $374.9 million aggregate principal amount of their 11% Senior Secured Notes due 2014, or SEC-Registered Notes, in exchange for $374.9 million of their outstanding, 11% Senior Secured Notes due 2014, or the Unregistered Notes, issued in a transaction pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, or the Securities Act. The SEC-Registered Notes have substantially identical terms to the Unregistered Notes, except that the SEC-Registered Notes were issued in a transaction registered under the Securities Act. The SEC-Registered Notes and the Unregistered Notes are collectively referred to herein as the 11% Senior Secured Notes.

  

Note 2. Basis of Presentation

 

The accompanying condensed consolidated financial statements included herein have been prepared by ACEP, without audit, in accordance with the accounting policies described in our 2011 audited consolidated financial statements and pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such rules and regulations. We believe that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments (consisting only of those of a normal recurring nature), which are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results to be expected for any future interim period or for the entire fiscal year.

 

These condensed consolidated financial statements should be read in conjunction with the notes to the 2011 consolidated audited financial statements presented in our annual report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 22, 2012 (SEC File No. 000-52975). Our reports are available electronically by visiting the SEC website at http://www.sec.gov. You may also visit the investor relations section of the American Casino & Entertainment Properties LLC website at http://www.acepllc.com.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of ACEP and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

  

5
 

 

Recently Issued Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income. This update requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Presentation of the components of other comprehensive income as part of the statements of changes in members’ equity is no longer permitted. The new guidance requirements are effective for the fiscal years beginning after December 15, 2011 and for interim periods within those years. There was no impact to our statement of operations or statement of members’ equity upon adoption.

 

In September 2011, FASB issued Accounting Standards Update 2011-08, Testing Goodwill for Impairment. This update amends prior guidance to allow an entity to first evaluate qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amended guidance is effective for annual and interim goodwill impairment tests performed for the fiscal years beginning after December 15, 2011. Adoption of this guidance did not have a material impact on our financial statements.

 

Note 3. Related Party Transactions

 

On February 20, 2008, we entered into a consulting agreement with Highgate Hotels, L.P., or Highgate, pursuant to which Highgate provides asset management consulting services to us. Highgate owns a less than 5% membership interest in Holdings. The agreement was amended to reduce fees payable thereunder on June 25, 2009 and Highgate converted amounts due them from ACEP to contributed capital in Holdings. The consulting agreement expires on June 20, 2013. Highgate is entitled to receive a $1.5 million per year base consulting fee for the periods through February 20, 2011 and a $1.0 million per year consulting fee for the periods after February 20, 2011, additional consulting fees up to $500,000 per year for periods after February 20, 2011 based on EBITDA results at the properties and development fees at 4% of the aggregate costs of any agreed upon development projects. We incurred Highgate fees of approximately $250,000 and $319,000 for the three months ended March 31, 2012 and March 31, 2011, respectively. As of March 31, 2012 and December 31, 2011, we owed Highgate $0. For the three months ended March 31, 2012, and March 31, 2011 we provided IT consulting services to Highgate of approximately $0 and $14,000, respectively. As of March 31, 2012 and December 31, 2011, Highgate owed us $0.

 

On June 16, 2008, we entered into an agreement with Travel Tripper LLC, or TTL, to utilize their technology for online hotel reservations. TTL is owned by an affiliate of Goldman Sachs (9%), an affiliate of Highgate (9%) and an employee of Highgate (40%). From June 16, 2008 to July 31, 2010, TTL was paid 4% of room revenues booked utilizing its system. As of August 1, 2010, the fee paid to TTL was reduced to 2%. We expensed fees of approximately $51,000 and $52,000 for the three months ended March 31, 2012 and March 31, 2011, respectively. As of March 31, 2012 and December 31, 2011, we owed TTL approximately $16,000 and $11,000, respectively.

 

Archon Group, LP, or Archon, an affiliate of Goldman Sachs, provides various services to us such as cash management and insurance brokers. We expensed fees of approximately $19,000 and $20,000 for the three months ended March 31, 2012 and March 31, 2011, respectively. In addition, we provided construction management services to Archon for hotels managed by them. We recorded the services as a reduction of general and administrative expenses of approximately $7,000 and $130,000 for the three months ended March 31, 2012 and March 31, 2011, respectively. As of March 31, 2012 and December 31, 2011, we owed Archon $0. As of March 31, 2012 and December 31, 2011, Archon owed us approximately $7,000 and $196,000, respectively.

 

On October 3, 2008, we entered into a participation agreement with Nor1, Inc., or Nor1, to utilize their technology to help sell perishable suite and room inventories. Nor1 gives the guest who books on-line the opportunity to book a non-guaranteed suite or upgraded rooms at a discounted rate if such is available at check-in. If the suite or upgraded room is awarded, Nor1 is paid 25% of the upgrade fee. Goldman Sachs owns less than 5% of Nor1. We expensed fees of approximately $10,000 and $12,000 for the three months ended March 31, 2012 and March 31, 2011, respectively. As of March 31, 2012 and December 31, 2011, we owed Nor1 approximately $3,000 and $2,000, respectively.

 

6
 

 

We follow a related party transaction approval policy for reviewing related person transactions. These procedures are intended to ensure that transactions with related persons are fair to us and in our best interests. If a proposed transaction appears to or does involve a related person, the transaction is presented to our audit committee for review. The audit committee is authorized to retain and pay such independent advisors as it deems necessary to properly evaluate the proposed transaction, including, without limitation, outside legal counsel and financial advisors to determine the fair value of the transaction.

 

Note 4. Intangible Assets

 

Pursuant to authoritative guidance, indefinite-lived intangible assets are subject to an annual assessment for impairment during the fourth quarter, or more frequently if there are indications of possible impairment, by applying a fair-value-based test.

 

Our finite-lived acquired intangible assets include our player loyalty plan and a non-compete agreement. Our indefinite-lived acquired intangible assets include trade names. Acquired assets are recorded at fair value on the date of acquisition and finite-lived assets are amortized over the estimated period to be benefited.

 

As of March 31, 2012 and December 31, 2011, we had the following intangible assets.

 

      (in thousands)
      March 31, 2012  December 31, 2011
      Gross     Net  Gross     Net
   Asset  Carrying  Accumulated  Carrying  Carrying  Accumulated  Carrying
Amortizing intangible assets:  Life  Amount  Amortization  Amount  Amount  Amortization  Amount
Player Loyalty Plan   5 Years   $7,450   $(6,083)  $1,367   $7,450   $(5,711)  $1,739 
Non-Compete Agreement   38 Months    1,045    (743)   302    1,045    (660)   385 
        $8,495   $(6,826)  $1,669   $8,495   $(6,371)  $2,124 
                                    
Non-amortizing intangible assets:                                    
Trade Name                 $15,507             $15,507 
                  $17,176             $17,631 

 

Note 5. Debt

 

Long-term debt and capital lease obligations consist of the following:

 

   As of  As of
   March 31, 2012  December 31, 2011
       
   (In thousands)
11% Senior Secured Notes due June 15, 2014  $356,250   $356,250 
Unamortized discount   (12,675)   (13,897)
Capital lease obligations   1,847    1,919 
Total long-term debt and capital lease obligations   345,422    344,272 
Current portion of capital lease obligations   (293)   (289)
Total long-term debt and capital lease obligations, net  $345,129   $343,983 

 

7
 

 

11% Senior Secured Notes

 

 On August 14, 2009, the Issuers issued the Unregistered Notes pursuant to the Indenture among the Issuers, certain subsidiary guarantors and The Bank of New York Mellon, as trustee, or the Indenture. The 11% Senior Secured Notes mature on June 15, 2014 and bear interest at a rate of 11% per annum. Interest is computed on the basis of a 360-day year composed of twelve 30-day months and is payable semi-annually on June 15 and December 15 of each year, beginning on December 15, 2009. The obligations are jointly, severally and unconditionally guaranteed by all of the subsidiaries of ACEP other than ACEP Finance and will be so guaranteed by any future domestic subsidiaries of ACEP, subject to certain exceptions. The 11% Senior Secured Notes are collateralized by substantially all fee and leasehold real property comprising the Stratosphere, the Aquarius, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder.

 

On February 23, 2010, the Issuers completed an exchange offer registered with the SEC in which the Issuers issued approximately $374.9 million aggregate principal amount of their SEC-Registered Notes in exchange for $374.9 million of their Unregistered Notes. The SEC-Registered Notes have substantially identical terms to the Unregistered Notes, except that the SEC-Registered Notes were issued in a transaction registered under the Securities Act.

 

On May 31, 2011, the Issuers completed a redemption of five percent (5%) of aggregate principal amount of the 11% Senior Secured Notes pursuant to paragraph 5(b) of the 11% Senior Secured Notes and the redemption provisions of the Indenture (Section 3.07(b)). The redemption price for the 11% Senior Secured Notes was 102% of the principal amount of the 11% Senior Secured Notes redeemed, or $19.1 million, plus accrued interest to the redemption date of approximately $951,000. Interest on the 11% Senior Secured Notes called for redemption ceased to accrue on and after the redemption date. As a result of the redemption, a loss of $1.4 million was recognized. The loss is comprised of the redemption premium of $375,000 and a proportionate write-off of debt issuance and debt discount costs of $1.0 million.

 

In accordance with positions established by the SEC, separate financial information with respect to the parent, co-issuer, guarantor subsidiaries and non-guarantor subsidiaries is not required as the parent and co-issuer have no independent assets or operations, the guarantees are full and unconditional and joint and several, and the total assets, stockholders’ equity, revenues, income from operations before income taxes and cash flows from operating activities of the non-guarantor subsidiaries is less than 3% of ACEP’s consolidated amounts.

 

The fair value of our debt is estimated based on market prices for the same or similar issues. We issued the Unregistered Notes on August 14, 2009. The estimated fair value of the 11% Senior Secured Notes was approximately $376.7 million as of March 31, 2012.

 

On or after June 15, 2012, the Issuers may redeem all or a part of the 11% Senior Secured Notes at the redemption prices set forth in the Indenture, plus accrued and unpaid interest to the applicable redemption date. In addition, at any time prior to June 15, 2012, the Issuers may, on one or more than one occasion, redeem some or all of the 11% Senior Secured Notes at a redemption price equal to 100% of the principal amount of the 11% Senior Secured Notes redeemed, plus a “make-whole” premium, and accrued and unpaid interest to the applicable redemption date. At any time prior to June 15, 2012, we may also redeem up to 35% of the aggregate principal amount of the 11% Senior Secured Notes, using the proceeds of certain qualified equity offerings, at a redemption price of 111% of the principal amount thereof, plus accrued and unpaid interest to the applicable redemption date. We may, not more than once in the 12-month period ending on June 15, 2012, redeem up to 5% of the original aggregate principal amount of the 11% Senior Secured Notes at a redemption price equal to 102% of the principal amount of the 11% Senior Secured Notes redeemed plus accrued and unpaid interest to the applicable redemption date. As described above, on May 31, 2011 the Issuers redeemed 5% of the aggregate principal amount of the 11% Senior Secured Notes. As described in “Note 7. Subsequent Events” below, on April 30, 2012 the Issuers redeemed 5% of the aggregate principal amount of the 11% Senior Secured Notes.

 

If certain change of control events occur as specified in the Indenture, we must offer to repurchase the 11% Senior Secured Notes at a repurchase price equal to 101% of the principal amount of the 11% Senior Secured Notes repurchased, plus accrued and unpaid interest to the applicable repurchase date.

 

8
 

 

If ACEP or its subsidiaries sell assets under certain circumstances or experience certain events of loss, we must offer to repurchase the 11% Senior Secured Notes at a repurchase price equal to 100% of the principal amount of the Notes repurchased, plus accrued and unpaid interest to the date of purchase, prepayment or redemption, as the case may be.

 

We are bound by certain covenants contained and defined in the Indenture that requires us to file quarterly and annual reports, and among other things, restricts our ability to:

 

    declare or pay dividends and distributions on our equity interests, purchase, redeem, or otherwise retire for value any equity interest, make payments on debt, or make investments;
       
    incur indebtedness or issue preferred stock;
       
    sell, create liens, or otherwise encumber our assets or equity interests; and
       
    enter into transactions with affiliates.

 

These covenants contained in the Indenture are subject to a number of important limitations and exceptions.

 

The Indenture provides for events of default, including, but not limited to, cross defaults to certain other debt of ACEP and its subsidiaries. In the case of an event of default arising from specified events of bankruptcy or insolvency, all outstanding 11% Senior Secured Notes will become due and payable immediately without further action or notice. Management believes that we are in compliance with the provisions of the Indenture as of quarter end and the date of this filing.

 

Note 6. Legal Proceedings

 

We are, from time to time, a party to various legal proceedings arising out of our businesses. We believe, however, there are no proceedings pending or threatened against us, which, if determined adversely, would have a material adverse effect upon our financial condition, results of operations or liquidity.

  

Note 7. Subsequent Events

 

On April 30, 2012, the Issuers completed a redemption of five percent (5%) of aggregate principal amount of the 11% Senior Secured Notes pursuant to paragraph 5(b) of the 11% Senior Secured Notes and the redemption provisions of the Indenture (Section 3.07(b)). The redemption price for the 11% Senior Secured Notes was 102% of the principal amount of the 11% Senior Secured Notes redeemed, or $19.1 million, plus accrued interest to the redemption date of approximately $773,000. Interest on the 11% Senior Secured Notes called for redemption ceased to accrue on and after the redemption date. As a result of the redemption, a loss of approximately $1.1 million will be recognized.

 

9
 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

With the exception of historical facts, the matters discussed in this quarterly report on Form 10-Q are forward looking statements. Forward-looking statements may relate to, among other things, future actions, future performance generally, business development activities, future capital expenditures, strategies, the outcome of contingencies such as legal proceedings, future financial results, financing sources and availability and the effects of regulation and competition. When we use the words “believe”, “intend”, “expect”, “may”, “will”, “should”, “anticipate”, “could”, “estimate”, “plan”, “predict”, “project”, or their negatives, or other similar expressions, the statements which include those words are usually forward-looking statements. When we describe strategy that involves risks or uncertainties, we are making forward-looking statements.

 

These forward-looking statements are based on the current plans and expectations of our management and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. These factors include, but are not limited to: the size of our indebtedness, our indebtedness' effect on our business, the adverse effect of government regulation and other matters affecting the gaming industry, increased operating costs of our properties, increased competition in the gaming industry, adverse effects of economic downturns and terrorism, our failure to make necessary capital expenditures, increased costs associated with our growth strategy, the loss of key personnel, risks associated with geographical market concentration, our failure to satisfy our working capital needs from operations or our indebtedness, our inability to raise additional money, our dependence on water, energy and technology services, adverse effects of increasing energy costs, and the availability of and costs associated with potential sources of financing.

 

You should also read, among other things, the risks and uncertainties described in the section entitled Risk Factors in Item 1A of our annual report on Form 10-K, filed with the SEC on March 22, 2012 (SEC File No. 000-52975).

 

We warn you that forward-looking statements are only predictions. Actual events or results may differ as a result of risks that we face. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update them.

 

The following discussion contains management’s discussion and analysis of financial condition and results of operations. Management’s discussion and analysis should be read in conjunction with “Item 1. Financial Statements” of this quarterly report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations presented in our annual report on Form 10-K for the year ended December 31, 2011.

 

Overview

 

We own and operate four gaming and entertainment properties in Clark County, Nevada. The four properties are the Stratosphere Casino Hotel & Tower, or the Stratosphere, which is located on the Las Vegas Strip and caters to visitors to Las Vegas, two off-Strip casinos, Arizona Charlie's Decatur and Arizona Charlie's Boulder, which cater primarily to residents of Las Vegas and the surrounding communities, and the Aquarius Casino Resort, in Laughlin, Nevada, or the Aquarius, which caters to visitors to Laughlin. The Stratosphere is one of the most recognized landmarks in Las Vegas, our two Arizona Charlie’s properties are well-known casinos in their respective marketplaces and the Aquarius has the largest hotel in Laughlin. Each of our properties offers customers a value-oriented experience by providing competitive odds in our casinos, quality rooms in our hotels, award-winning dining facilities and, at the Stratosphere and Aquarius, an offering of competitive value-oriented entertainment attractions. We believe the value we offer our customers, together with a strong focus on customer service, will enable us to continue to attract customers to our properties.

 

Our operating results are greatly dependent on the volume of customers at our properties, which in turn affects the price we can charge for our non-gaming amenities. A substantial portion of our operating income is generated from our gaming operations, more specifically, slot play (including video poker). Approximately 57.6% of our gross revenue for the three months ended March 31, 2012 was generated from our gaming operations. Hotel and food and beverage sales generated similar percentages of our gross revenue during the three months ended March 31, 2012, with hotel sales representing 16.6% and food and beverage sales representing 17.6%. The majority of our revenue is cash based through customers wagering with cash or paying for non-gaming amenities with cash or credit card. Because our business is capital intensive, we rely heavily on the ability of our properties to generate operating cash flow to repay debt financing, fund maintenance capital expenditures and provide excess cash for future development.

 

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Las Vegas is one of the largest entertainment markets in the country. Las Vegas hotel occupancy rates are among the highest of any major market in the United States. We believe that the Las Vegas gaming market has two distinct sub-segments: the tourist market, which tends to be concentrated on the Las Vegas Strip and Downtown Las Vegas, and the local market, which includes the surrounding Las Vegas area.

 

We use certain key measurements to evaluate operating revenue. Casino revenue measurements include “table games drop” and “slot coin-in,” which are measures of the total amounts wagered by patrons. “Win” or “hold percentage” represents the percentage of table games drop or slot coin-in that is retained 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 guests served, and the average check amount per guest.

 

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Results of Operations

 

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

 

The following table sets forth the results of our operations for the periods indicated.

 

   Three months ended March 31,
   2012  2011
   (in millions)
Income Statement Data:          
Revenues:          
Casino  $54.0   $53.2 
Hotel   15.6    15.2 
Food and beverage   16.5    16.8 
Tower, retail, entertainment and other   7.6    7.4 
Gross revenues   93.7    92.6 
Less promotional allowances   6.6    6.2 
Net revenues   87.1    86.4 
           
Costs and expenses:          
Casino   16.8    16.9 
Hotel   8.2    8.4 
Food and beverage   12.4    12.4 
Other operating expenses   2.8    3.2 
Selling, general and administrative   28.5    29.1 
Depreciation and amortization   8.7    11.0 
Total costs and expenses   77.4    81.0 
Income from operations  $9.7   $5.4 
           
EBITDA Reconciliation:          
Net loss  $(1.4)  $(6.2)
Interest expense   11.1    11.6 
Depreciation and amortization   8.7    11.0 
EBITDA  $18.4   $16.4 

 

We believe that our presentation of EBITDA is an important supplemental measure of our operating performance to investors. EBITDA is a commonly used measure of performance in our industry which we believe, when considered with measures calculated in accordance with United States Generally Accepted Accounting Principles (GAAP), gives investors a more complete understanding of operating results before the impact of investing and financing transactions and income taxes and facilitates comparisons between us and our competitors. Although EBITDA is a non-GAAP measure, we believe this measure will be used by investors in their assessment of our operating performance and the valuation of our company.

 

Our consolidated gross revenues increased 1.2% to $93.7 million for the three months ended March 31, 2012 from $92.6 million for the three months ended March 31, 2011. Our consolidated income from operations and EBITDA increased 79.6% and 12.2% to $9.7 million and $18.4 million for the three months ended March 31, 2012 compared to $5.4 million and $16.4 million for the three months ended March 31, 2011, respectively. The increases in our gross revenues, income from operations and EBITDA are due primarily to revenue growth for our gaming and hotel divisions caused by higher slot coin-in and table games hold percentage for the casino, and for the hotel, higher average daily room rates and market factors, such as the increased visitation to Las Vegas. Income from operations for the three months ended March 31, 2012 was positively impacted by a 20.9% decrease in depreciation and amortization expenses to $8.7 million from $11.0 million and a 34.3% decrease in advertising expenses to $2.3 million from $3.5 million for the three months ended March 31, 2012, compared to the three months ended March 31, 2011, respectively. The decrease in depreciation and amortization expenses was due to certain of our property, plant and equipment assets reaching the end of their depreciable life during the first three months of 2011. The decrease in advertising expenses was due to the launch of the Elevate Your Expectations advertising campaign for the Stratosphere and an advertising campaign supporting the launch of Ron’s Steakhouse at Arizona Charlie’s Decatur during 2011.

 

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Casino

 

Casino revenues consist of revenues from slot machines, table games, poker, race and sports book, bingo and keno. Casino revenues increased 1.5% to $54.0 million for the three months ended March 31, 2012, compared to $53.2 million for the three months ended March 31, 2011. Our slot and table revenues increased 1.3% and 3.3%, respectively. Slot revenues increased due to a 2.0% increase in coin-in and a 0.1 percentage point increase in the slot hold while table revenues increased due to a 1.2 percentage point increase in hold while the table games drop declined 2.8% compared to the three months ended March 31, 2011. For the three months ended March 31, 2012, slot machine revenues were 84.6% of casino revenues, and table game revenues were 11.7% of casino revenues, compared to 84.8% and 11.5% of casino revenues, respectively, for the three months ended March 31, 2011. Other casino revenues, consisting of race and sports book, poker, bingo and keno, were unchanged for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. Increased race and sports book and poker revenues were offset by lower bingo revenues. Race and sports book revenues increased 3.4% compared to the three months ended March 31, 2011 due to a combination of a 5.4% decrease in handle and a 0.9 percentage point increase in hold. In addition, bingo revenues declined 17.4% due to a 6.0% decline in the number of patrons and a 1.5 percentage point decrease in hold. Poker revenues increased 48.1% due to higher tournament revenues. Casino operating expenses were $16.8 million for the three months ended March 31, 2012, compared to $16.9 million for the three months ended March 31, 2011. The decrease in expenses was due primarily to lower slot participation expenses and repair and maintenance expenses which were partially offset by increased revenue taxes. Participation expenses consist of fees paid to game owners for the use of their games. As a result, our casino operating margin was 68.9% for the three months ended March 31, 2012, compared to 68.2% for the three months ended March 31, 2011.

 

Hotel

 

Hotel revenues increased 2.6% to $15.6 million for the three months ended March 31, 2012 from $15.2 million for the three months ended March 31, 2011.  Overall room occupancy increased to 66.0% for the three months ended March 31, 2012 compared to 65.4% for the three months ended March 31, 2011 and the average daily room rate increased 1.4% for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. All properties except Arizona Charlie’s Boulder increased room revenue for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. We believe our ability to increase our average daily room rate and, as a result, increase our hotel revenue is due to increased occupancy and higher room rates in Las Vegas in general and the improved room product at Stratosphere and Aquarius. Our hotel expenses decreased 2.4% to $8.2 million for the three months ended March 31, 2012, compared to $8.4 million for the three months ended March 31, 2011 due primarily to lower commission and broker expenses. Due primarily to the increase in revenues, our hotel operating margin increased to 47.4% for the three months ended March 31, 2012 as compared to 44.7% for the three months ended March 31, 2011.

 

Food & Beverage

 

Food and beverage revenues declined 1.8% to $16.5 million for the three months ended March 31, 2012, compared to $16.8 million for the three months ended March 31, 2011.  Food and beverage revenues at the Aquarius declined 9.7% for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 due to closures of certain of our food venues and bars to replace plumbing, equipment and fixtures. Overall, food covers and beverage covers decreased 3.2% and 1.8%, respectively, for the three months ended March 31, 2012, compared to the three months ended March 31, 2011.  Average revenue per cover for the three months ended March 31, 2012 increased 1.3% compared to the three months ended March 31, 2011. Our food and beverage expenses were $12.4 million for both the three months ended March 31, 2012 and March 31, 2011. Our food and beverage cost of goods sold increased by 0.7 percentage points due to rising product costs in general. Due to the decline in revenues, our food and beverage operating margin decreased to 24.8% for the three months ended March 31, 2012 as compared to 26.2% for the three months ended March 31, 2011.

 

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Tower, Retail, Entertainment and Other

 

Tower, retail, entertainment and other revenues increased 2.7% to $7.6 million for the three months ended March 31, 2012 from $7.4 million for the three months ended March 31, 2011. Tower revenues increased 4.5% for the three months ended March 31, 2012, compared to the three months ended March 31, 2011. The increase was due primarily to an 11.8% increase in total guest admissions and a 10.6% increase in Sky Jump revenues compared to the three months ended March 31, 2011. Entertainment revenue declined 27.7% for the three months ended March 31, 2012, compared to the three months ended March 31, 2011, due to fewer performances. Prior to its closure on March 30, 2011, the American Superstars show at the Stratosphere offered nine performances per week. Frankie Moreno Live at Stratosphere debuted on November 9, 2011 with three performances per week. Retail revenue decreased 0.2% for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. Other operating income increased 20.1% for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. The increase in revenue was primarily due to higher ATM commission revenues. Other operating expenses decreased 12.5% to $2.8 million for the three months ended March 31, 2012 compared to $3.2 million for the three months ended March 31, 2011. This decrease was primarily due to a reduction in entertainer fees.

 

Promotional Allowances

 

Promotional allowances are comprised of the retail value of goods and services provided to casino patrons under various marketing programs. As a percentage of casino revenues, promotional allowances increased to 12.2% for the three months ended March 31, 2012 from 11.7% for the three months ended March 31, 2011. This increase was primarily due to increased room and retail promotions.

 

Selling, General and Administrative (‘‘SG&A’’)

 

Selling, general and administrative expenses are primarily comprised of payroll, marketing, advertising, utilities and other administrative expenses. These expenses decreased 2.1% to $28.5 million, or 30.4% of gross revenues, for the three months ended March 31, 2012, compared to $29.1 million, or 31.4% of gross revenues for the three months ended March 31, 2011. This decrease was primarily due to lower advertising and property tax expenses. Advertising expenses declined to approximately $2.3 million during the three months ended March 31, 2012 compared to $3.5 million during the three months ended March 31, 2011, due to the launch of the Elevate Your Expectations advertising campaign for the Stratosphere and an advertising campaign supporting the launch of Ron’s Steakhouse at Arizona Charlie’s Decatur during the three months ended March 31, 2011.

 

Interest Expense

 

Interest expense decreased 4.3% to $11.1 million for the three months ended March 31, 2012, compared to $11.6 million for the three months ended March 31, 2011. The decrease was due primarily to the redemption of 5% of the aggregate principal amount of our 11% Senior Secured Notes on May 31, 2011.

 

Financial Condition

 

Liquidity and Capital Resources

 

The following liquidity and capital resources discussion contains certain forward-looking statements with respect to our business, financial condition, results of operations, dispositions, acquisitions, renovation projects and our subsidiaries, which involve risks and uncertainties that cannot be predicted or quantified, and consequently, actual results may differ materially from those expressed or implied herein. Such risks and uncertainties include, but are not limited to, financial market risks, the ability to maintain existing management, competition within the gaming industry, the cyclical nature of the hotel business and gaming business, economic conditions, regulatory matters and litigation and other risks described in our filings with the SEC. In addition, renovation projects entail significant risks, including shortages of materials or skilled labor, unforeseen regulatory problems, work stoppages, weather interference, floods, unanticipated cost increases, and disruption to business. The anticipated costs and construction periods are based on budgets, conceptual design documents and construction schedule estimates. There can be no assurance that the budgeted costs or construction period will be met. All forward-looking statements are based on our current expectations and projections about future events.

 

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Net cash provided by operating activities was $19.5 million for the three months ended March 31, 2012 compared to $15.8 million for the three months ended March 31, 2011. The increase in cash flow from operations was driven by a $0.7 million increase in net revenues and $3.6 million decrease in expenses.

 

During the three months ended March 31, 2012, our total capital expenditures were $5.7 million (including approximately $400,000 in non-cash items), of which approximately $300,000 was spent on slot machine replacements and conversions, $700,000 on a replacement fire safety system at the Stratosphere, $600,000 for renovations to our public areas and food and beverage venues, $600,000 on information technology and $3.5 million on our facilities and operations. For the three months ended March 31, 2011, our total capital expenditures were $3.2 million (including approximately $200,000 in non-cash items), of which approximately $1.3 million was spent on slot machine replacements and conversions, $200,000 on hotel room renovations and upgrades, $1.0 million for renovations to our public areas and food and beverage venues and $700,000 on our facilities, operations and information technology.

 

Our primary cash requirements for the next twelve months are expected to include (i) expenses associated with ongoing day-to-day operations, (ii) interest payments on indebtedness, (iii) payments for design and development costs of future projects, (iv) regular maintenance and other capital expenditures, and (v) the redemption of five percent of the aggregate principal amount of our 11% Senior Secured Notes, as discussed below. We currently anticipate that we will spend approximately $19.1 million on regular maintenance and renovation capital projects during 2012, which will be evaluated throughout the year.

 

We may from time to time seek to retire or repurchase our outstanding 11% Senior Secured Notes through cash purchases in the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. On April 30, 2012, the Issuers redeemed five percent (5%) of aggregate principal amount of the 11% Senior Secured Notes. The redemption price for the 11% Senior Secured Notes was 102% of the principal amount of the 11% Senior Secured Notes redeemed, or $19.1 million, plus accrued interest to the redemption date of approximately $773,000. On May 31, 2011, the Issuers redeemed five percent (5%) of aggregate principal amount of the 11% Senior Secured Notes. The redemption price was 102% of the principal amount, or $19.1 million, plus accrued interest to the redemption date of approximately $951,000. Interest on the 11% Senior Secured Notes called for redemption ceased to accrue on and after the redemption dates.

 

We believe our cash flow from operations and our cash balances will be sufficient to fund our operations, interest payments and capital expenditures for the next 12 months. However, our ability to fund our operations, make payments on our debt and fund planned capital expenditures will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control as well as the factors described in the section entitled Risk Factors in Item 1A of our annual report on Form 10-K, filed with the SEC on March 22, 2012 (SEC File No. 000-52975).

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary risk exposure relates to interest rate risk. All of our long-term debt is subject to fixed rates of interest at 11% and does not mature until June 15, 2014.

  

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The fair value of our debt is estimated based on the quoted market prices for the same or similar issues. ACEP issued the Unregistered Notes on August 14, 2009. The estimated fair value of the 11% Senior Secured Notes was approximately $376.7 million as of March 31, 2012.

 

For the three months ended March 31, 2012, we incurred approximately $11.1 million in interest expense.

 

We do not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure.

 

Item 4. Controls and Procedures

 

Our principal executive officer and principal financial officer, based on their evaluation of our disclosure controls and procedures (as such terms are defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q, have concluded that our disclosure controls and procedures are effective for ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

There were no changes in our internal control over financial reporting that occurred during the first three months of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control 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 certain 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.

 

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PART II-OTHER INFORMATION

 

You should also read, among other things, the risks and uncertainties described in the section entitled Risk Factors in Item 1A of our annual report on Form 10-K, filed with the SEC on March 22, 2012 (SEC File No. 000-52975). There were no material changes to those risk factors during the three months ended March 31, 2012.

 

Item 6. Exhibits

 

The list of exhibits required by Item 601 of Regulation S-K and filed as part of this report is set forth in the exhibits index.

 

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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.

 

AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC

 

By: /s/ EDWARD W. MARTIN, III
  Edward W. Martin, III
 

Authorized Officer, Chief Financial Officer

and Treasurer

(Principal Financial and Accounting Officer)

Date: May 11, 2012

 

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EXHIBITS INDEX

 

EXHIBIT NO.   DESCRIPTION
     
31.1   Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Principal Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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