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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 September 30, 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 September 30, 2012 (unaudited) and December 31, 2011 1
       
    Condensed Consolidated Statements of Operations (unaudited) for the Three months ended September 30, 2012 and September 30, 2011 2
       
    Condensed Consolidated Statements of Operations (unaudited) for the Nine months ended September 30, 2012 and September 30, 2011 3
       
    Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine months ended September 30, 2012 and September 30, 2011 4
       
    Condensed Consolidated Statement of Members’ Equity (unaudited) for the Nine months ended September 30, 2012 5
       
    Notes to Condensed Consolidated Financial Statements (unaudited) 6
       
  Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations 11
       
  Item 3.   Quantitative and Qualitative Disclosures About Market Risk 20
       
  Item 4.   Controls and Procedures 20
       
Part II   Other Information 21
       
  Item 6.   Exhibits 21

 

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 
   September 30, 2012   December 31, 2011 
   (Unaudited)     
   (In thousands) 
Assets          
Current Assets:          
Cash and cash equivalents  $74,806   $74,201 
Investments-restricted   211    211 
Accounts receivable, net   4,503    4,280 
Accounts receivable, net - related party   122    196 
Other current assets   10,936    11,462 
Total Current Assets   90,578    90,350 
Property and equipment, net   1,101,938    1,111,787 
Debt issuance costs, net   2,195    2,055 
Intangible and other assets   16,434    17,837 
Total Assets  $1,211,145   $1,222,029 
           
Liabilities and Members' Equity          
Current Liabilities:          
Accounts payable  $4,832   $4,730 
Accrued expenses   25,650    16,429 
Accounts payable and accrued expenses - related party   17    13 
Accrued payroll and related expenses   13,346    11,431 
Current portion of capital lease obligations   301    289 
Total Current Liabilities   44,146    32,892 
           
Long-Term Liabilities:          
Long-term debt, net of unamortized discount   327,922    342,353 
Capital lease obligations, less current portion   1,402    1,630 
Total Long-Term Liabilities   329,324    343,983 
           
Total Liabilities   373,470    376,875 
           
Commitments and Contingencies          
           
Members' Equity:          
Members' Equity   837,675    845,154 
Total Members' Equity   837,675    845,154 
Total Liabilities and Members' Equity  $1,211,145   $1,222,029 

 

See notes to condensed consolidated financial statements.

 

1
 

 

AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Three months ended September 30, 
   2012   2011 
   (Unaudited) 
   (In thousands) 
Revenues:          
Casino  $48,454   $49,238 
Hotel   17,012    17,184 
Food and beverage   17,185    17,505 
Tower, retail, entertainment and other   9,364    9,242 
Gross revenues   92,015    93,169 
Less promotional allowances   6,167    6,205 
Net revenues   85,848    86,964 
           
Costs And Expenses:          
Casino   16,108    16,430 
Hotel   9,125    9,124 
Food and beverage   13,240    13,052 
Other operating expenses   2,958    3,041 
Selling, general and administrative   28,867    28,800 
Depreciation and amortization   8,099    9,403 
Pre-opening costs   39    - 
(Gain) loss on disposal of assets   (42)   32 
Management fee - related party   250    250 
Total costs and expenses   78,644    80,132 
           
Income From Operations   7,204    6,832 
           
Other Income (Expense):          
Interest income   -    1 
Interest expense   (10,524)   (11,062)
Total other expense, net   (10,524)   (11,061)
           
Net Loss  $(3,320)  $(4,229)

 

See notes to condensed consolidated financial statements.

 

2
 

 

AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Nine months ended September 30, 
   2012   2011 
   (Unaudited) 
   (In thousands) 
Revenues:          
Casino  $152,563   $153,166 
Hotel   50,407    49,288 
Food and beverage   51,278    51,812 
Tower, retail, entertainment and other   25,440    25,123 
Gross revenues   279,688    279,389 
Less promotional allowances   18,987    18,288 
Net revenues   260,701    261,101 
           
Costs And Expenses:          
Casino   49,181    49,915 
Hotel   26,458    26,439 
Food and beverage   38,949    38,658 
Other operating expenses   8,701    9,209 
Selling, general and administrative   85,835    83,718 
Depreciation and amortization   25,030    30,062 
Pre-opening costs   39    - 
(Gain) loss on disposal of assets   (49)   65 
Management fee - related party   750    819 
Total costs and expenses   234,894    238,885 
           
Income From Operations   25,807    22,216 
           
Other Income (Expense):          
Loss on debt redemption   (1,112)   (1,378)
Interest income   -    2 
Interest expense   (32,174)   (34,072)
Total other expense, net   (33,286)   (35,448)
           
Net Loss  $(7,479)  $(13,232)

 

See notes to condensed consolidated financial statements.

 

3
 

 

AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Nine months ended September 30, 
   2012   2011 
   (Unaudited) 
   (In thousands) 
Cash Flows From Operating Activities:          
Net loss  $(7,479)  $(13,232)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Depreciation and amortization   25,030    30,062 
Amortization of debt issuance and debt discount costs   4,217    3,934 
Loss on debt redemption   1,112    1,378 
(Gain) loss on disposal of assets   (49)   65 
Changes in operating assets and liabilities:          
Accounts receivable, net   (223)   (159)
Other assets   564    (1,821)
Accounts payable and accrued expenses   11,110    10,185 
Related party activity, net   78    (190)
Net Cash Provided by Operating Activities   34,360    30,222 
           
Cash Flows From Investing Activities:          
Decrease in investments - restricted   -    960 
Acquisition of property and equipment   (13,745)   (9,965)
Proceeds from sale of property and equipment   106    96 
Net Cash Used in Investing Activities   (13,639)   (8,909)
           
Cash Flows From Financing Activities:          
Deferred financing costs   (775)   - 
Payments on note payable   (19,125)   (19,125)
Payments on capital lease obligation   (216)   (206)
Net Cash Used in Financing Activities   (20,116)   (19,331)
           
Net increase in cash and cash equivalents   605    1,982 
Cash and cash equivalents - beginning of period   74,201    85,311 
Cash and cash equivalents - end of period  $74,806   $87,293 
           
Supplemental Disclosures of Cash Flow Information:          
           
Cash paid during the period for interest, net of amounts capitalized  $18,758   $20,420 
           
Supplemental Disclosures of Non-Cash Items:          
           
Accrued capital expenditures  $128   $- 

 

See notes to condensed consolidated financial statements.

 

4
 

 

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   -    (7,479)   (7,479)
Balances at September 30, 2012  $-   $837,675   $837,675 

 

See notes to condensed consolidated financial statements.

 

5
 

 

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 audited consolidated 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.

 

6
 

 

Recently Issued Accounting Pronouncements

 

In July 2012, FASB issued Accounting Standards Update 2012-02, Testing Indefinite-Lived Intangible Assets 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 an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test. The amended guidance is effective for annual and interim impairment tests performed for the fiscal years beginning after September 15, 2012, with early adoption permitted. Adoption of this guidance is not expected to have a material impact on our financial statements.

 

Debt Issuance Costs

 

Debt issuance costs of $2.2 million and $2.1 million consist primarily of professional and registration fees directly related to the Company’s 11% Senior Secured Notes and are included on the Company’s consolidated balance sheet at September 30, 2012 and December 31, 2011, respectively. Included in the $2.2 million is approximately $775,000 of costs associated with the potential refinancing of the 11% Senior Secured Notes. If the potential refinancing is terminated, the costs associated with the potential refinancing will be expensed.

 

Reclassifications

 

Certain reclassifications have been made to the three and nine months periods ending September 30, 2011 consolidated financial statements to conform to the September 30, 2012 presentation. These reclassifications had no effect on net loss.

 

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 for both the three months ended September 30, 2012 and 2011. We incurred Highgate fees of approximately $750,000 and $819,000 for the nine months ended September 30, 2012 and September 30, 2011, respectively. As of September 30, 2012 and December 31, 2011, we owed Highgate $0. During the first quarter of 2011 we provided IT consulting services to Highgate; we received consulting fees of approximately $0, and $10,000, respectively, for the three and nine months ended September 30, 2011. For the three months and nine months ended September 30, 2012 we did not provide any IT consulting services to Highgate. As of September 30, 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 $44,000 and $54,000 for the three months ended September 30, 2012 and September 30, 2011, respectively. We expensed fees of approximately $145,000 and $157,000 for the nine months ended September 30, 2012 and September 30, 2011, respectively. As of September 30, 2012 and December 31, 2011, we owed TTL approximately $14,000 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 paid fees of approximately $355,000 and $18,000 for the three months ended September 30, 2012 and September 30, 2011, respectively. We paid fees of approximately $408,000 and $40,000 for the nine months ended September 30, 2012 and September 30, 2011, respectively. In addition, we provided construction management services to Archon for hotels managed by them. We record these services as revenues. We recorded revenues of approximately $262,000 and $483,000 for the three and nine months ended September 30, 2012, respectively compared to approximately $292,000 and $530,000 for the three months and nine months ended September 30, 2011, respectively. During April 2012, Archon prepaid for certain construction management services. We have recorded approximately $86,000 in deferred revenues as of September 30, 2012. The services will be provided by us through December 31, 2012. As of September 30, 2012 and December 31, 2011, we owed Archon $0. As of September 30, 2012 and December 31, 2011, Archon owed us approximately $122,000 and $196,000, respectively.

 

7
 

 

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 $11,000 and $12,000 for the three months ended September 30, 2012 and September 30, 2011, respectively. We expensed fees of approximately $35,000 for both the nine months ended September 30, 2012 and September 30, 2011. As of September 30, 2012 and December 31, 2011, we owed Nor1 approximately $3,000 and $2,000, respectively.

 

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 September 30, 2012 and December 31, 2011, we had the following intangible assets.

 

 

      (in thousands) 
      September 30, 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   $(6,828)  $622   $7,450   $(5,711)  $1,739 
Non-Compete Agreement  38 Months   1,045    (908)   137    1,045    (660)   385 
      $8,495   $(7,736)  $759   $8,495   $(6,371)  $2,124 
                                  
Non-amortizing intangible assets:                              
Trade Name               $15,507             $15,507 
                $16,266             $17,631 

 

8
 

 

Note 5. Debt

 

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

 

   As of   As of 
   September 30, 2012   December 31, 2011 
         
   (In thousands) 
11% Senior Secured Notes due June 15, 2014  $337,500   $356,250 
Unamortized discount   (9,578)   (13,897)
Capital lease obligations   1,703    1,919 
Total long-term debt and capital lease obligations   329,625    344,272 
Current portion of capital lease obligations   (301)   (289)
Total long-term debt and capital lease obligations, net  $329,324   $343,983 

 

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.

 

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 $1.1 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 $737,000.

 

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.

 

9
 

 

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 $351.0 million as of September 30, 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. As described above, on May 31, 2011 the Issuers redeemed 5% of the aggregate principal amount of the 11% Senior Secured Notes and on April 30, 2012 the Issuers redeemed an additional 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.

 

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.

 

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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. Unaudited Condensed Consolidated 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 and residents of Laughlin.

 

We believe that 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 is the largest hotel by number of rooms 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, 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.

 

Las Vegas is one of the largest entertainment markets in the country. 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.

 

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We use certain key measurements to evaluate operating revenues. Casino revenue measurements include “table games drop” and “slot coin-in”, which are measures of the total amounts wagered by customers. “Win” and “hold percentage” represents the residual amount and the percentage of table games drop or slot coin-in that is won by the casino and recorded as casino revenues. 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.

 

Our operating results are greatly dependent on the volume of customers at our properties, which in turn affects our gaming revenues and 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 52.7% of our gross revenue for the three months ended September 30, 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 September 30, 2012, with hotel sales representing 18.5% and food and beverage sales representing 18.7%. The majority of our revenue is cash based through customers wagering with cash or paying for non-gaming amenities with cash or credit card.

 

Our expenses also depend on the volume of customers at our properties. The volume of customers that visit our properties directly affects our labor, which represented approximately 51.6% of our expenses during the three months ended September 30, 2012, and the amount we spend on marketing, which represented approximately 2.4% of our expenses during the three months ended September 30, 2012. However, we incur a significant amount of costs that do not vary directly with changes in the volume of customers. As a result, it is difficult to reduce costs to match reductions in demand, which results in reduced operating margins. 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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Results of Operations

 

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

 

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

 

   Three months ended September 30, 
   2012   2011 
   (in millions) 
Income Statement Data:          
Revenues:          
Casino  $48.4   $49.2 
Hotel   17.0    17.2 
Food and beverage   17.2    17.5 
Tower, retail, entertainment and other   9.4    9.3 
Gross revenues   92.0    93.2 
Less promotional allowances   6.2    6.2 
Net revenues   85.8    87.0 
           
Costs and expenses:          
Casino   16.1    16.4 
Hotel   9.1    9.1 
Food and beverage   13.2    13.1 
Other operating expenses   3.0    3.0 
Selling, general and administrative   29.1    29.1 
Pre-opening costs   -    - 
Depreciation and amortization   8.1    9.4 
Total costs and expenses   78.6    80.1 
Income from operations  $7.2   $6.9 
           
EBITDA Reconciliation:          
Net loss  $(3.3)  $(4.2)
Interest expense   10.5    11.0 
Depreciation and amortization   8.1    9.4 
EBITDA  $15.3   $16.2 

 

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.

 

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Our consolidated gross revenues decreased 1.3% to $92.0 million for the three months ended September 30, 2012 from $93.2 million for the three months ended September 30, 2011. The decrease in our gross revenues was due primarily to decreases in casino, hotel and food and beverage revenues. Our consolidated income from operations and EBITDA increased 4.3% and decreased 5.6% to $7.2 million and $15.3 million for the three months ended September 30, 2012 compared to $6.9 million and $16.2 million for the three months ended September 30, 2011, respectively. Income from operations for the three months ended September 30, 2012 was positively impacted by a 13.8% decrease in depreciation and amortization expenses to $8.1 million from $9.4 million for the three months ended September 30, 2012, compared to the three months ended September 30, 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 2011.

 

Casino

 

Casino revenues consist of revenues from slot machines, table games, poker, race and sports book, bingo and keno. Casino revenues decreased 1.6% to $48.4 million for the three months ended September 30, 2012, compared to $49.2 million for the three months ended September 30, 2011. For the three months ended September 30, 2012, slot machine revenues were 83.9% of casino revenues, and table game revenues were 12.6% of casino revenues, compared to 85.0% and 12.2% of casino revenues, respectively, for the three months ended September 30, 2011. Our slot revenues decreased 2.6% and table revenues increased 1.7% year-over-year. The increase in tables was the result of a 2.0 percentage point increase in hold and 7.8% decrease in drop compared to the three months ended September 30, 2011. Other casino revenues, consisting of race and sports book, poker, bingo and keno, increased 14.3% for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Race and sports book revenues increased 60.8% compared to the three months ended September 30, 2011 due to a 3.1% increase in handle and a 5.0 percentage point increase in hold. Bingo revenues declined 8.5% due primarily to a 10.1% decline in the number of patrons. Poker revenues decreased 19.5%. Casino operating expenses decreased 1.8% to $16.1 million for the three months ended September 30, 2012, compared to $16.4 million for the three months ended September 30, 2011. The decrease in expenses was due primarily to lower slot participation expenses and revenue taxes. Participation expenses consist of fees paid to game owners for the use of their games. Despite the decline in revenues, our casino operating margin was 66.7% for both the three months ended September 30, 2012 and 2011.

 

Hotel

 

Hotel revenues decreased 1.2% to $17.0 million for the three months ended September 30, 2012 from $17.2 million for the three months ended September 30, 2011.  Our combined room occupancy increased to 72.4% for the three months ended September 30, 2012 compared to 71.5% for the three months ended September 30, 2011 and the average daily room rate decreased 1.7% for the three months ended September 30, 2012 compared to the three months ended September 30, 2011.  Our hotel expenses were $9.1 million for both the three months ended September 30, 2012 and September 30, 2011. Due to the increase in occupancy and decline in revenues, our hotel operating margin decreased to 46.5% for the three months ended September 30, 2012 as compared to 47.1% for the three months ended September 30, 2011.

 

Food & Beverage

 

Food and beverage revenues decreased 1.7% to $17.2 million for the three months ended September 30, 2012, compared to $17.5 million for the three months ended September 30, 2011.  Overall, food covers and beverage covers decreased 6.5% and 4.0%, respectively, for the three months ended September 30, 2012, compared to the three months ended September 30, 2011.  Average revenue per cover for the three months ended September 30, 2012 increased 5.0% compared to the three months ended September 30, 2011. Our food and beverage expenses increased 0.8% to $13.2 million for the three months ended September 30, 2012 compared to $13.1 million for the three months ended September 30, 2011. This increase was due to higher labor costs that were partially offset by a 0.4 percentage point decrease in our food and beverage cost of goods sold. Because of the decline in revenues and increase in expenses, our food and beverage operating margin decreased to 23.3% for the three months ended September 30, 2012 as compared to 25.1% for the three months ended September 30, 2011.

 

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Tower, Retail, Entertainment and Other

 

Tower, retail, entertainment and other revenues increased 1.1% to $9.4 million for the three months ended September 30, 2012 from $9.3 million for the three months ended September 30, 2011. Tower revenues increased 0.3% for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. The increase was due primarily to a 14.0% increase in average revenue per guest admission compared to the three months ended September 30, 2011. Guest admissions declined 12.0% for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. Entertainment revenue increased 5.8% for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. Higher revenues associated with the Frankie Moreno Live at Stratosphere show were partially offset by a decrease in the number of events at the Aquarius. The American Superstars show at the Stratosphere closed on March 30, 2011, while Frankie Moreno Live at Stratosphere debuted on November 9, 2011. Retail revenue decreased 0.2% for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Other operating income increased 5.5% for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The increase in revenue was primarily due to higher rental income and management fee revenues. Other operating expenses were $3.0 million for both the three months ended September 30, 2012 and 2011.

 

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 12.8% for the three months ended September 30, 2012 from 12.6% for the three months ended September 30, 2011. This increase was primarily due to the decrease in casino revenues combined with an increase in direct marketing room redemptions by our guests.

 

Pre-opening Expenses

 

Pre-opening expenses were $39,000 for the three months ended September 30, 2012, compared to $0 for the three months ended September 30, 2011. These expenses consisted of labor, equipment and supplies for the McCall’s Heartland Grill restaurant venue at the Stratosphere.

 

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 were unchanged at $29.1 million, or 31.6% of gross revenues, for the three months ended September 30, 2012, compared to $29.1 million, or 31.2% of gross revenues for the three months ended September 30, 2011. Increases in sales tax, labor costs and repair and maintenance expenses were offset by declines in utilities and advertising expenses. Sales tax expenses for the three months ended September 30, 2012 includes approximately $192,000 in accruals for sales taxes on complimentary meals provided to customers and employees. In 2012, we began to accrue for sales taxes on complimentary meals provided to customers and employees based on a decision by the Nevada Tax Commission.

 

Interest Expense

 

Interest expense decreased 4.5% to $10.5 million for the three months ended September 30, 2012, compared to $11.0 million for the three months ended September 30, 2011. The decrease was due primarily to the redemption of 5% of the aggregate principle amount of our 11% Senior Secured Notes on April 30, 2012.

 

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Nine months Ended September 30, 2012 Compared to Nine months Ended September 30, 2011

 

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

 

   Nine months ended September 30, 
   2012   2011 
   (in millions) 
Income Statement Data:          
Revenues:          
Casino  $152.6   $153.2 
Hotel   50.4    49.3 
Food and beverage   51.3    51.8 
Tower, retail, entertainment and other   25.4    25.1 
Gross revenues   279.7    279.4 
Less promotional allowances   19.0    18.3 
Net revenues   260.7    261.1 
           
Costs and expenses:          
Casino   49.2    49.9 
Hotel   26.5    26.4 
Food and beverage   38.9    38.7 
Other operating expenses   8.7    9.2 
Selling, general and administrative   86.6    84.6 
Pre-opening costs   -    - 
Depreciation and amortization   25.0    30.1 
Total costs and expenses   234.9    238.9 
Income from operations  $25.8   $22.2 
           
EBITDA Reconciliation:          
Net loss  $(7.5)  $(13.2)
Interest expense   32.2    34.0 
Depreciation and amortization   25.0    30.1 
EBITDA  $49.7   $50.9 

 

Our consolidated gross revenues increased 0.1% to $279.7 million for the nine months ended September 30, 2012 from $279.4 million for the nine months ended September 30, 2011. Our consolidated income from operations and EBITDA increased 16.2% and decreased 2.4% to $25.8 million and $49.7 million for the nine months ended September 30, 2012 compared to $22.2 million and $50.9 million for the nine months ended September 30, 2011, respectively. Income from operations for the nine months ended September 30, 2012 was positively impacted by a 16.9% decrease in depreciation and amortization expenses to $25.0 million from $30.1 million and a 16.1% decrease in advertising expenses to $4.7 million from $5.6 million for the nine months ended September 30, 2012, compared to the nine months ended September 30, 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 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 the first quarter of 2011. Income from operations and EBITDA for the nine months ended September 30, 2012 was negatively impacted by a 2.4% increase in selling, general and administrative expenses (see Selling, General & Administrative “SG&A” below). EBITDA for the nine months ended September 30, 2012 was also negatively impacted by a $1.1 million charge for the early redemption of debt related to the voluntary redemption of 5% of the aggregate principal amount of our 11% Senior Secured Notes, of which approximately $737,000 was non-cash. Similarly, EBITDA for the nine months ended September 30, 2011 was negatively impacted by a $1.4 million charge for the early redemption of debt related to the voluntary redemption of 5% of our 11% Senior Secured Notes, of which $1.0 million was non-cash.

 

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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 decreased 0.4% to $152.6 million for the nine months ended September 30, 2012, compared to $153.2 million for the nine months ended September 30, 2011. Our slot and table revenues decreased 0.5% and increased 2.2%, respectively. For the nine months ended September 30, 2012, slot machine revenues were 84.8% of casino revenues, and table game revenues were 11.9% of casino revenues, compared to 84.9% and 11.6% of casino revenues, respectively, for the nine months ended September 30, 2011. Slot revenues decreased 0.5% due to a 0.1 percentage point decrease in hold while table revenues increased 2.2% due to a 1.4 percentage point increase in hold and 4.9% decrease in drop compared to the nine months ended September 30, 2011. Other casino revenues, consisting of race and sports book, poker, bingo and keno, decreased 7.4% for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Lower bingo revenues were partially offset by increased race and sports book revenues. Race and sports book revenues increased 7.9% compared to the nine months ended September 30, 2011 due to a combination of a 0.7% increase in handle and a 0.8 percentage point increase in hold. Bingo revenues declined 46.3% due to a 9.9% decline in the number of patrons and a 3.7 percentage point decrease in hold. The decline in bingo patrons, which was especially pronounced during the three months ended June 30, 2012, coupled with increased promotional activity and special game offerings by our competitors, was the primary cause for the decline in revenues. Revenues for the three month period ended June 30, 2011 benefitted from a jackpot promotion at Arizona Charlie’s Boulder that boosted patron headcounts and revenues. Casino operating expenses decreased 1.4% to $49.2 million for the nine months ended September 30, 2012, compared to $49.9 million for the nine months ended September 30, 2011. The decrease in expenses was due primarily to lower slot participation expenses and repair and maintenance expenses. Participation expenses consist of fees paid to game owners for the use of their games. As a result, our casino operating margin was 67.8% for the nine months ended September 30, 2012, compared to 67.4% for the nine months ended September 30, 2011.

 

Hotel

 

Hotel revenues increased 2.2% to $50.4 million for the nine months ended September 30, 2012 from $49.3 million for the nine months ended September 30, 2011.  The increase in revenue was driven largely by higher occupancy for the Aquarius. Combined room occupancy increased to 70.5% for the nine months ended September 30, 2012 compared to 69.2% for the nine months ended September 30, 2011 and the average daily room rate increased 0.8% for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.  Our hotel expenses increased 0.4% to $26.5 million for the nine months ended September 30, 2012 compared to $26.4 million for the nine months ended September 30, 2011 due primarily to higher costs associated with higher occupancy. Due to the increase in revenues, our hotel operating margin increased to 47.4% for the nine months ended September 30, 2012 as compared to 46.5% for the nine months ended September 30, 2011.

 

Food & Beverage

 

Food and beverage revenues declined 1.0% to $51.3 million for the nine months ended September 30, 2012, compared to $51.8 million for the nine months ended September 30, 2011.  Food and beverage revenues at the Aquarius declined 1.3% for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 due to closures of certain of our food venues and bars to replace plumbing, equipment and fixtures during the three months ended March 31, 2012. Overall, food covers and beverage covers decreased 4.2% and 2.8%, respectively, for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011.  Average revenue per cover for the nine months ended September 30, 2012 increased 3.4% compared to the nine months ended September 30, 2011. Our food and beverage expenses increased 0.5% to $38.9 million for the nine months ended September 30, 2012 compared to $38.7 million the nine months ended September 30, 2011. The increase in our food and beverage expenses was due primarily to higher labor costs and a 0.4 percentage point increase in our cost of goods sold due to rising product costs in general. Due to the decline in revenues, our food and beverage operating margin decreased to 24.2% for the nine months ended September 30, 2012 as compared to 25.3% for the nine months ended September 30, 2011.

 

Tower, Retail, Entertainment and Other

 

Tower, retail, entertainment and other revenues increased 1.2% to $25.4 million for the nine months ended September 30, 2012 from $25.1 million for the nine months ended September 30, 2011. Tower revenues decreased 0.4% for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. Total guest admissions fell 3.1% while overall average revenue per guest admission rose 2.8% for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Entertainment revenue declined 1.2% for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011, due primarily to lower average ticket prices. Retail revenue decreased 2.8% for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Other operating income increased 12.3% for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The increase in revenue was primarily due to higher ATM commission revenues and vendor rebates. Other operating expenses decreased 5.4% to $8.7 million for the nine months ended September 30, 2012 compared to $9.2 million for the nine months ended September 30, 2011. This decrease was primarily due to a reduction in labor costs, repair and maintenance expenses and entertainer fees.

 

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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 12.5% for the nine months ended September 30, 2012 from 11.9% for the nine months ended September 30, 2011. This increase was primarily due to increased room and entertainment promotions. Room promotions increased due to increased direct marketing room redemptions by our guests and entertainment promotions increased due to the addition of the Frankie Moreno Live at Stratosphere show.

 

Pre-opening Expenses

 

Pre-opening expenses were $39,000 for the nine months ended September 30, 2012, compared to $0 for the nine months ended September 30, 2011. These expenses consisted of labor, equipment and supplies for the McCall’s Heartland Grill restaurant venue at the Stratosphere.

 

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 increased 2.4% to $86.6 million, or 31.0% of gross revenues, for the nine months ended September 30, 2012, compared to $84.6 million, or 30.3% of gross revenues for the nine months ended September 30, 2011. This increase was primarily due to higher sales tax, repair and maintenance, guest loss and damage provisions, printing and postage expenses and labor costs. Sales tax expenses for the nine months ended September 30, 2012 includes approximately $248,000 for audit assessment related to a Nevada Department of Taxation audit. Additionally, as a result of a decision by the Nevada Tax Commission, we began to accrue for sales taxes on complimentary meals provided to customers and employees resulting in an additional $498,000 in expenses. Repair and maintenance expenses include approximately $470,000 for a plumbing and drain repair project at Arizona Charlie’s Decatur and $188,000 in building repairs at the Aquarius. For the nine months ended September 30, 2011 guest loss and damage expense benefited from a credit of approximately $190,000 for the reduction in liability for two major claims. The increased expenses were partially offset by reduced advertising and utilities expenses. Advertising expenses declined to approximately $4.7 million during the nine months ended September 30, 2012 compared to $5.6 million during the nine months ended September 30, 2011, which included 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 nine months ended September 30, 2011.

 

Interest Expense

 

Interest expense decreased 5.3% to $32.2 million for the nine months ended September 30, 2012, compared to $34.0 million for the nine months ended September 30, 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 and the redemption of an additional 5% of the aggregate principle amount of our 11% Senior Secured Notes on April 30, 2012.

 

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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.

 

As of September 30, 2012 we had $74.8 million in unrestricted cash and cash equivalents compared to $87.3 million on September 30, 2011. Net cash provided by operating activities for the nine months ended September 30, 2012 was $34.4 million compared to $30.2 million for the nine months ended September 30, 2011. The increase in cash flow from operations was driven by decreases in expenses and interest expense of $3.5 million and $1.9 million, respectively.

 

During the nine months ended September 30, 2012, our total capital expenditures were $13.9 million (including approximately $128,000 in non-cash items), of which approximately $1.7 million was spent on slot machine replacements and conversions, $1.3 million on a replacement fire safety system at the Stratosphere, $3.0 million for renovations to our hotel rooms, public areas and food and beverage venues, $1.1 million on information technology and $6.8 million on our facilities and operations. For the nine months ended September 30, 2011, our total capital expenditures were $10.0 million, of which approximately $2.9 million was spent on slot machine replacements and conversions, $900,000 on hotel room renovations and upgrades, $1.7 million for renovations to our public areas and food and beverage venues and $4.5 million 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, and (iv) regular maintenance and other capital expenditures. We currently anticipate that we will spend approximately $18.0 million on regular maintenance and renovation capital projects during 2012.

 

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 have deferred approximately $775,000 of costs associated with the potential refinancing of our 11% Senior Secured Notes; these costs are included in debt issuance costs on our September 30, 2012 consolidated balance sheet. If the potential refinancing is terminated, the costs associated with the potential refinancing will be expensed.

 

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).

 

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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.

 

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 $351.0 million as of September 30, 2012.

 

For the nine months ended September 30, 2012, we incurred approximately $32.2 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 nine 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 September 30, 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: November 9, 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.
   
101* The following information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011 (audited); (ii) Unaudited Condensed Consolidated Statements of Operations for the three and nine month ended September 30, 2012 and 2011; (iii) Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011; (iv) Unaudited Condensed Consolidated Statement of Members’ Equity for the nine months ended September 30, 2012; and (v) Notes to the Unaudited Condensed Consolidated Financial Statements.

 

*Pursuant to rule 406T of Regulation S-T, the XBRL related information in this exhibit is furnished and not filed or a part of a registration statement or prospectus for the purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for the purposes of Section 18 of the Securities Exchange of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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