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Table of Contents

 

 

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: 000-53938

 

 

Nevada Property 1 LLC

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   27-1695189

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3708 Las Vegas Boulevard South

Las Vegas, Nevada

  89109
(Address of principal executive offices)   (Zip Code)

702-698-7000

(Registrant’s telephone number, including area code)

 

 

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 website, 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  x    No  ¨

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

The Registrant’s Class A and Class B membership interests are not publicly traded. As of November 9, 2012 Nevada Voteco LLC owns all of the 100 Class A Voting Membership Interests and Nevada Mezz 1 LLC owns all of the 100 Class B Non-Voting Membership Interests of the Registrant.

 

 

 


Table of Contents

NEVADA PROPERTY 1 LLC

INDEX

 

     Page
Number
 
PART I — FINANCIAL INFORMATION   

Item 1. Condensed Consolidated Financial Statements (unaudited)

     3   

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

     3   

Condensed Consolidated Statements of Operations for the three and nine months ended September  30, 2012 and 2011

     4   

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011

     5   

Notes to Condensed Consolidated Financial Statements

     6   

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

     14   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     25   

Item 4. Controls and Procedures

     25   
PART II — OTHER INFORMATION   

Item 1. Legal Proceedings

     26   

Item 1A. Risk Factors

     26   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     26   

Item 3. Defaults Upon Senior Securities

     26   

Item 4. Mine Safety Disclosures

     26   

Item 5. Other information

     26   

Item 6. Exhibits

     26   

SIGNATURES

     27   


Table of Contents

Part I — Financial Information

Item 1 — Condensed Consolidated Financial Statements

NEVADA PROPERTY 1 LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

 

     September 30,
2012
    December 31,
2011
 
ASSETS     

Current assets:

    

Cash held with Deutsche Bank

   $ 28,960      $ 19,578   

Cash held with third parties and on hand

     25,300        57,715   
  

 

 

   

 

 

 

Total cash and cash equivalents

     54,260        77,293   

Accounts receivable, net

     58,852        46,240   

Inventories

     10,453        10,059   

Deferred income taxes

     169,719        128,819   

Restricted cash

     195        32,332   

Prepaid expenses and other assets

     19,742        27,212   
  

 

 

   

 

 

 

Total current assets

     313,221        321,955   

Property and equipment, net

     2,972,695        3,111,248   

Intangible asset, net

     12,045        13,298   

Restricted cash

     2,149        3,415   

Other assets

     42,567        46,849   
  

 

 

   

 

 

 

Total assets

   $ 3,342,677      $ 3,496,765   
  

 

 

   

 

 

 
LIABILITIES AND MEMBERS’ EQUITY (DEFICIT)     

Current liabilities:

    

Accounts payable

   $ 16,460      $ 12,232   

Interest payable to affiliate

     11,757        11,122   

Accrued and other liabilities

     70,106        63,926   

Advance condominium deposits

     —          31,118   
  

 

 

   

 

 

 

Total current liabilities

     98,323        118,398   

Accounts payable—construction

     —          4,479   

Accounts payable—retention

     341        15,583   

Accrued and other liabilities—construction

     3,114        34,388   

Advance condominium deposits

     2,149        3,413   

Loan payable to affiliate

     3,526,951        3,530,857   

Deferred income taxes

     2,405        3,691   

Other liabilities

     9,706        9,726   
  

 

 

   

 

 

 

Total liabilities

     3,642,989        3,720,535   
  

 

 

   

 

 

 

Commitments and contingencies (note 12)

    

Members’ deficit

     (300,312     (223,770
  

 

 

   

 

 

 

Total liabilities and members’ equity (deficit)

   $ 3,342,677      $ 3,496,765   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

NEVADA PROPERTY 1 LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012     2011     2012     2011  

Revenues:

        

Casino

   $ 22,557      $ 23,862      $ 92,060      $ 83,069   

Rooms

     59,896        49,286        182,346        129,607   

Food and beverage

     82,424        68,903        237,102        196,614   

Entertainment, retail and other

     8,818        6,819        23,349        17,443   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross revenues

     173,695        148,870        534,857        426,733   

Less — promotional allowances

     (28,388     (22,244     (80,718     (69,023
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     145,307        126,626        454,139        357,710   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Casino

     26,697        22,523        75,071        71,563   

Rooms

     14,252        13,156        42,590        34,802   

Food and beverage

     56,554        51,405        161,839        147,665   

Entertainment, retail and other

     7,309        9,356        20,481        23,567   

General and administrative

     37,692        34,671        114,219        103,375   

Corporate expense

     3,391        3,196        9,342        9,494   

Pre-opening expenses

     —          684        —          1,466   

(Gain) loss on disposal of assets

     (6     216        807        (6,197

Depreciation and amortization

     41,449        40,685        125,169        116,915   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     187,338        175,892        549,518        502,650   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (42,031     (49,266     (95,379     (144,940

Other income (expense):

        

Net settlement and default income

     110        —          12,771        —     

Interest income

     (111     186        5        231   

Interest expense, net of amounts capitalized

     (11,757     (9,409     (36,125     (24,909
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (53,789     (58,489     (118,728     (169,618

Income tax benefit

     (19,435     —          (42,187     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (34,354   $ (58,489   $ (76,541   $ (169,618
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

NEVADA PROPERTY 1 LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

     Nine Months Ended September 30,  
     2012     2011  

Cash flows from operating activities:

    

Net loss

   $ (76,541   $ (169,618

Deferred income taxes

     (42,187     —     

Depreciation and amortization

     125,169        116,915   

Gain on disposal of assets

     807        (6,197

Changes in operating assets and liabilities:

    

Accounts receivable, net

     (12,612     (30,232

Inventories

     (394     (3,042

Prepaids and other assets

     7,523        (5,430

Accounts payable

     4,228        (4,335

Accrued and other liabilities

     6,160        (12,951

Landlord contribution

     —          2,286   

Interest payable to affiliate

     635        8,276   

Restricted cash

     33,403        4,051   

Advance condominium deposits

     (32,382     (4,051
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     13,809        (104,328
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (33,037     (325,099

Proceeds from sale of assets

     101        16,481   
  

 

 

   

 

 

 

Net cash used in investing activities

     (32,936     (308,618
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings under loan payable to affiliate

     21,094        400,028   

Principal payments under loan payable to affiliate

     (25,000     —     
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (3,906     400,028   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (23,033     (12,918

Cash and cash equivalents at beginning of period

     77,293        86,108   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 54,260      $ 73,190   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest, net of interest capitalized

   $ 36,125      $ 16,419   
  

 

 

   

 

 

 

Non-cash investing activities

    

Change in accrued additions to construction in progress

   $ 46,766      $ 173,693   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

NEVADA PROPERTY 1 LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Organization and Description of the Business

Nevada Property 1 LLC, a limited liability company organized in Delaware (the “Company”), owns and operates The Cosmopolitan of Las Vegas (the “Property” or “The Cosmopolitan”) which commenced operations on December 15, 2010. Prior to December 15, 2010, the Property was in its construction and pre-opening stage.

The entity that previously owned the Property was Cosmo Senior Borrower LLC, a limited liability company organized in Delaware (“CSB”), which acquired the Property from its affiliate, 3700 Associates, LLC, a Delaware limited liability company (the “Previous Owner”), in December 2005. In April 2004, the Previous Owner purchased approximately 8.7 acres of land in Las Vegas, Nevada, in order to develop the Property and to eventually run the business at The Cosmopolitan. A subsidiary of Deutsche Bank AG made a mortgage loan to CSB on December 30, 2005 (the “Cosmopolitan Mortgage Loan”), encumbering the Property. The Cosmopolitan Mortgage Loan went into default on January 15, 2008 and remedies were exercised against CSB.

The Company was formed on July 30, 2008 for the purpose of holding the first lien mortgage loan on the Property and ultimately foreclosing on the Property. On August 29, 2008, the Company, which is an indirect wholly-owned subsidiary of Deutsche Bank AG New York Branch (“Deutsche Bank”), acquired ownership of the Cosmopolitan Mortgage Loan. The Company then acquired the Property at a foreclosure sale for $1.0 billion on September 3, 2008, and is the current owner of the Property. In accordance with the terms of its operating agreement, the Company shall continue in perpetuity until dissolved upon the election of Nevada Mezz 1 LLC (“Nevada Mezz”) and Nevada Voteco LLC (“Nevada Voteco” or “Voteco”) or through a judicial dissolution under Section 18-802 of the Delaware Limited Liability Company Act. Nevada Voteco and Nevada Mezz are collectively referred to as the “Members” within this Quarterly Report on Form 10-Q.

The Company’s wholly-owned subsidiaries are Nevada Restaurant Venture 1 LLC (“Nevada Restaurant”), which was formed on November 24, 2009 as a limited liability company in Delaware and Nevada Retail Venture 1 LLC (“Nevada Retail”), which was also formed on November 24, 2009 as a limited liability company in Delaware. Nevada Restaurant master leases the Property’s restaurants and the nightclub from the Company and has entered into management agreements with third party restaurant operators and a nightclub operator to manage and operate their respective establishments at the Property. Nevada Retail master leases certain of the retail spaces at the Property from the Company and operates certain of the retail spaces within the Property. In addition, Nevada Retail has also entered into lease agreements with third party retail operators to manage and operate their respective retail businesses at the Property.

The Company’s operations are conducted entirely at the Property, which includes hotel, casino, food and beverage, retail and other related operations. Given the integrated nature of these operations, the Company is considered to have one operating segment.

 

2. Basis of Presentation, Principles of Consolidation and Summary of Significant Accounting Principles

The unaudited interim condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Although we believe the disclosures made are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”) have been condensed or omitted pursuant to such rules or regulations. In management’s opinion, all adjustments and normal recurring accruals necessary for a fair presentation of the results for the interim periods have been made. The results for the three and nine months ended September 30, 2012 are not necessarily indicative of results to be expected for the full fiscal year. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K which was filed with the SEC on March 23, 2012.

 

6


Table of Contents

As previously noted, the Company is an indirect wholly-owned subsidiary of Deutsche Bank. In the normal course of business, the Company’s operations may include significant transactions conducted with Deutsche Bank or affiliated entities of Deutsche Bank.

Reclassifications

Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the current period’s presentation. These reclassifications had no effect on the previously reported net loss.

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the reporting period. Estimates used by us include, among other things, the estimated useful lives for depreciable and amortizable assets, the estimated allowance for doubtful accounts receivable, estimated income tax provisions, the evaluation of the future realization of deferred tax assets, determining the adequacy of reserves for self-insured liabilities and our Identity customer reward program, estimated cash flows in assessing the recoverability of long-lived assets and asset impairments, and contingencies and litigation. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Although management believes these estimates are based upon reasonable assumptions within the bounds of its knowledge of the Company’s business and operations, actual results could differ materially from those estimates.

Fair Value of Financial Instruments

The carrying value of the Company’s cash and cash equivalents, restricted cash, and accounts payable approximates fair value due to their short-term maturities. All of the Company’s debt is held by an affiliate and accrues interest at the three month London Interbank Offering Rate (“LIBOR”) plus 85 basis points. LIBOR is determined two days in advance of the funding based on publicly available quotes published by Reuters. Interest is calculated on the basis of actual days outstanding over a 360 day year. Given the related party nature of the Company’s debt, it is unlikely that the Company could obtain similar financing on the same terms with a third party in an arm’s length transaction.

Newly Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-04 Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS. ASU 2011-04 clarifies certain areas of the fair value guidance, including application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, and quantitative information about unobservable inputs used in a Level 3 fair value measurement. Additionally, ASU 2011-04 contains guidance on measuring the fair value of instruments that are managed within a portfolio, application of premiums and discounts in a fair value measurement, and requires additional disclosures about fair value measurements. The amendments contained in ASU 2011-04 are to be applied prospectively, and ASU 2011-04 is effective for public companies for interim and annual periods beginning after December 15, 2011. ASU 2011-04 did not have a material impact on the Company’s consolidated condensed financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. This ASU amends the FASB Accounting Standards Codification (“Codification”) to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 will be applied retrospectively. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not currently have any comprehensive income to report. The adoption of this amendment will only impact the presentation of any comprehensive income that may become reportable on the Company’s consolidated condensed financial statements in future periods.

 

7


Table of Contents

In December 2011, FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210) Disclosures about Offsetting Assets and Liabilities”. This ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendments will enhance disclosures required by US GAAP by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45. The Company does not currently have any financial instruments or derivative instruments to report. The adoption of this amendment will only impact the disclosures in the Company’s consolidated condensed financial statements in future periods should the Company obtain a financial instrument or derivative instrument.

In December 2011, FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”. This ASU defers only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments. All other requirements in ASU No. 2011-05 are not affected by this update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The Company does not currently have any comprehensive income to report.

No other new accounting pronouncements issued or effective during 2012 or 2011 have had or are expected to have a material impact on the Company’s financial position or results of operations.

 

3. Income Taxes

For the three months ended September 30, 2012 and 2011, the effective income tax rates were (36.13%) and 0%, respectively.

The Company’s major tax jurisdiction is the United States. Effective January 1, 2012, the Company is now part of a Corporate Consolidated Tax Group (“Consolidated Group”) owned by Deutsche Bank and is included in Consolidated Group’s income tax return. The Consolidated Group’s income tax return is under examination and the Company believes it has no uncertain tax positions; however, there is no assurance that taxing authorities will not propose adjustments that are more or less than our expected outcome and impact the provision for income taxes.

 

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Table of Contents
4. Accounts Receivable

Accounts receivable consist of the following as of September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30,
2012
    December 31,
2011
 

Casino

   $ 28,784      $ 23,715   

Rooms

     26,022        21,558   

Other

     10,886        4,713   
  

 

 

   

 

 

 
     65,692        49,986   

Less: allowance for doubtful accounts

     (6,840     (3,746
  

 

 

   

 

 

 
   $ 58,852      $ 46,240   
  

 

 

   

 

 

 

Accounts receivable, including casino and room receivables, are typically non-interest bearing. The Company issues credit to approved casino customers following investigations of creditworthiness. The allowance is estimated based on specific review of customer accounts, as well as management’s experience with collection trends in the gaming and hospitality industry and current economic and business conditions.

 

5. Prepaid Expenses and Other Current Assets

Prepaid Expenses and other current assets consist of the following as of September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30,
2012
     December 31,
2011
 

Prepaid expenses

   $ 15,478       $ 22,594   

Other assets

     4,264         4,618   
  

 

 

    

 

 

 
   $ 19,742       $ 27,212   
  

 

 

    

 

 

 

Prepaid expenses as of September 30, 2012 and December 31, 2011 consist primarily of expenses relating to insurance, property taxes, marketing, gaming related taxes, maintenance contracts and commissions on sales of condominium units. Other assets as of September 30, 2012 and December 31, 2011 consist primarily of imprest funds relating to our partner restaurants and security deposits.

 

6. Property and Equipment

Property and Equipment are stated at the lower of cost or fair value and consist of the following as of September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30,
2012
    December 31,
2011
 

Land

   $ 110,454      $ 110,454   

Buildings, building improvements and land improvements

     2,683,898        2,716,832   

Furniture, fixtures and equipment

     462,552        446,335   

Construction in progress

     5,886        4,565   

Less: accumulated depreciation

     (290,095     (166,938
  

 

 

   

 

 

 
   $ 2,972,695      $ 3,111,248   
  

 

 

   

 

 

 

No interest was capitalized during the periods in 2012. Interest of $0.4 million and $0.9 million was capitalized during the three months ended September 30, 2011 and the nine months ended September 30, 2011, respectively.

 

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7. Owner Controlled Insurance Program

The Company maintains a comprehensive owner controlled insurance program that provides insurance coverage for the construction phases of the Property. The program provides the following coverage: workers’ compensation, primary general liability, excess liability, contractors’ pollution legal liability, builders’ risk and project professional liability. The general contractor and all of the sub-contractors working on the Property are required to enroll in the program.

The Company is exposed on a first dollar loss basis in the event a claim is filed under either the workers compensation or general liability portions of the program. The Company retains the first $250,000 of the builders’ risk of loss, $500,000 of each of general liability, employer’s liability, and workers’ compensation claims. Claims that exceed the maximum loss amount of $500,000 per claim are covered by a traditional insurance program. The loss payout account receives interest at a rate based on the terms of the policy.

We also maintain a reserve for workers’ compensation claims incurred but not reported (“IBNR”). The IBNR reserve estimate is determined on our actual historical expense experience and reporting patterns. The total reserve as of September 30, 2012 and December 31, 2011 was $3.1 million and $3.8 million, respectively, and is classified as accrued and other liabilities — construction in the accompanying Condensed Consolidated Balance Sheet.

Once the insurance policies are closed out, the loss payout account will remain open and continue to pay claims until all claims are paid and closed or until the Company’s obligations have been met. The general liability claims period remains open for ten years following the completion of The Cosmopolitan in compliance with Nevada regulations. Workers’ compensation claims remain open until all claims are settled. Once all claims are paid and all obligations are settled, any residual funds in the loss payout account will be returned to the Company. The Company believes the existing balance in the loss payout account as of September 30, 2012 will be sufficient to pay all existing and expected future claims related to the Property.

As of September 30, 2012, the balance for our owner controlled insurance program was $22.4 million compared to $23.4 million as of December 31, 2011. For the three and nine months ended September 30, 2012, we paid claims of $1.2 million and $1.8 million, respectively; $0.0 million and $1.8 million related to current year and prior years claims, respectively. For the three and nine months ended September 30, 2011, we paid claims of $0.6 million and $1.9 million, respectively; $0.1 million and $1.8 million related to 2011 year and prior years claims, respectively.

The net balance of deposits in the loss payout account is classified as non-current other assets in the accompanying Condensed Consolidated Balance Sheets.

 

8. Restricted Cash and Advance Condominium Deposits

Restricted cash consists of non-refundable condominium sales deposits plus earned interest that are held in interest bearing escrow accounts and tokes (tips) earned by our Co-Stars in the Company’s Slot and Table Games Departments. The balance as of September 30, 2012 is comprised of $2.1 million advanced condominium deposits and $0.2 million tokes. As of December 31, 2011, the toke balance was $1.2 million. The advanced condominium balance of $2.1 million is composed of $1.9 million in principal and $0.2 million in interest and the advanced condominium balance of $34.5 million as of December 31, 2011 is composed of $30.6 million in principal and $3.9 million in interest.

The Company records deposits received under condominium-hotel unit (“condominium”) sale agreements as restricted cash and deferred revenue. Deposits are refundable in the case of a proven default by the Company. These amounts will be recognized as income upon closing of the sale of the condominium, except in the case of a proven default by the Company. Interest earned on these deposits is subject to refund in the case of a proven default by the Company. Interest earned on escrow deposits is deferred and will be recognized in other income within the Condensed Consolidated Statement of Operations at closing or any other termination of the sales contract, except in the case of a proven default by the Company. Income resulting from legal settlements reached with the condominium purchasers or arising due to buyer default is recognized within other income within the Condensed Consolidated Statement of Operations (refer to Note 12 for further discussion).

 

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9. Accrued and Other Liabilities

Accrued and other liabilities consist of the following (in thousands):

 

     September 30,
2012
     December 31,
2011
 

Accrued accounts payable

   $ 12,313       $ 9,487   

Deposits-patrons

     5,578         9,522   

Advance deposits

     9,474         8,869   

Accrued PTO

     5,198         4,717   

Accrued salaries and wages

     2,753         4,327   

Sales tax payable

     3,895         1,883   

Chip liability

     3,099         5,597   

Other liabilities

     27,796         19,524   
  

 

 

    

 

 

 
   $ 70,106       $ 63,926   
  

 

 

    

 

 

 

 

10. Loan Payable to Affiliate

The Company maintains a $3.9 billion credit facility with Deutsche Bank AG Cayman Island Branch (“DBCI”), a Branch of Deutsche Bank AG. On March 3, 2010, $1.6 billion of this facility was converted into a committed line of credit. DBCI has no obligation to provide the Company with additional funding beyond the $3.9 billion credit facility. Amounts under the total facility are drawn down in tranches which have varying maturity dates and are automatically renewed upon their expiration at the prevailing interest rates. The credit facility does not include any financial covenants.

Borrowings carry an interest rate of LIBOR plus a LIBOR margin. Prior to the opening of The Cosmopolitan on December 15, 2010, the LIBOR margin was 0 basis points (0.0%). All loan tranches drawn on or after the opening of the Property attract a LIBOR margin of 85 basis points (0.85%). Loan tranches outstanding at December 15, 2010 do not attract the 85 basis points margin until they are renewed. LIBOR is determined two days in advance of the funding based on publicly available quotes published by Reuters. Interest is calculated on the basis of actual days outstanding over a 360 day year.

Prior to the opening of the Property on December 15, 2010, interest on the loan was added to the principal loan balance. At the opening of the Property, the outstanding balance of the credit facility from DBCI, including all unpaid interest, was converted into a five year term loan. Any undrawn amounts under the credit facility remain available to the Company and are added to the principal balance as and when drawn. Interest on the loan is payable in arrears and is due and payable on the first business day of each quarter. Principal repayment of the term loan and any future draw downs will be due on the fifth year anniversary of the term loan.

Proceeds from these facilities may be used to pay for (i) the costs of constructing and completing the Property, (ii) Property operating deficits and, (iii) payment of interest on the Loan to the extent that cash flow from the Property is insufficient to pay same after paying the cost of operating the Property. All outstanding debt will become due and payable upon a change of control of the Company.

The total amount of the loan payable to affiliate at September 30, 2012 and December 31, 2011 was $3.5 billion and $3.5 billion, respectively. Additionally, at September 30, 2012 and December 31, 2011, the Company had accrued interest payable to affiliate of $11.8 million and $11.1 million, respectively, with a weighted-average interest rate of approximately 1.33% and 1.27%, respectively.

The Company classifies construction related accounts payable, retention and accrued and other liabilities as long term liabilities as they are financed by the Company’s credit facility with DBCI and therefore, will not require the use of working capital.

 

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11. Related Party Transactions

The Company is involved in significant financing and other transactions with certain of its affiliates and Deutsche Bank (refer to Note 10 for further discussion).

The following table sets forth amounts held with, receivable from and payable to affiliates and Deutsche Bank as of September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30,
2012
     December 31,
2011
 

Cash held with Deutsche Bank

   $ 28,960       $ 19,578   

Loan payable to affiliate

     3,526,951         3,530,857   

Interest payable to affiliate

     11,757         11,122   

Deutsche Bank provided certain administrative and other support services to the Company, including accounting, development management, procurement and logistics, and legal during the development phase of the Company. The Company was charged $0.0 million and $0.0 million during the three and nine months ended September 30, 2012, respectively for those services. The Company was charged $0.1 million and $0.5 million during the three and nine months ended September 30, 2011, respectively, for those services. On October 21, 2010, the Company entered into an agreement with Voteco to pay for all expenses relating to Voteco and the Voteco members including costs incurred for the services of all advisors and consultants to the extent such costs are reasonable and documented. The amount paid during the three months ended September 30, 2012 and 2011 by the Company on behalf of Voteco amounted to $0.2 million and $0.4 million, respectively. The amount paid during the nine months ended September 30, 2012 and 2011 by the Company on behalf of Voteco amounted to $0.8 million and $0.8 million, respectively.

 

12. Commitments, Contingencies and Litigation

a. Property General Contractor and other purchase obligations

The Company had previously engaged Perini Building Company (“Perini”) to act as the general contractor for the Property. Perini operated under a Guaranteed Maximum Price (“GMP”) contract that defines the scope of work to be performed, established the budget for the scope of work, and set the general time scale of the job. As of September 30, 2012, there are no remaining amounts expected to be paid to Perini under the GMP.

The Company engaged Penta Building Group (“Penta”) in April 2011 to act as the general contractor for the Property for all post opening approved projects. Penta operates under a Master Agreement which pre-defined the type of contractual agreement (lump sum fee, cost plus fee or guaranteed maximum price) based on the total cost of the agreed upon project. Penta bills the Company for work completed on a monthly basis and the amounts paid to Penta are dependent on the number of approved projects and the amount of work executed during that month. Amounts owed to Penta are recorded as Accounts Payable – Construction in the Condensed Consolidated Balance Sheets.

During 2010, the Company engaged W A Richardson Builders LLC (“WARB”) to act as the general contractor for the build-out of our spa and restaurants. As of September 30, 2012, there are no amounts expected to be paid to WARB under executed contracts.

As of September 30, 2012 the Company had total construction commitments of $1.2 million.

b. Jockey Club Agreement

Upon acquisition, the Company, as lessor, assumed a 99-year lease agreement with the Jockey Condominium, Inc. (“JCI”), the homeowners’ association of a timeshare condominium development located adjacent to the Property. Under the terms of the lease agreement, the Company is required to provide non-exclusive access and use to various public portions of the Property and provide 358 parking spaces in the Property’s parking facility for the condominium development’s use. Although JCI is not required to pay base rent, the lease agreement provides that JCI shall pay operating expenses associated with the parking spaces for their allocable share of the parking facility.

 

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c. Condominium Litigation

The Company was a named defendant in a number of lawsuits and arbitrations concerning the purchase and sale of condominium-hotel units located within the East and West Towers of the Property. The plaintiffs alleged, among other things, that delays in the completion of the Property and changes to the design of the Property constituted material breaches by the Company, thus permitting the plaintiffs/purchasers to rescind their contract and receive a full refund of their earnest money deposit, plus interest thereon. The Company was represented in each of these matters by outside legal counsel. Virtually all of the original claims have been settled (through either a series of class action or individual settlements) or litigated to completion.

During the three and nine months ended September 30, 2012, various buyers agreed to settle and release their claims against the Company arising under their agreements to purchase condominium-hotel units. Under the terms of the settlements, buyers of units in the West Tower of The Cosmopolitan received a refund of 50% of their principal earnest money deposits and buyers of units in the East Tower received a refund of 40% of their principal earnest money deposits. The Company retained 50% of the principal deposits, plus 100% of all interest, under the West Tower purchase contracts, and 60% of the principal deposits, plus 100% of all interest, under the East Tower purchase contracts, resulting in a net gain of $0.1 million and $12.8 million for the three and nine months ended September 30, 2012, respectively, which the Company recognized as net settlement income in its Condensed Consolidated Statement of Operations.

As of November 9, 2012, there were 8 condominium-hotel units that remain the subject of ongoing arbitrations. The Company is actively engaged in various arbitrations and other dispute resolution proceedings with respect to all of those units. Those proceedings are in varying stages and the Company disputes the allegations made by the buyers in those proceedings. For each of these claims, the Company believes that it has strong legal defenses, and intends to vigorously defend its position. Management does not believe that these claims will have a material adverse impact on the condensed consolidated financial position, cash flows, or the results of operations of the Company. The Company expects that some of the units that are the subject of ongoing arbitrations may be settled under similar terms to those of prior settlements, while others may be litigated to completion.

d. Class Action Suits

Wage and Hour

The Company has been put on notice and or served with two separate class action lawsuits related to alleged unpaid compensation for time incurred by employees while on property for donning and doffing of the employees’ required uniform, alleged improper rounding of time for hours worked and various other claims related to alleged unpaid compensation. The Company is in the process of evaluating the lawsuits and cannot at this time determine the potential impact of the lawsuits on the condensed consolidated financial position, cash flows, or the results of operations of the Company.

Alleged unlawful taping/recording

A class action lawsuit has been filed in Superior Court in the State of California against the Company, alleging violation of the California Penal Code regarding the unlawful taping or recording of calls. The Company is in the process of evaluating the lawsuit and cannot at this time determine the potential impact of the lawsuit on the condensed consolidated financial position, cash flows, or the results of operations of the Company.

e. Other Matters

The Company is subject to various claims and litigation arising in the normal course of business. In the opinion of management, all pending legal matters will not have a material adverse impact on the condensed consolidated financial position, cash flows, or the results of operations of the Company.

 

13. Membership Interests

The Company’s membership interests are comprised of Class A and Class B Membership Interests. Holders of Class A Membership Interests are entitled to vote on any matter to be voted upon by the members. Holders of Class B Membership Interests have all the economic interests in the Company and, except as provided by law, do not have any right to vote.

100% of the Company’s Class A Membership Interests are held by Nevada Voteco and 100% of the Company’s Class B Membership Interests are held by Nevada Mezz.

 

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

Cautionary Note Regarding Forward-Looking Statements

Any statements made in this report that are not statements of historical fact or that refer to estimated or anticipated future events are forward-looking statements. These statements may include, or be preceded or followed by, the words “may,” “will,” “should,” “might,” “could,” “potential,” “possible,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “hope” or similar expressions. We have based our forward-looking statements on management’s beliefs and assumptions based on information available to our management at the time these statements are made. Although we believe our expectations are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, our actual results may materially differ from expected results. Factors that could have a material adverse effect on our operations and future prospects or that could cause actual results to differ materially from our expectations include, but are not limited to: continuing recessionary economic and market conditions, particularly in levels of spending in the Las Vegas hotel, resort and casino industry; changes in the competitive environment in our industry; the seasonal nature of the hotel, resort and casino industry; the capital intensive nature of the Las Vegas hotel, resort and casino industry; costs associated with compliance with extensive regulatory requirements; diminishing value of our name, image and brand; maintaining the integrity of customer information; the loss of key members of our senior management; and the other risks discussed in the section entitled “Item 1A — Risk Factors” in our Annual Report on Form 10-K which was filed with the SEC on March 23, 2012. In addition, new risks and uncertainties emerge from time to time, and it is not possible for us to predict or assess the impact of every factor that may cause our actual results to differ from those contained in any forward-looking statements. Undue reliance should not be placed on such statements, which speak only as of the date of this document or the date of any document that may be incorporated by reference into this document. Consequently, readers of this Quarterly Report on Form 10-Q should consider these forward-looking statements only as our current plans, estimates and beliefs. We do not undertake and specifically decline any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We undertake no obligation to update or revise any forward-looking statements in this Quarterly Report on Form 10-Q or in our Annual Report on Form 10-K to reflect any new events or any change in conditions or circumstances.

Operations

We commenced operations on December 15, 2010. Prior to December 15, 2010, the Property was in its construction and pre-opening stage.

The Cosmopolitan comprises approximately 8.7 acres of land and is located on the Las Vegas Strip directly between Bellagio and MGM’s City Center. The Cosmopolitan is connected to City Center to the south via an elevated pedestrian bridge, to the east side of the Las Vegas Strip via a second pedestrian bridge, and to the Bellagio to the north via a ground floor public access sidewalk.

The Casino

The approximately 110,000 square-foot casino features the latest in gaming technology offered in a modern, energetic atmosphere. The casino floor includes 1,364 slot machines and 102 table games, with immediate guest access from each of the East and West Towers and accessible just steps from the Las Vegas Strip. The casino level also contains several destination bar/lounge areas, a three story feature attraction using an innovative light and music display, as well as an intimate entertainment lounge used to bring live performances to the gaming floor. The casino also has a separate area for high limit table games and slots, centrally located but distinct from the main gaming floor, catering specifically to our higher limit clientele.

The Hotel

Phase I of the Property opened on December 15, 2010. At opening, the 50-story East and 52-story West Towers was comprised of 1,998 hotel and condominium-hotel style rooms ranging in size from 730 square feet to over 5,400 square feet in addition to ten three-story bungalow-style suites adjacent to the west pool deck. The rooms feature contemporary bespoke room décor featuring spacious living areas, luxurious bathrooms, state-of-the-art

 

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technology control panels, flat-screen televisions, entertainment systems, wireless internet and a custom in-room bar. The condominium-hotel style rooms offer expansive terraces with dazzling views of the Strip. An additional 968 hotel and condominium-hotel style units located in the West Tower (“Phase II”) were completed incrementally through September 2011 without disruption to the already existing operations.

An approximately 65,000 square-foot, 1,800 seat showroom, the top 4 floors of the East Tower and a restaurant space (the “Future Phases”) will be completed at a later date as management deems appropriate based on various factors, including market conditions.

Food and Beverage and the Restaurant Collection

The Cosmopolitan offers a number of casual dining options for our guests, including a premiere buffet, a burger bar, a poolside grill, a casual restaurant on the casino level, a pizzeria, and in-room dining options available twenty-four hours a day, seven days a week. The Cosmopolitan also incorporates a number of bars, lounges, and destination venues which collectively feature a comprehensive cocktail and wine program, offering our guests a wide range of the finest in beverage options. In addition, The Cosmopolitan also offers a collection of distinctive restaurants, managed and operated by experienced world class culinary third-parties.

Retail

Our retail offering includes nine eclectic retail boutiques on the second level of the podium in approximately 60,000 square feet of contiguous space. A sizeable amount of foot traffic naturally flows through our second floor retail space, as this is the primary pathway for Las Vegas visitors to travel north and south between the City Center project and Bellagio. Our retail operators were selected to fit with our overall brand image and profile, and offer our guests a range of distinctive retail options.

Nightclub and Dayclub

The Cosmopolitan features an integrated entertainment venue of approximately 53,000 square feet including a cutting edge, world class nightclub operation called “Marquee Nightclub & Dayclub at The Cosmopolitan” (the “Marquee”). Marquee is approximately 31,000 square feet, and is located at the top of the podium between the two hotel towers. Marquee Nightclub encompasses all of the features of a major Las Vegas integrated resort nightclub, including an ultra lounge experience and a Dayclub. The Dayclub operates from April through October, and was first opened in April 2011 featuring 22,000 square feet of entertainment space including two pools, several bars, a gaming area comprised of nine table games, and grand cabanas with individual infinity pools.

Spa/Salon/Fitness Centers

Our integrated resort offers a 50,000 square-foot spa & hammam facility, located at the base of the West Tower which is easily accessible from any room in The Cosmopolitan. Our spa & hammam are key elements in the overall offerings to our guests, and offers a level of quality, service, and experience that we believe competes with the best spa offerings in the Las Vegas market.

Separately, the Property also offers two fitness centers, one in the East Tower and the other in the West Tower, offering our guests twenty-four hours a day, seven days a week access to high quality fitness and exercise equipment.

Convention and Banquet Facility

Our approximately 185,000 square-foot convention and banquet facility is located on the second, third and fourth levels of the podium. The space is designed for maximum flexibility and can accommodate everything from small group meetings to large conferences in the 66,000 square feet of ballroom space. Directly beneath the hotel towers, the location of the ballroom space is unique to the Las Vegas market, allowing convention attendees immediate, direct access from the hotel towers to the meeting space. The space has support capabilities to enable all modern meeting technology requirements.

 

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Results of Operations

The following table presents Condensed Consolidated Statements of Operations data for each of the periods indicated (in thousands):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012     2011     2012     2011  

Net revenue

   $ 145,307      $ 126,626      $ 454,139      $ 357,710   

Operating expenses

     (187,338     (175,892     (549,518     (502,650
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (42,031     (49,266     (95,379     (144,940

Loss before income taxes

     (53,789     (58,489     (118,728     (169,618

Income tax benefit

     (19,435     —          (42,187     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (34,354   $ (58,489   $ (76,541   $ (169,618

The Company’s operations are conducted entirely at the Property, which includes hotel, casino, food and beverage, retail and other related operations. Given the integrated nature of these operations, the Company is considered to have one operating segment.

We incurred a net loss of $34.4 million and $58.5 million for the three months ended September 30, 2012 and 2011, respectively. We incurred a net loss of $76.5 million and $169.6 million for the nine months ended September 30, 2012 and 2011, respectively.

Income Taxes

For the quarters ended September 30, 2012 and 2011, our income tax provision was ($19.4) million and $0 million, respectively. Our effective income tax rate was (36.13%) for the quarter ended September 30, 2012, compared to 0% for the corresponding 2011 period. Effective January 1, 2012, the Company is part of a Corporate Consolidated Tax Group (“Consolidated Group”) owned by Deutsche Bank and is party to a tax sharing agreement with the Consolidated Group. The effective income tax rate for the quarter ending September 30, 2012 includes the benefit for being a party to such tax sharing agreement. The Consolidated Group is expected to generate more than sufficient taxable income annually to utilize the Company’s deferred tax assets.

Operating Measures

Certain gaming and hospitality industry specific statistics are included in the discussion of our operational performance. These statistics are defined below:

 

   

Table games win percentage is the percentage of drop (amount of cash and markers issued; net markers paid at the gaming table with cash, and deposited in a gaming table’s drop box) that is won by the casino and recorded as casino revenue.

 

   

Average Daily Rate (“ADR”) — calculated by dividing total room revenue by total rooms occupied.

 

   

Revenue per Available Room (“REVPAR”) — calculated by dividing total room revenue by total rooms available.

 

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

Revenues

Our revenues for the three months ended September 30, 2012 and 2011 were as follows (in thousands):

 

     Three Months Ended September 30,  
     2012     2011  

Revenues:

    

Casino

   $ 22,557      $ 23,862   

Rooms

     59,896        49,286   

Food and beverage

     82,424        68,903   

Entertainment, retail and other

     8,818        6,819   
  

 

 

   

 

 

 

Gross revenues

     173,695        148,870   

Less—promotional allowances

     (28,388     (22,244
  

 

 

   

 

 

 

Net revenues

   $ 145,307      $ 126,626   

Gross revenues for the three months ended September 30, 2012 increased $24.8 million or 16.7%, from $148.9 million to $173.7 million. Casino revenues decreased $1.3 million or (5.5%) primarily due to the performance of our table games. The table games hold percentage for the three months ended September 30, 2012 was 7.2% as compared to 9.1% for the three months ended September 30, 2011. Our results were negatively affected by a low hold percentage in certain table games. The hold percentage was significantly below our expected range of 12% to 15%. Our focus continues to be on supplementing the level of table games play at the Property. In November 2011, the Company completed the construction of an additional high limit gaming area (The Talon Club), approximating 9,600 square feet. We also continue to focus our efforts on increasing the volume of slot play through leveraging our unique Identity guest loyalty program, building our database of slot customers and expanding our alliance program.

Room revenues increased $10.6 million or 21.5% which continue to reflect strong demand in both the free independent traveler and group sales categories and was principally driven by an increase in the number of available rooms over the prior period. The three months ended September 30, 2012 ADR and REVPAR both increased over the the same period 2011 amounts despite our increase in the number of rooms of 458 placed in service in September 2011. ADR and occupancy for the three months ended September 30, 2012 were $257 and 85.7%, respectively, generating REVPAR of $220. ADR and occupancy for the three months ended September 30, 2011 were $233 and 83.7%, respectively, generating REVPAR of $195.

Food and beverage revenues for the three months ended September 30, 2012 and 2011 were $82.4 million and $68.9 million, respectively, representing an increase of $13.5 million or 19.6%. Food and beverage revenues are comprised of revenues from Company-operated restaurants, banquets and conventions, in-room dining and bars. Additionally, it includes revenues from our restaurant collection as well as Marquee, all of which are 100% owned by the Company, but managed and operated by third-parties. The revenue performance for the three months ended September 30, 2012 is attributable to the continuing strong demand and high volume of customers in Marquee and our restaurants, as well as the increased number of customers staying at our Property.

Entertainment, retail and other revenues are comprised of revenues from retail outlets, concerts, boxing events, and other miscellaneous activities. Entertainment, retail and other revenues for the three months ended September 30, 2012 and 2011 were $8.8 million and $6.8 million, respectively, representing an increase of $2.0 million or 32.4%. The increase in revenue for the three months ended September 30, 2012 reflected higher revenues in retail, spa services and various fees.

Revenues for the three months ended September 30, 2012 and 2011 include the retail value of accommodations, food and beverage, and other services furnished to our guests without charge. These amounts

 

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totaled $28.4 million and $22.2 million, respectively, and, in accordance with industry practice, have been deducted from revenues as promotional allowances. We believe the level of promotional allowances incurred was necessary to continue to drive customer awareness, build our customer database and create customer loyalty. We expect this level of promotional allowance expense to continue in the short-term, but decline to industry norms over the long-term.

Operating expenses

Our operating expenses for the three months ended September 30, 2012 increased 6.7% when compared to the same quarter in the prior year. The increase was notably slower than the growth in gross revenues, which was up 16.7% in the quarter. The Company has ongoing efforts focused on restraining the growth, and in some cases, reducing departmental operating expenses, resulting in higher operating margins. Our operating expenses for the three months ended September 30, 2012 and 2011 were as follows (in thousands):

 

     Three Months Ended September 30,  
     2012     2011  

Operating expenses:

    

Casino

   $ 26,697      $ 22,523   

Rooms

     14,252        13,156   

Food and beverage

     56,554        51,405   

Entertainment, retail and other

     7,309        9,356   

General and administrative

     37,692        34,671   

Corporate expense

     3,391        3,196   

Pre-opening expenses

     —          684   

Loss (gain) on sale of assets

     (6     216   

Depreciation and amortization

     41,449        40,685   
  

 

 

   

 

 

 

Total operating expenses

   $ 187,338      $ 175,892   
  

 

 

   

 

 

 

Departmental Expenses

Casino expenses increased by $4.2 million or 18.5% from $22.5 million for the three months ended September 30, 2011 to $26.7 million for the three months ended September 30, 2012 reflecting the increase in additional gaming space associated with the opening of the Talon Club as an additional high limit gaming area in November 2011 and higher gaming volume. Casino expenses include the estimated departmental cost of providing promotional allowances.

Room expenses increased by $1.1 million or 8.3% as a result of the additional costs to service the additional 458 rooms placed in service between periods. Room expenses were $14.3 million for the three months ended September 30, 2012 and $13.2 million for the three months ended September 30, 2011.

Food and beverage expenses increased by $5.2 million or 10.0%. The increase in Food and beverage expense was the result of increased volume in our managed restaurants and bars and in our partner restaurants. We also had higher management and incentive fees owed to our partner restaurants and Marquee for performing at higher levels in their respective agreements. Food and beverage expenses were $56.6 million for the three months ended September 30, 2012 and $51.4 million for the three months ended September 30, 2011.

Entertainment, retail and other expenses decreased by $2.1 million or 21.9% from $9.4 million for the three months ended September 30, 2011 to $7.3 million for the three months ended September 30, 2012. The decrease is a result of less contract entertainment expense associated with fewer shows during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. Operating expenses within “entertainment, retail and other” include entertainment activities on the casino floor that are offered free of charge to the public. Entertainment is a key component of the overall marketing and positioning strategy of the Property, and is an important driver of visitation to the Property.

 

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General Administrative and Corporate Expenses

General and administrative expenses increased by $3.0 million or 8.7 %, from $34.7 million to $37.7 million for the three months ended September 30, 2011 and 2012, respectively. The increase in General and administrative expenses is a result of the Company’s increased marketing efforts related to our television advertising campaign during the three months ended September 30, 2012. Such spending enhances our strong brand identity, helping to drive traffic to our Property. General and administrative expenses include salaries, advertising and marketing, property taxes and insurance. Corporate expense increased slightly by $0.2 million or 6.1% from $3.2 million for the three months ended September 30, 2011 to $3.4 million for the three months ended September 30, 2012. Corporate expenses include corporate salaries and legal expenses.

Pre-opening Expenses

Pre-opening expenses for the three months ended September 30, 2012 were $0.0 million compared to $0.7 million for the three months ended September 30, 2011. Pre-opening expenses consist primarily of direct salaries and wages, legal and consulting fees, insurance and utilities expenses relating to Phase I and II of the Property.

Depreciation and Amortization

Depreciation and amortization increased by $0.8 million, from $40.7 million to $41.5 million, in the three months ended September 30, 2012 as compared to the same period in the prior year. The primary reason for the increase was that additional assets were placed into service upon the completion of Phase I and II of the Property.

Other Income (Expense)

Our other income and expenses for the three months ended September 30, 2012 and 2011 were as follows (in thousands):

 

     Three Months Ended September 30,  
     2012     2011  

Other income (expense):

    

Net settlement and default income

   $ 110      $ —     

Interest income

     (111     186   

Interest expense, net of amounts capitalized

     (11,757     (9,409
  

 

 

   

 

 

 
   $ (11,758   $ (9,223
  

 

 

   

 

 

 

Net Settlement and Default Income

We recorded net settlement income of $0.1 million and $0.0 million for the three months ended September 30, 2012 and 2011. Net settlement income represents income from some of the purchasers within the East and the West Towers who had previously opted out of the settlement offers, settling their claims with us in individual transactions.

Interest Expense, Net of Amounts Capitalized

Interest expense for the three months ended September 30, 2012 was $11.8 million as compared to $9.4 million for the three months ended September 30, 2011. The significant increase in interest expense is due to the increase in the applicable interest rate. The Company has borrowings of $3.5 billion at an interest rate of 1.33% for the three months ended September 30, 2012 compared to borrowings of $3.5 billion at an interest rate of 1.09% for the three months ended September 30, 2011.

 

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Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

Revenues

Our revenues for the nine months ended September 30, 2012 and 2011 were as follows (in thousands):

 

     Nine Months Ended September 30,  
     2012     2011  

Revenues:

    

Casino

   $ 92,060      $ 83,069   

Rooms

     182,346        129,607   

Food and beverage

     237,102        196,614   

Entertainment, retail and other

     23,349        17,443   
  

 

 

   

 

 

 

Gross revenues

     534,857        426,733   

Less—promotional allowances

     (80,718     (69,023
  

 

 

   

 

 

 

Net revenues

   $ 454,139      $ 357,710   

Gross revenues for the nine months ended September 30, 2012 increased $108.1 million or 25.3%, from $426.7 million to $534.9 million. Casino revenues increased $9.0 million or 10.8%, reflecting growth primarily in high limit table games. The table games hold percentage for the nine months ended September 30, 2012 was 9.9% as compared to 11.1% for the nine months ended September 30, 2011. The hold percentage was significantly below our expected range of 12% to 15%. Our focus continues to be on supplementing the level of table games play at the Property. In November 2011, the Company completed the construction of an additional high limit gaming area (The Talon Club), approximating 9,600 square feet. We also continue to focus our efforts on increasing the volume of slot play through leveraging our unique Identity guest loyalty program, building our database of slot customers and expanding our alliance program.

Room revenues increased $52.7 million or 40.7% which continue to reflect strong demand in both the free independent traveler and group sales categories and was principally driven by an increase in the number of available rooms over the prior period. The nine months ended September 30, 2012 ADR and REVPAR both increased over the same period 2011 amounts while our occupancy rate declined slightly. The number of rooms available increased by 458 rooms in September 2011. ADR and occupancy for the nine months ended September 30, 2012 were $260 and 86.6%, respectively, generating REVPAR of $225. ADR and occupancy for the nine months ended September 30, 2011 were $240 and 86.8%, respectively, generating REVPAR of $207.

Food and beverage revenues for the nine months ended September 30, 2012 and 2011 were $237.1 million and $196.6 million, respectively, representing an increase of $40.5 million or 20.6%. Food and beverage revenues are comprised of revenues from Company-operated restaurants, banquets and conventions, in-room dining and bars. Additionally, it includes revenues from our restaurant collection as well as Marquee, all of which are 100% owned by the Company, but managed and operated by third-parties. The revenue performance for the nine months ended September 30, 2012 is attributable to the continuing strong demand and high volume of customers in Marquee and our restaurants, as well as the increased number of customers staying at our Property.

Entertainment, retail and other revenues are comprised of revenues from retail outlets, concerts, boxing events, and other miscellaneous activities. Entertainment, retail and other revenue for the nine months ended September 30, 2012 and 2011 were $23.4 million and $17.4 million, respectively, representing an increase of $6.0 million or 34.4%. The revenue increase for the nine months ended September 30, 2012 reflected higher revenues in retail, spa services and various fees.

Revenues for the nine months ended September 30, 2012 and 2011 include the retail value of accommodations, food and beverage, and other services furnished to our guests without charge. These amounts totaled $80.7 million and $69.0 million, respectively, and, in accordance with industry practice, have been deducted from revenues as promotional allowances. We believe the level of promotional allowances incurred were necessary to continue to drive customer awareness, build our customer database and create customer loyalty. We expect this level of promotional allowance expense to continue in the short-term, but decline to industry norms over the long-term.

 

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Operating Expenses

Our operating expenses for the nine months ended September 30, 2012 increased 9.3% when compared to the same period in the prior year. The increase was notably slower than the growth in gross revenues, which was up 25.3% in the nine months. The Company has ongoing efforts focused on restraining the growth, and in some cases, reducing departmental expenses, resulting in higher operating margins. Our operating expenses for the nine months ended September 30, 2012 and 2011 were as follows (in thousands):

 

     Nine Months Ended September 30,  
     2012      2011  

Operating expenses:

     

Casino

   $ 75,071       $ 71,563   

Rooms

     42,590         34,802   

Food and beverage

     161,839         147,665   

Entertainment, retail and other

     20,481         23,567   

General and administrative

     114,219         103,375   

Corporate expense

     9,342         9,494   

Pre-opening expenses

     —           1,466   

Loss (gain) on sale of assets

     807         (6,197

Depreciation and amortization

     125,169         116,915   
  

 

 

    

 

 

 

Total operating expenses

   $ 549,518       $ 502,650   
  

 

 

    

 

 

 

Departmental Expenses

Casino expenses increased by $3.5 million or 4.9 % from $71.6 million to $75.1 million for the nine months ended September 30, 2011 and 2012, reflecting the increase in additional gaming space associated with the opening of the Talon Club as an additional high limit gaming area in November 2011 and higher gaming volume. Casino expenses include the estimated departmental cost of providing promotional allowances.

Rooms expenses increased by $7.8 million or 22.4% as a result of the higher costs to service the additional 458 rooms placed in service between periods. Rooms expenses were $42.6 million for the nine months ended September 30, 2012 and $34.8 million for the nine months ended September 30, 2011.

Food and beverage expenses increased by $14.1 million or 9.6%. The increase in Food and beverage expense was the result of increased volume in our managed restaurants, bars and in our partner restaurants. We also had higher management and incentive fees owed to our partner restaurants for performing at higher levels in their respective agreements, and Marquee. Food and beverage expenses were $161.8 million for the nine months ended September 30, 2012 and $147.7 million for the nine months ended September 30, 2011.

Entertainment, retail and other expenses decreased by $3.1 million or 13.1% from $23.6 million for the nine months ended September 30, 2011 to $20.5 million for the nine months ended September 30, 2012. The lower expenses resulted from a decrease in contract entertainment and production related expenses associated with a different mix of shows during the nine months ended September 30, 2012 when compared to the nine months ended September 30, 2011. Operating expenses within entertainment, retail and other include entertainment activities on the casino floor that are offered free of charge to the public. Entertainment is a key component of the overall marketing and positioning strategy of the Property, as well as an important driver of visitation to the Property.

General Administrative and Corporate Expenses

General and administrative expenses increased by $10.8 million or 10.5%, from $103.4 million to $114.2 million for the nine months ended September 30, 2011 and 2012, respectively. The increase in General and administrative expenses is a result of the Company’s increased marketing efforts related to our television advertising campaign during the nine months ended September 30, 2012. Such spending enhances our strong brand identity, helping to drive traffic to our Property. General and administrative expenses include salaries, advertising and marketing, property taxes and insurance. Corporate expense remained relatively constant at $9.3 million and $9.5 million for the nine months ended September 30, 2012 and 2011, respectively. Corporate expenses include corporate salaries and legal expenses.

 

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Pre-opening Expenses

Pre-opening expenses for the nine months ended September 30, 2012 were $0.0 million compared to $1.5 million for the nine months ended September 30, 2011. Pre-opening expenses consist primarily of direct salaries and wages, legal and consulting fees, insurance and utilities expenses relating to Phase I and II of the Property.

Depreciation and Amortization

Depreciation and amortization increased by $8.3 million, from $116.9 million to $125.2 million, in the nine months ended September 30, 2012 as compared to the same period in the prior year. The primary reason for the increase was that additional assets were placed into service upon the completion of Phase I and II of the Property.

Other Income (Expense)

Our other income and expenses for the nine months ended September 30, 2012 and 2011 were as follows (in thousands):

 

     Nine Months Ended September 30,  
     2012     2011  

Other income (expense):

    

Net settlement and default income

   $ 12,771      $ —     

Interest income

     5        231   

Interest expense, net of amounts capitalized

     (36,125     (24,909
  

 

 

   

 

 

 
   $ (23,349   $ (24,678
  

 

 

   

 

 

 

Net Settlement and Default Income

The income of $12.8 million for the nine months ended September 30, 2012 is primarily comprised of a net gain of $13.1 million associated with buyers representing 178 condominium-hotel units in The Cosmopolitan who agreed to settle and release their claims against the Company arising under their agreements to purchase the condominium hotel units.

Interest Expense, Net of Amounts Capitalized

Interest expense for the nine months ended September 30, 2012 was $36.1 million as compared to $24.9 million for the nine months ended September 30, 2011. The significant increase in interest expense is due to the increase in the applicable interest rate.

Non-GAAP measure — EBITDA and adjusted EBITDA

Adjusted EBITDA is used by management as the primary measure of the operating performance of The Cosmopolitan. Adjusted EBITDA is calculated as the net income (loss) attributable to the Company before interest, income taxes, depreciation and amortization, pre-opening expenses, rent expenses and corporate expenses.

Management has presented adjusted EBITDA information as a supplemental disclosure to the reported US GAAP measures because it believes that this measure is widely used to assess the operating performance in the gaming and hospitality industry. Certain items excluded from adjusted EBITDA may be recurring in nature and should not be disregarded in the evaluation of our earnings performance. However, management believes that the exclusion of such items provides a meaningful analysis of current results and trends as these items can vary significantly depending on specific underlying transactions or events that may not be comparable between the periods being presented.

Adjusted EBITDA should not be construed as an alternative to operating income or net income, as an indicator of our performance; or as an alternative to cash flows from operating activities, as a measure of liquidity; or as any other measure determined in accordance with US GAAP. Also, other companies in the gaming and hospitality industry that report adjusted EBITDA information may calculate adjusted EBITDA in a different manner.

 

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The following table presents a reconciliation of adjusted EBITDA to net loss for the three and nine months ended September 30, 2012 and 2011 (unaudited, in thousands):

 

     Three Months Ended
September 30, 2012
    Three Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2012
    Nine Months Ended
September 30, 2011
 

Net loss

   $ (34,354   $ (58,489   $ (76,541   $ (169,618

Interest, net

     11,868        9,223        36,120        24,678   

Income tax (benefit)

     (19,435     —          (42,187     —     

Depreciation and amortization

     41,449        40,685        125,169        116,915   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     (472     (8,581     42,561        (28,025

Pre-opening expenses

     —          684        —          1,466   

Corporate expenses

     3,391        3,196        9,342        9,494   

Rent expenses

     499        443        1,575        2,239   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 3,418      $ (4,258   $ 53,478      $ (14,826
  

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

The following table presents Condensed Consolidated Statements of Cash Flows data for each of the periods indicated (unaudited, in thousands):

 

     Nine Months Ended
September 30, 2012
    Nine Months Ended
September 30, 2011
 

Net cash provided by (used in) operating activities

   $ 13,809      $ (104,328

Net cash used in investing activities

     (32,936     (308,618

Net cash (used in) provided by financing activities

     (3,906     400,028   

Net cash provided by (used in) operating activities

The increase in net cash provided by operating activities in the nine months ended September 30, 2012 compared to net cash used in operating activities in the nine months ended September 30, 2011 is primarily attributable to our improved operating results, the increase in working capital from operations and the income generated by the condominium settlement and default income noted above under Net settlement and default income.

Net cash used in investing activities

Capital expenditures totaling $33.0 million during the nine months ended September 30, 2012 were primarily incurred for the payment of construction payables from Phase I and the ongoing construction of Phase II of the Property. Capital expenditures totaling $325.1 million during the nine months ended September 30, 2011 were primarily incurred for further construction of our integrated resort.

We estimate capital expenditures for the remainder of the year ending December 31, 2012 will total between $10.0 and $15.0 million. This is expected to be comprised of renovations and other capital improvements to remain competitive, including replacement of furniture, fixtures and equipment.

Net cash (used in) provided by financing activities

These cash flows during the nine months ended September 30, 2012 represent the amounts drawn against our credit facility with DBCI of $21.1 million which were used to pay construction expenses relating to Phase I and Phase II of the Property, construction of the additional high limit gaming area and to finance, in part, the operations at the Property. These draws were offset by repayments during 2012 of principal of $25.0 million. For the nine months ended September 30, 2011, we borrowed $400.0 million under our credit facility with DBCI which were used to pay for construction relating to Phase I and Phase II of the Property, construction of the additional high limit gaming area and to finance, in part, the operations at the Property.

 

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Liquidity

As of September 30, 2012, we had $54.3 million in available cash and cash equivalents. We intend to finance the costs to complete Phase II of the Property, to include a showroom with borrowings from DBCI pursuant to the credit facility. We may require additional financing to support future growth. However, due to the existing uncertainty in the capital and credit markets, access to capital may not be available on terms acceptable to us or at all. The cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Continued turbulence in the US and international markets and economies and prolonged declines in business and consumer spending may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers, including our ability to refinance maturing liabilities and access to capital markets to meet liquidity needs.

The Company maintains a $3.9 billion credit facility with DBCI, $3.5 billion of which was outstanding as of September 30, 2012. Deutsche Bank has no obligation to provide the Company with additional funding beyond the $3.9 billion credit facility. Amounts under the total facility are drawn down in tranches which have varying maturity dates and are automatically renewed upon their expiration at the prevailing interest rates. The credit facility does not include any financial covenants. The current expiration of the credit facility is December 2015.

Borrowings carry an interest rate of LIBOR plus a LIBOR margin. Prior to the opening of the Property on December 15, 2010, the LIBOR margin was 0 basis points (0.0%). All loan tranches drawn on or after the opening of the Property attract a LIBOR margin of 85 basis points (0.85%). Loan tranches outstanding at December 15, 2010 do not attract the 85 basis points margin until they are renewed. LIBOR is determined two days in advance of the funding based on publicly available quotes published by Reuters. Interest is calculated on the basis of actual days outstanding over a 360 day year.

Prior to the opening of the Property on December 15, 2010, interest on the loan was added to the principal loan balance. At the opening of the Property, the outstanding balance of the credit facility from DBCI, including all unpaid interest, was converted into a five year term loan. Any undrawn amounts under the credit facility remain available to the Company and are added to the principal balance as and when drawn. Interest on the loan is payable in arrears and is due and payable on the first business day of each quarter. Principal repayment will be due on the fifth year anniversary of the term loan.

Under the terms of our credit agreements, proceeds from our credit facilities may be used to pay for (i) the costs of constructing and completing the Property, (ii) Property operating deficits and, (iii) payment of interest on the loan to the extent that cash flow from the Property is insufficient to pay same after paying the cost of operating the Property. All outstanding debt will become due and payable upon a change of control of the Company.

The Company classifies construction related accounts payable, retention and accrued and other liabilities as long term liabilities as they are financed by the Company’s credit facility with DBCI and therefore will not require the use of working capital.

The Company has both short-term and long-term liquidity requirements as described in more detail below.

Short-Term Liquidity Requirements: We generally consider our short-term liquidity requirements to consist of those items that are expected to be incurred or come due within the next twelve months and believe those requirements consist primarily of funds necessary to pay construction payables and retention from Phase I and complete the construction of Phase II of the Property as well as to finance interest payments and ongoing working capital requirements. We expect to meet our short-term liquidity needs through borrowings from DBCI under the existing credit facility and from operating cash flows generated by the Property. We believe that these sources of capital will be sufficient to meet our short-term liquidity requirements.

Long-Term Liquidity Requirements: We generally consider our long-term liquidity requirements to consist of those items that are expected to be incurred beyond the next twelve months and believe these requirements consist primarily of funds necessary to finance future renovation projects and to finance ongoing operational costs.

 

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We intend to satisfy our long-term liquidity requirements through borrowings from DBCI under the existing credit facility and operating cash flows generated by the Property.

The debt structure described above will require the Company to generate sufficient cash flow to pay the current interest due on the outstanding borrowings on a quarterly basis. Since interest rates will reset quarterly based on the value of LIBOR at the reset date, the Company will have a variable interest obligation that may cause volatility in our cash flows. The interest rate structure described above does not include a credit risk premium in the spread over the base rate. The lack of a risk premium in the interest rate reflects the fact that the Company is an indirect wholly-owned subsidiary of Deutsche Bank. This interest rate is not representative of third party interest rates that the Property would have to ordinarily bear if funding were obtained from an unrelated party. Upon a change of control event, we expect that the Company will be subject to pay a credit risk premium to any lender that provides financing. In addition, base interest rates are at historic low levels and interest rates will likely increase over time.

Critical Accounting Policies and Estimates

The preparation of our Condensed Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States of America (“US GAAP”) requires us to make estimates and judgments about the effects of matters that are inherently uncertain. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. The critical accounting policies are summarized in Note 2 to our Consolidated Financial Statements included in our 2011 Annual Report on Form 10-K filed on March 23, 2012.

Newly Issued Accounting Standards

Refer to related disclosure within Note 2 to our Condensed Consolidated Financial Statements included in Item 1 — Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

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. The outstanding debt under our credit facility with DBCI has a variable interest rate. As of September 30, 2012, an increase in market rates of interest by 1.0% would have increased our annual interest cost by $35.3 million.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) is recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, as of the end of the period covered by this Quarterly Report, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

 

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Changes in Internal Controls

There have been no significant changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

See Note 12, Commitments, Contingencies and Litigation, to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a description of our significant current legal proceedings.

Item 1A. Risk Factors

In addition to the other information contained in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Item 1A “Risk Factors” in our Annual Report on Form 10-K which was filed with the SEC on March 23, 2012, in evaluating our business, financial position, future results, and prospects. Although there have been no material changes to the risk factors described in the Annual Report on Form 10-K, the risks described therein are not the only risks facing our Company. Additional risks that we do not presently know or that we currently believe are not material could also materially adversely affect our business, financial position, future results and prospects.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of equity securities.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

 

Exhibit

    
31.1*    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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101**   The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, filed with the SEC on November 9, 2012 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011, (ii) the Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011, (iii) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011, and (iv) Notes to Condensed Consolidated Financial Statements.

 

* Filed herewith
** This exhibit is furnished and not filed or a part of a registration statement or prospectus for 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 Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

 

NEVADA PROPERTY 1 LLC
Registrant

/S/    JOHN UNWIN

John Unwin

Chief Executive Officer

(Principal Executive Officer)

Date: November 9, 2012

/S/    RONALD G. EIDELL

Ronald G. Eidell
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Date: November 9, 2012

 

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