ITEM 1. BUSINESS
General
American Casino & Entertainment Properties LLC, or ACEP, was formed in Delaware on December 29, 2003. ACEP owns and operates the Stratosphere Casino Hotel & Tower, or the Stratosphere, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder in Las Vegas, Nevada, and the Aquarius Casino Resort, or the Aquarius, in Laughlin, Nevada.
On April 22, 2007, American Entertainment Properties Corp., or AEP, our former direct parent, entered into a Membership Interest Purchase Agreement, or the Agreement, with W2007/ACEP Holdings, LLC, or Holdings, an affiliate of Whitehall Street Global Real Estate Limited Partnership 2007 and Whitehall Parallel Global Real Estate Limited Partnership 2007, collectively Whitehall 2007, funds affiliated with Goldman, Sachs & Co., to sell all of our issued and outstanding membership interests to Holdings, for approximately $1.3 billion. Pursuant to the Assignment and Assumption Agreement, dated December 4, 2007, between Holdings and W2007/ACEP Managers Voteco, LLC, or Voteco, Holdings assigned all of its rights, obligations and interests under the Agreement to Voteco. The acquisition, or the Acquisition, closed at a purchase price of $1.2 billion on February 20, 2008.
On January 24, 2008, the Nevada Gaming Commission issued an order of registration of ACEP as constituted after the consummation of the Acquisition. The order (1) prohibits Voteco or Holdings, or their respective affiliates, from selling, assigning, transferring, pledging or otherwise disposing of our membership interests or any other security convertible into or exchangeable for our class A membership interests, or Class A Interests, or our class B membership interests, or Class B Interests, without the prior approval of the Nevada Gaming Commission, (2) prohibits the direct or indirect members of Voteco from selling, assigning, transferring, pledging or otherwise disposing of any direct or indirect membership interest in Voteco without the prior administrative approval of the Chairman of the Nevada State Gaming Control Board or his designee, and (3) prohibits ACEP from declaring cash dividends or distributions on any class of membership interest of ACEP beneficially owned in whole or in part by Holdings or Voteco, or their respective affiliates, without the prior approval of the Nevada Gaming Commission.
On February 20, 2008, ACEP issued and sold 100% of our Class B Interests to Holdings for approximately $200.1 million. Except as otherwise expressly required by law, holders of our Class B Interests have no voting rights.
On February 20, 2008, upon the consummation of the closing of the Acquisition, ACEP, Voteco and Holdings entered into an Amended and Restated Limited Liability Company Agreement of ACEP, or the Amended Operating Agreement.
On February 20, 2008, in connection with the closing of the Acquisition, each member of Voteco, Holdings and Voteco entered into a Transfer Restriction Agreement. The Transfer Restriction Agreements provides, among other things, that:
·Holdings has the right to acquire Class A Interests from Voteco on each occasion that Class B Interests held by Holdings would be transferred to a proposed purchaser who, in connection with such proposed sale, has obtained all licenses, permits, registrations, authorizations, consents, waivers, orders, findings of suitability or other approvals required to be obtained from, and has made all findings, notices or declarations required to be made with, all gaming authorities under all applicable gaming laws,
·A specific purchase price, as determined in accordance with the Transfer Restriction Agreement, will be paid to acquire the Class A Interests from Voteco, and
·Voteco will not transfer ownership of Class A Interests owned by it except pursuant to such option of Holdings.
Pursuant to the Amended Operating Agreement, holders of Class A Interests will be entitled to one vote per interest in all matters to be voted on by our voting members. Except as otherwise expressly required by law, holders of Class B Interests will have no right to vote on any matters to be voted on by our members. Holders of Class A Interests and Class B Interests will have no preemptive rights, no other rights to subscribe for additional interests, no conversion rights and no redemption rights, will not benefit from any sinking fund, and will not have any preferential rights upon a liquidation.
Upon consummation of the Acquisition, Voteco acquired control of ACEP from our previous direct parent, which sold all the issued and outstanding membership interests of ACEP to Voteco pursuant to the membership interest purchase agreement. The membership interests of ACEP acquired by Voteco were redeemed and canceled pursuant to the terms of the Amended Operating Agreement entered into by ACEP, Voteco and Holdings upon the consummation of the Acquisition. Voteco acquired 100% of our voting securities by purchasing 100% of our newly issued Class A Interests in exchange for consideration in the amount of $30. The source of funds used by Voteco to purchase the Class A Interests were contributions of capital made to Voteco by each of its three members. Each of the members of Voteco is party to the Transfer Restriction Agreement.
Certain of our wholly owned indirect subsidiaries obtained term loans in an aggregate amount of approximately $1.1 billion from Goldman Sachs Mortgage Company, or GSMC, pursuant to certain mortgage and mezzanine loan agreements, collectively the Goldman Term Loans. The Goldman Term Loans had an initial term of two years with two one-year extension options and a blended annual interest rate of LIBOR plus 3.00% during the initial term and LIBOR plus 3.25% during any extension term. As a condition of the Goldman Term Loans, we were required to maintain a cash management account where we deposited all cash revenues. In addition, the Goldman Term Loans contained important affirmative and negative financial covenants customary for loans of this nature.
On June 25, 2009, ACEP and GSMC closed the restructuring of the Goldman Term Loans. In connection with the restructuring, (i) Whitehall 2007 invested $200 million of new capital, $165 million of which was paid to Holdings and used to repay a portion of the Goldman Term Loans and $35 million of which was contributed in cash to ACEP, (ii) ACEP and certain of its wholly-owned indirect subsidiaries entered into a new loan agreement with GSMC evidencing a five-year term loan with an aggregate principal amount of $350 million, or the 2014 Term Loans, (iii) Holdings agreed to issue to an affiliate of GSMC a 22% interest in Holdings upon receipt of necessary gaming approvals and (iv) GSMC agreed to terminate the Goldman Term Loans.
On August 14, 2009, ACEP and ACEP Finance Corp., a wholly-owned subsidiary of ACEP, collectively the Issuers, issued $375 million aggregate principal amount of 11% Senior Secured Notes due 2014, or the 11% Senior Secured Notes. The 11% Senior Secured Notes were issued pursuant to an indenture, dated as of August 14, 2009, or, the Indenture, among the Issuers, all of the then existing subsidiaries of ACEP other than ACEP Finance Corp., as guarantors, or the Guarantors, and The Bank of New York Mellon, as trustee. The 11% Senior Secured Notes mature on June 15, 2014. The 11% Senior Secured Notes bear interest at a rate of 11% per annum. Interest on the 11% Senior Secured Notes is computed on the basis of a 360-day year composed of twelve 30-day months and is payable semi-annually on June 15 and December 15 of each year, beginning on December 15, 2009.
The obligations under the 11% Senior Secured Notes are jointly, severally and unconditionally guaranteed, or the Guarantees, by all of the subsidiaries of ACEP other than ACEP Finance Corp. and will be so guaranteed by any future domestic subsidiaries of ACEP, subject to certain exceptions. The gross proceeds from the issuance of the 11% Senior Secured Notes, approximately $311.3 million, were used to repay a portion of the then outstanding balance of the 2014 Term Loans. Upon such payment, the remaining balance, or approximately $38.8 million of the 2014 Term Loans, was forgiven by GSMC.
On February 23, 2010, the Issuers completed a United States Securities and Exchange Commission, or SEC, registered exchange offer in which the Issuers issued approximately $374.9 million aggregate principal amount of their SEC-registered 11% Senior Secured Notes due 2014, or the SEC-Registered Notes, in exchange for $374.9 million of their outstanding, unregistered 11% Senior Secured Notes. The SEC-Registered Notes have substantially identical terms to the 11% Senior Secured Notes, except that the SEC-Registered Notes are registered under the Securities Act of 1933, as amended, or the Securities Act, and there are certain differences relating to transfer restrictions, registration rights, and payment of additional interest in case of non-registration. The SEC-Registered Notes and the 11% Senior Secured Notes are collectively referred to herein as the 11% Senior Secured Notes.
Our executive offices are located at 2000 Las Vegas Boulevard South, Las Vegas, Nevada 89104 and our telephone number is (702) 380-7777.
Cautionary Statement Pursuant to the U.S. Private Securities Litigation Reform Act of 1995
We have included or incorporated by reference in this Annual Report on Form 10-K, and from time to time our management may make, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, among other things, as well as statements about the objectives and effectiveness of our risk management policies, statements about trends in or growth opportunities for our businesses, and statements about our future status, activities or regulation by the Nevada Gaming Commission and the Nevada State Gaming Control Board. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed below and under “Risk Factors” in Part I, Item 1A
Item 1A. RISK FACTORS
The downturn in the local, regional, national and global economies, the volatility and disruption of the capital and credit markets and adverse changes in the local, regional, national and global economies could continue to negatively impact our financial performance and our ability to access financing.
The severe economic downturn and adverse conditions in the local, regional, national and global markets have negatively affected our operations, and may continue to negatively affect our operations in the future. During 2008, 2009, 2010 and 2011 our revenues have decreased significantly compared to 2007. If the current economic condition continues or worsens, our revenues may decrease further while some of our costs remain fixed or may even increase. Gaming and other leisure activities we offer represent discretionary expenditures and participation in such activities has declined during the economic downturn and may continue to decline. We have experienced reduced numbers of visitors, lower occupancy rates and lower revenue.
The severe economic downturn has particularly affected the markets in which we operate. For example, the residential and commercial real estate markets in and around Las Vegas have experienced significant downturn and a decline in real estate values. Also, construction spending in the Las Vegas area (which has been an important driver for the local economy) has significantly decreased and unemployment in Las Vegas has significantly increased. In December 2011, Las Vegas unemployment was 12.7% compared to 8.3% nationally. We have summarized below publicly available data relating to the conditions in the markets in which we operate.
Clark County. In 2011, gaming revenue in Clark County, Nevada, where all of our properties are located, was approximately $9.2 billion, a 3.5% increase from 2010, as growth in the Las Vegas Strip area outpaced revenue growth in the other areas of the county. Baccarat play, which is favored by high-end international guests, was a significant contributor to gaming revenue growth in 2011. Our properties do not target the baccarat player. Gaming revenue is still below its peak of approximately $10.9 billion from 2007 due to the lingering effects of the economic downturn.
Las Vegas. According to the LVCVA statistical reports, convention attendance and meetings held increased 8.8% and 5.7%, respectively in 2011. Additionally, air passengers using McCarran International Airport, the primary airport serving Las Vegas, increased 4.3% in 2011 to approximately 41.5 million.
Laughlin. The Laughlin area economy, where Aquarius is located, is primarily dependent on the gaming and tourism industry. Laughlin visitor volume and occupancy rates have declined on an annual basis over the past several years while the number of hotel rooms has remained fairly constant. According to the LVCVA as of December 31, 2011, the Laughlin market consisted of approximately 10,334 hotel rooms and its gaming revenue for 2011 was approximately $465 million, down 3.7% from 2010. Visitor volume decreased 4.7% year-over-year to approximately 2.3 million compared to approximately 2.4 million in 2010. Hotel occupancy in 2011 decreased 0.7% to 63.0% while the average daily room rate increased 5.5% to $40.34.
We have reduced room rates and engaged in promotional activities to try to attract customers. The combination of fewer customers, less spending by customers and need for promotional incentives, reduces revenue and operating margins. At the same time, we have found it difficult to reduce operating costs in line with reductions in visitor numbers or customer spending, further reducing operating margins. As a consequence, this economic downturn has negatively affected our operations and, together with further economic declines in the markets in which we operate or from which we draw customers, may continue to negatively affect our operations. Even an uncertain economic outlook may adversely affect consumer spending in our gaming operations and related facilities, as consumers spend less. Furthermore, other uncertainties, including national and global economic conditions, terrorist attacks or other global events, could adversely affect consumer spending and adversely affect our operations.
Further, our properties draw a substantial number of customers from the Las Vegas Valley, as well as certain geographic areas, including Southern California and Arizona. Adverse economic conditions in any of these regions could result in a decrease in the number of customers traveling from those areas to our properties.
Our business is particularly sensitive to reductions in discretionary consumer spending as a result of downturns in the economy.
Consumer demand for entertainment and other amenities at casino hotel properties, such as ours, are particularly sensitive to downturns in the economy and the corresponding impact on discretionary spending on leisure activities. Changes in discretionary consumer spending or consumer preferences brought about by factors such as perceived or actual general economic conditions, effects of the current decline in consumer confidence in the economy, including the current housing, employment and credit crisis, the impact of high energy and food costs, the increased cost of travel, the potential for continued bank failures, decreased disposable consumer income and wealth, or fears of war and future acts of terrorism could further reduce customer demand for the amenities that we offer, thus imposing practical limits on pricing and negatively impacting our results of operations and financial condition.
For example, the economic recession that occurred in the United States from 2008 - 2009 resulted in one of the toughest economic periods in Southern Nevada history. The current housing crisis and economic slowdown in the United States has resulted in a significant decline in the amount of tourism and spending in Las Vegas. Similarly, weak economic conditions have also adversely affected tourism and spending in Laughlin, where Aquarius is located. Since our business model relies on consumer expenditures on entertainment, luxury and other discretionary items, continuation or deepening of the economic downturn will further adversely affect our results of operations and financial condition.
Because all four of our gaming properties are concentrated in a relatively small area in Nevada, we are especially subject to certain risks, including economic and competitive risks, associated with the conditions in that area and in the areas from which we draw customers.
Three of our gaming properties are located in Las Vegas, Nevada, and one of them in Laughlin, Nevada, approximately 97 miles from Las Vegas. Because our operations are concentrated in a relatively small area, we are subject to greater risks from local conditions than a gaming company with operating properties in several different markets. A decrease in revenues from or increase in costs for one of these locations is likely to have a proportionally higher impact on our business and operations than it would for a gaming company with more geographically diverse operating properties. Our business is particularly sensitive to reductions in discretionary consumer spending as a result of downturns in the economy. Risks from local conditions include the following:
·local economic conditions, including the economic downturn in the Las Vegas metropolitan area discussed in ‘‘The downturn in the local, regional, national and global economies, the volatility and disruption of the capital and credit markets and adverse changes in the local, regional, national and global economies could continue to impact our financial performance and our ability to access financing’’;
·local competitive conditions;
·reduced land and air travel due to increasing fuel costs, reduced flights into Las Vegas, or transportation disruptions;
·inaccessibility of the area due to inclement weather, road construction or closure of primary access routes; and
·a decline in the number of visitors to Las Vegas and Laughlin, Nevada.
Local Competitive Risks. In addition to the risks described under ‘‘If we are unable to compete effectively against our competitors, our business will suffer’’ below, we face significant risks due to local competition in the markets in which we operate and the markets from which we draw our customers. Prior to the recent economic downturn, the Las Vegas market experienced a substantial increase in the construction and development of hotels and casinos available to our potential customers. As of December 31, 2011, LVCVA reported Las Vegas hotel room inventory of 150,161 and as of May 19, 2011, projects 640 additional rooms to open in 2012.
We do not believe that our competition is limited to a particular geographic area, and gaming operations in other states or countries could attract our customers. To the extent that new casinos or hotel room capacity is expanded by others in major destination locations, competition will increase. As a result of the increase in product available to our potential customers and the recent economic downturn, we are competing for a smaller number of potential customers with fewer dollars to spend with a larger number of competitors. Arizona Charlie’s Decatur, Arizona Charlie’s Boulder and the Aquarius largely cater to the local markets and depend on the local markets for customers. Competition for local customers has historically been intense. Local competitive risks and our failure to attract a sufficient number of guests, gaming customers and other visitors in these locations could adversely affect our business.
Transportation-Related Risks. The majority of our customers at the Stratosphere travel by air or car to Las Vegas. Increasing transportation costs, for example, caused by increased fuel costs, may deter people from traveling to our properties from long distances or decrease the amount of money they have available to spend once there. Further, leisure and business travel, especially travel by air, remain particularly susceptible to global geopolitical events. We cannot control the number or frequency of flights into or out of Las Vegas, but we rely on air traffic for a significant portion of our visitors. Reductions in flights by major airlines can impact the number of visitors to our properties. For the year ended December 31, 2011, arriving and departing passengers through McCarran International Airport in Las Vegas increased 4.3% to approximately 41.5 million from approximately 39.8 million in 2010.
Additionally, there is one principal interstate highway between Las Vegas and Southern California, where a large number of our customers reside. Capacity constraints of that highway or any other traffic disruptions may also affect the number of customers who visit our properties.
Weather and Public Health Risks. Due to our concentration of properties in Nevada, any man-made or natural disasters in or around Nevada, or the areas from which we draw customers to our properties, could have a significant adverse effect on our business, financial condition and results of operations. The outbreak of public health threats at any of our properties, or in the areas in which they are located, or the perception that such threats exist could also have a significant, adverse effect on our business, financial condition and results of operations.
If we are unable to compete effectively against our competitors, our business will suffer.
The gaming industry is highly competitive and our competitors vary considerably in size, quality of facilities, number of operations, brand identities, marketing and growth strategies, financial strength and capabilities, level of amenities, management talent and geographic diversity. We also compete with other nongaming resorts and vacation areas and with various other entertainment businesses.
Our competitors in each market that we participate in may have substantially greater financial, selling and marketing, technical and other resources than we do. Many of our competitors have reduced room rates and increased their promotional activities. This has forced all of our properties to reduce rates, operate with lower occupancy or both. We cannot assure you that we will be able to compete effectively in our markets or that we will be capable of maintaining or further increasing our current market share. Our failure to compete successfully in our markets could adversely affect our business, financial condition, results of operations and cash flow.
In recent years, with fewer new markets opening for development, many casino operators have been reinvesting in existing markets to attract new customers or to gain market share, thereby increasing competition in those markets. As companies have completed new expansion projects, supply has typically grown at a faster pace than demand in some markets, including Las Vegas, our largest market, and competition has increased significantly. The expansion of existing casino entertainment properties, the increase in the number of properties and the aggressive marketing strategies of many of our competitors have increased competition in the markets in which we operate, and this intense competition is expected to continue.
Rising operating costs for our gaming properties could have a negative impact on our business.
The operating expenses associated with our gaming properties could increase due to, among other reasons, the following factors:
·changes in the tax or regulatory environment which impose additional restrictions or increase our operating costs; our properties use significant amounts of electricity, natural gas and other forms of energy, and energy price increases may adversely affect our cost structure;
·our properties use significant amounts of water and a water shortage may adversely affect our operations;
·an increase in the cost of health care benefits for our employees could have a negative impact on our profitability;
·as of December 2011, approximately 40% of our employees were members of various unions and covered by union-sponsored collective bargaining agreements and we may incur higher costs or work slow-downs or stoppages due to union activities; The collective bargaining agreements representing our culinary employees at the Stratosphere and our operating engineers and entertainment stagehands at the Aquarius all expire in 2012. We do not anticipate any business disruptions or significant increases in costs.
·our reliance on slot play revenues and the concentration of relatively few slot play vendors could impose additional costs on us;
·as our properties age, we may need to increase our expenditures for repairs, maintenance, and to replace equipment necessary to operate our business in amounts greater than what we have spent historically; and
·aggressive marketing and promotional campaigns by our competitors for an extended period of time could force us to increase our expenditures for marketing and promotional campaigns in order to maintain our existing customer base and attract new customers.
If our operating expenses increase without any off-setting increase in our revenues, our profitability is likely to suffer.
Changes in tax laws could increase our cost of doing business and negatively affect our business.
The gaming industry represents a significant source of tax revenue, particularly to the State of Nevada and its counties and municipalities. Gaming companies are currently subject to significant state and local taxes and fees in addition to normal federal and state corporate income taxes, and such taxes and fees are subject to increase at any time. From time to time, various state and federal legislators and officials have proposed changes in tax law, or in the administration of such law, affecting the gaming industry. The Regular Session of the Nevada Legislature (‘‘Nevada Legislature’’) adjourned in June 2011 and there were no increases in taxes affecting gaming revenue. In prior sessions, the Nevada Legislature did approve a 3% increase in the tax charged against room sales. Although this tax is passed on to our guests, the effect of this tax is to increase the cost to our guests of staying in hotels and, therefore, could negatively impact visitation and/or other expenditures. The Nevada Legislature also approved an increase from 0.63% to 1.17% in the Modified Business Tax that is charged against employee wages, which has increased our labor costs. The State of Nevada projects a budget shortfall from 2011 to 2013. From time to time, there have been gaming revenue tax increase proposals in Nevada. The Nevada Legislature meets again in 2013 and we cannot assure you that our taxes or fees will not be increased.
An initiative petition was filed with the Nevada Secretary of State office on February 7, 2012 to boost the gambling tax on big casinos from 6% to 9% of gross gaming revenue. To qualify the petition, would require the gathering of 72,352 signatures of registered voters statewide by November 13, 2012. If the signatures are gathered, the petition will be presented to the 2013 Nevada Legislature. If it is not passed by lawmakers, it will go on the election ballot in 2014. If approved by either, the increased tax would be effective in January 2015.
The federal government has also previously considered a federal tax on gaming revenues and may consider such a tax in the future. Decreases in tax revenues resulting from the economic downturn may increase pressure on federal, state or local authorities to increase taxes. If there is any material increase in federal, state or local taxes and fees, our business, financial condition and results of operations could be adversely affected because of increased costs to us or our customers.
Our business is subject to extensive governmental gaming regulation, which is costly to comply with, and failure to do so could cause us to incur penalties or force us to cease operations.
We are subject to a variety of regulations in the jurisdictions in which we operate, including the extensive gaming laws and regulations of the State of Nevada. Compliance with these regulations is costly and time-consuming. Regulatory authorities at the federal, state and local levels have broad powers with respect to the regulation and licensing of casino operations and may revoke, suspend, condition or limit our gaming or other licenses, impose substantial fines on us and take other actions, any one of which would have a significant adverse effect on our business, financial condition and results of operations.
If additional gaming regulations were adopted in a jurisdiction in which we operate, such regulations could impose restrictions on us that would prevent us from operating our business as it is currently operated, or the increased costs associated with compliance with such regulations could lower our profitability. From time to time, various proposals are introduced in the legislatures of the jurisdictions in which we have operations that, if enacted, could adversely affect the tax, regulatory, operational or other aspects of the gaming industry and our company. Legislation of this type may be enacted in the future.
Our members, managers, directors, officers and key employees must also be approved by certain state regulatory authorities. If state regulatory authorities were to find a person occupying any such position unsuitable, we would be required to sever our relationship with that person. We may thereby lose key personnel which would have a negative effect on our operations. Certain public and private issuances of securities and certain other transactions by us also require the approval of certain state regulatory authorities. Further, our gaming regulators can require us to disassociate ourselves from suppliers or business partners found unsuitable by the regulators. For a summary of some of the significant gaming regulations that affect our business, see ‘‘Regulation and Licensing.” The regulatory environment in any particular jurisdiction may change in the future and any such change could have a material adverse effect on our results of operations. In addition, we are subject to various gaming taxes, which are subject to increase at any time.
Our business is subject to various federal, state and local laws and regulations in addition to gaming regulations. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, environmental matters, employees, currency transactions, taxation, zoning and building codes, and marketing and advertising. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted. Material changes, new laws or regulations, or material differences in interpretations by courts or governmental authorities could adversely affect our operations.
If we lose one or more licenses used in our business or our operations or are otherwise restrained by law or regulation, we may be unable to continue our operations as they are conducted today, or may be forced to cease operations.
We have significant working capital needs, and if we are unable to satisfy those needs from cash generated from our operations or indebtedness, we may not be able to meet our obligations, including payroll and statutory tax payment requirements.
We require significant amounts of working capital to operate our business. We currently do not have a revolving credit facility. Under the indenture for the notes, if we are able to meet a certain leverage ratio, we may enter into and incur up to $20.0 million in indebtedness under a credit facility, which could share equally and ratably in the collateral securing the notes. There can be no assurance that we will be able to meet this leverage ratio at any time during the term of the notes. Even if we are able to meet this leverage ratio, there can be no assurance that we will be able to obtain a credit facility. As a result, we expect our primary source of cash to come from the operation of our properties. If we experience a significant and sustained drop in operating profits, or if there are unanticipated reductions in cash inflows or increases in cash outlays, we may be subject to cash shortfalls. If such a shortfall were to occur for even a brief period of time, it may have a significant adverse effect on our business and our ability to meet our obligation to make payments on the notes.
Our hotels and casinos may need to increase capital expenditures to compete effectively but we may not have sufficient funds to do so.
Capital expenditures, such as room refurbishments, amenity upgrades and new gaming equipment, may be necessary from time to time to preserve the competitiveness of our hotels and casinos. The gaming industry market is very competitive and is expected to become more competitive in the future. If cash from operations is insufficient to provide for needed levels of capital expenditures and we are unable to raise funds for such purposes elsewhere, we may be unable to make necessary improvements and our facilities may be less attractive to our visitors than that of our competitors’, causing us to lose our competitive position.
We may be unable to raise additional indebtedness because of the recent instability in the financial markets.
The financial markets in the United States and internationally have been marked by a significant downturn, which has reduced the availability and, in particular, increased the cost of financing for issuers with a rating below investment grade. The adverse market conditions, together with our relatively high debt levels, have made it difficult for us to attract financing or to enhance our existing debt. Although we have significantly reduced our debt as a result of the Restructuring, we still have significant debt relative to our EBITDA. In addition, recent financings in the casino industry have occurred at a higher cost than in recent years, with less favorable terms. This higher cost may be a result of declining property values, concerns about leverage in the casino industry, the consolidation of financial institutions and the current turmoil in the credit markets or some combination of such factors and/or other factors. We cannot predict with any certainty how we will be impacted in the future by financial market conditions. There can be no assurance that we will be able to secure financing in the future at all or at a cost comparable to or lower than what is available in the current credit markets or on favorable terms.
Increasing prices or shortages of energy and water may increase our cost of operations or force us to temporarily or permanently cease operations.
Our properties use significant amounts of water, electricity, natural gas and other forms of energy. Our properties are located in a desert where water is scarce and the hot temperatures require heavy use of air conditioning. While we have not experienced any shortages of energy or water in the past, we cannot guarantee you that we will not in the future. Other states have suffered from electricity shortages. For example, California and Texas experienced rolling blackouts due to excessive air conditioner use because of unexpectedly high temperatures in recent years. We expect that potable water will become an increasingly scarce commodity in the areas in which we operate at an increasing price.
Further, the increasing cost of energy and water will increase our costs of operations, thereby likely lowering our net cash flows. In addition, energy price increases in the regions that provide a significant source of customers for our properties could result in a decline of disposable income of potential customers and a corresponding decrease in visitation and spending at our properties, which could negatively impact revenues.
Our operations may be adversely impacted by expanded Native American gaming operations if they attract customers that otherwise would visit our properties.
The expansion of Native American casinos in the United States continues to have an impact on casino revenues in Nevada and such impact may be significant on the markets in which we operate. California’s state officials are in active negotiations to renegotiate certain compacts with Native American tribes. Some Native American casino compacts have already been changed to allow for additional slot machines. In addition, several initiatives have been proposed which would, if approved, further expand the scope of gaming in California. While the effect of increased gaming in California and other states is difficult to predict, our revenues could decline if such competing casinos attract customers who would otherwise travel to Las Vegas or Laughlin.
Acts of terrorism and war and natural disasters may negatively impact our business.
Terrorist attacks and other acts of war or hostility have created many economic and political uncertainties. We cannot predict the extent to which terrorism, security alerts or war, or hostilities in Iraq and other countries throughout the world will continue to directly or indirectly impact our business and operating results. For example, the terrorist attacks that occurred on September 11, 2001 had a negative impact on travel and leisure expenditures at our properties and on the industry as a whole. As a consequence of the threat of terrorist attacks and other acts of war or hostility in the future, premiums for a variety of insurance products have increased, and some types of insurance are no longer available. Given current conditions in the global insurance markets, we are substantially uninsured for losses and interruptions caused by terrorist acts and acts of war. If any such event were to affect our properties, we would likely be adversely impacted.
Extreme weather conditions or earthquakes may interrupt our operations, damage our properties, and reduce the number of customers who visit our facilities in such areas. Although we maintain both property and business interruption insurance coverage for certain extreme weather conditions or earthquakes, such coverage is subject to deductibles and limits on maximum benefits, including limitation on the coverage period for business interruption, and we cannot assure you that we will be able to fully insure such losses or fully collect, if at all, on claims resulting from such extreme weather conditions or earthquakes. Furthermore, such extreme weather conditions may interrupt or impede access to our affected properties and may cause visits to our affected properties to decrease for an indefinite period.
We are subject to a wide variety of environmental laws and potential exposure to environmental liabilities.
We are subject to various federal, state and local laws, ordinances and regulations that govern activities or operations that may have adverse environmental effects, such as discharges to air and water or may impose liability for the costs of cleaning up and certain damages resulting from sites of spills, disposals or other releases of hazardous or toxic substances or wastes. These laws and regulations are complex, and subject to change, and violations can lead to significant fines and penalties. Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating contamination on its property, without regard to whether the owner or operator knew of, or caused, the presence of the contaminants, and regardless of whether the practices that resulted in the contamination were legal at the time that they occurred. We endeavor to maintain compliance with environmental laws, but from time to time, current or historical operations on, or adjacent to, our property may have resulted or may result in noncompliance with environmental laws or liability for cleanup pursuant to environmental laws. In that regard, we may incur costs for cleaning up contamination relating to historical uses of certain of our properties.
From time to time, we are a defendant in a variety of litigation and other adversary proceedings, which are costly to defend, divert management’s attention from our operations and may cause us to pay damages if we are unsuccessful in defending against the actions or unable to cover damages with insurance proceeds.
We are involved, from time to time, in a variety of litigation arising out of our business. We carry insurance to cover most business risks, but there can be no assurance that the insurance coverage we have will cover all claims that may be asserted against us. Should any ultimate judgments or settlements not be covered by insurance or exceed our insurance coverage, such uncovered losses could increase our costs and thereby lower our profitability. There can also be no assurance that we will be able to obtain appropriate and sufficient types or levels of insurance in the future or that those adequate replacement policies will be available on acceptable terms, if at all.
We may incur property and other losses that are not adequately covered by insurance, which may harm our results of operations.
Although we maintain insurance that our management believes is customary and appropriate for our business, we cannot assure you that insurance will be available or adequate to cover all loss and damage to which our business or our assets might be subjected. The lack of adequate insurance for certain types or levels of risk could expose us to significant losses in the event that a catastrophe occurred for which we are underinsured. Any losses we incur that are not adequately covered by insurance may decrease our future operating income, require us to find replacements or repairs for destroyed property and reduce the funds available for payments of our obligations, including the notes.
A significant portion of our labor force is covered by collective bargaining agreements, and a dispute with covered employees or new labor agreements may lower our revenues and increase our costs.
Approximately 1,700 of our 4,300 employees are covered by collective bargaining agreements. A prolonged dispute with the covered employees could have an adverse impact on our operations. In addition, wage and/or benefit increases resulting from new labor agreements may be significant and could also have an adverse impact on our results of operations. The collective bargaining agreements representing our culinary employees at the Stratosphere and our operating engineers and entertainment stagehands at the Aquarius all expire in 2012.
Claims that we infringe upon third parties’ intellectual property rights could be costly to defend or settle, and thus could reduce our income or increase our net loss.
We may from time to time encounter disputes over rights and obligations concerning intellectual property. Third parties may bring claims of infringement against us. Such claims may be with or without merit. Any litigation to defend against claims of infringement or invalidity could result in substantial costs and diversion of resources. Furthermore, a party making such a claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from operating our websites. Our business, operating results and financial condition could be harmed should we face challenges to our intellectual property.
Our revenues may be negatively impacted by volatility in our hold percentage.
Casino revenue is recorded as the difference between gaming wins and losses or net win from gaming activities. Net win is impacted by variations in the hold percentage (the ratio of net win to total amount wagered), or actual outcome, on our slot machines, table games, race and sports betting, and all other games we provide to our customers. We use the hold percentage as an indicator of a game’s performance against its expected outcome. Although each game generally performs within a defined statistical range of outcomes, actual outcomes may vary for any given period. The hold percentage and actual outcome on our games can be impacted by the level of a customer’s skill in a given game, errors made by our employees, the number of games played, faults within the computer programs that operate our slot machines and the random nature of slot machine payouts. If our games perform below their expected range of outcomes, our cash flow may suffer.
The loss of management and other key personnel could significantly harm our business, and the quality of individuals hired for positions in the hotel and gaming operations will be critical to the success of our business.
Our ability to maintain our competitive position depends to a large degree on the efforts and skills of our senior management team. It may also be difficult to attract, retain and train qualified employees due to the competition for employees with other gaming companies and their facilities in Nevada. We may not be successful in retaining our current personnel or in hiring or retaining qualified personnel in the future. If we lose the services of any members of our management team, or fail to attract or retain qualified management and personnel at all levels, our business may be significantly disrupted and impaired.
We are dependent upon technology services and electrical power to operate our business, and if we experience damage or service interruptions, we may have to cease some or all of our operations, resulting in a decrease in revenues.
Our gaming operations rely heavily on technology services and an uninterrupted supply of electrical power. Our security system and all of our slot machines are controlled by computers and reliant on electrical power to operate. Without electrical power or a failure of the technology services needed to run the computers, we may be unable to run all or parts of gaming operations. Any unscheduled interruption in our technology services or interruption in the supply of electrical power is likely to result in an immediate, and possibly substantial, loss of revenues due to a shutdown of our gaming operations. Although our systems have been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks and similar events.
We may incur impairments to intangible assets or long-lived assets, which would reduce our net income.
We account for indefinite-lived intangible assets in accordance with applicable guidance; accordingly, we test our indefinite-lived intangible assets for impairment annually or if a triggering event occurs. We perform the annual impairment testing for indefinite-lived intangible assets in the fourth quarter of each fiscal year. In addition, we test long-lived assets for impairment if a triggering event occurs.
Significant negative industry or economic trends, including reduced estimates of future revenues and cash flows, disruptions to our business, slower growth rates or lack of growth in our business, have resulted in significant write-downs and impairment charges in 2011, 2010 and 2009, and, if such events continue, may indicate that additional impairment charges in future periods are required. If we are required to record additional impairment charges, this could have a material adverse affect on our results of operations.
For example, for the years ended December 31, 2011, 2010 and 2009, we recorded $290,000, $2.0 million and $7.1 million in aggregate non-cash impairment charges to write-down certain portions of our trade name assets to their fair value. The impairment of these assets was due primarily to our decrease in revenues, which was an indication that these assets may not be recoverable.
The primary reason for these impairment charges relates to the ongoing recession, which has caused us to reduce our estimates for projected revenues and cash flows, has reduced overall industry valuations, and has caused an increase in discount rates in the credit and equity markets.
A smoking ban in the jurisdictions in which we operate could have a negative impact on our business and operations.
From time to time, individual jurisdictions have considered legislation or referendums, such as bans on smoking in casinos and other entertainment and dining facilities. Such bans have been implemented in jurisdictions in which gaming facilities are located (such as in California and Atlantic City) and such bans have had a negative impact on business and operations. If such bans were implemented in the markets in which we operate, such a ban could adversely impact our business and operations.
We are controlled by officers of Goldman Sachs and the general partners of Whitehall 2007, and the interests of Goldman Sachs, Whitehall 2007 and their affiliates may not be aligned with ours.
All of the Class A voting membership interests of ACEP are held by Voteco, the members of which are comprised of current and former managing directors of Goldman Sachs. As such, the members of Voteco have the power to control our affairs and policies and to control the election of our board of directors, the appointment of management, the entering into of mergers, sales of substantially all of our assets and other extraordinary transactions.
Goldman Sachs, Whitehall 2007 and their affiliates are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us, as well as businesses that represent major customers of our businesses. Goldman Sachs, Whitehall 2007 and their affiliates may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. Goldman Sachs has agreed with the Nevada gaming authorities not to take any action to influence the members of Voteco in the exercise of their management or voting rights in respect of our gaming operations, and that the exercise of any such rights shall be made by the members of Voteco independently and without consultation with Goldman Sachs. However, since the members of Voteco are also officers of Goldman Sachs and the general partners of Whitehall 2007, it should be expected that the members of Voteco will act in the best interests of Goldman Sachs, Whitehall 2007 and their affiliates and that the interests of Goldman Sachs, Whitehall 2007 and their affiliates will dictate or strongly influence their decision making.
The net proceeds from the offering of the old notes were used to repay our Restructured Term Loan. GSMC, an affiliate of both Goldman, Sachs & Co., the initial purchaser of the old notes, and Whitehall 2007, owners of a majority of our indirect interests, was the sole lender under the Restructured Term Loan and accordingly was the recipient of the entire net proceeds of that offering. See “Certain Relationships and Related Party Transactions”.
In addition, as part of the recent Restructuring of our loans from GSMC, MTGLQ was issued a 22% indirect interest in us following receipt of necessary gaming approvals. Regulatory approval was obtained on August 20, 2009, and a new limited liability company agreement was executed on the same day reflecting the 22% interest of MTGLQ in our non-voting membership interests. On January 6, 2010, MTGLQ received approval from the Nevada State Gaming Control Board to transfer its 22% interest in Holdings to MLQ Stratosphere, LLC, a direct wholly-owned subsidiary of The Goldman Sachs Group, Inc.
Our hotels and casinos may incur substantial costs in connection with any growth and expansion strategy.
As part of our business strategy, we regularly evaluate opportunities for growth through development of gaming operations in existing or new markets, through acquiring other gaming entertainment facilities or through redeveloping our existing gaming facilities. The expansion of our operations, whether through acquisitions, development or internal growth could divert management’s attention and could also cause us to incur substantial costs, including legal, professional and consulting fees. There can be no assurance that we will be able to identify, acquire, develop or profitably manage additional companies or operations or successfully integrate such companies or operations into our existing operations without substantial costs, delays or other problems. Further, there can be no assurance that we will have the ability to obtain the necessary financing to execute our strategy.
We may find it difficult to expand our business into additional states due to varying state regulatory requirements.
Future growth in our operations depends, in part, on our ability to offer our services to prospective customers in new states, which may subject us to different regulatory requirements and standards. In order to operate effectively in a new state, we must obtain all necessary regulatory approvals, adapt our procedures to that state’s regulatory requirements and modify our service offerings to adapt to local market conditions. In the event that we expand into additional states, we may not be able to duplicate in other markets the financial performance experienced in our current markets.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved written comments that were received from the Securities and Exchange Commission staff 180 days or more before the end of our last fiscal year relating to our periodic or current reports under the Securities Exchange Act of 1934, or the Exchange Act.
ITEM 2.
ITEM 2. PROPERTIES
Please also see the discussion of our properties contained in this annual report on Form 10-K under the caption “Item 1. Business - Our Gaming and Entertainment Properties.”
Stratosphere
The Stratosphere is located at 2000 Las Vegas Boulevard South on the Las Vegas Strip on approximately 34 acres owned by us.
Arizona Charlie’s Decatur
Arizona Charlie’s Decatur is located at 740 South Decatur Boulevard, Las Vegas, Nevada on approximately 17 acres owned by us. In addition, Arizona Charlie’s Decatur leases office, storage and laundry space located in an adjacent shopping center.
Arizona Charlie’s Boulder
Arizona Charlie’s Boulder is located at 4575 Boulder Highway, Las Vegas, Nevada on approximately 24 acres owned by us.
Aquarius Casino Resort
Aquarius Casino Resort is located at 1900 South Casino Drive, Laughlin, Nevada on approximately 18 acres owned by us.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are, from time to time, parties to various legal proceedings arising out of our businesses. We believe, however, that there are no proceedings pending or threatened against us, which, if determined adversely, would have a material, adverse effect upon our business, financial condition, results of operations, or liquidity.
ITEM 4.
ITEM 4. RESERVED
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Price of and Dividends on the Registrant’s Common Equity and Related Member Matters
As of December 31, 2011, there was no public market for our common equity.
No established public trading market exists for our equity securities. There are no plans, proposals, arrangements or understandings with any person with regard to the development of a trading market in any of our equity securities.
There are no outstanding options or warrants to purchase, or securities convertible into, our common equity. All of our membership interests are subject to sale pursuant to Rule 144 under the Securities Act, subject to the limitations set forth therein. We have not agreed with any security holder to register any of our common equity for sale by any security holder. None of our common equity is being, or has been publicly proposed to be, publicly offered by us.
We have one holder of record of our Class A Interests and one holder of record of our Class B Interests.
We do not pay, and do not anticipate paying, any dividends or making any distributions on our common equity. The indenture that governs the 11% Senior Secured Notes restricts our payment of dividends and distributions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7 in the “Notes to Consolidated Financial Statements.”
There are no securities authorized for issuance under equity compensation plans and we do not anticipate authorizing securities for issuance under equity compensation plans in the foreseeable future.
Description of Registrant’s Securities to be Registered
General
Reference is made to information set forth in “Item - 1 Business - General”, which information is incorporated herein by reference.
Simultaneously with the closing of the Acquisition, we executed the Amended Operating Agreement, which created two classes of membership interests, the Class A Interests and the Class B Interests. At the closing of the Acquisition, Class A Interests and Class B Interests were outstanding. We issued Class A Interests to Voteco and Class B Interests to Holdings on a pro rata basis in proportion to the equity contributions made by each entity. The Class A Interests are the only class of our equity securities registered pursuant to a registration statement.
Class A Interests and Class B Interests
Pursuant to the Amended Operating Agreement, holders of Class A Interests are entitled to one vote per interest on all matters to be voted on by the members of our company and are not entitled to cumulative voting for the election of directors. Except as otherwise expressly required by law, holders of Class B Interests have no right to vote on any matters to be voted on by our members. Holders of Class A Interests and Class B Interests have no preemptive rights, no other rights to subscribe for additional interests of our company, no conversion rights and no redemption rights, do not benefit from any sinking fund and do not have any preferential rights upon a liquidation. Holders of Class A Interests and Class B Interests are entitled to share ratably in cash dividends or other distributions when, as and if distributed by us, as provided in our Amended Operating Agreement.
No securities issued by us and no interest, claim or charge therein or thereto may be transferred, except in accordance with the provisions of the Nevada Gaming Control Act and the regulations promulgated thereunder. Any transfer in violation thereof is void until we cease to be subject to the jurisdiction of the Nevada Gaming Commission or the Nevada Gaming Commission approves the transfer.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain of our selected historical consolidated financial data (see Note 1 “Notes To Consolidated Financial Statements”), which you should read in conjunction with the consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this annual report on Form 10-K.
The selected historical consolidated financial data as of December 31, 2011, 2010, 2009, 2008 (Successor) and 2007 (Predecessor), the years ended December 31, 2011, 2010 and 2009, the period February 21, 2008 through December 31, 2008 (Successor), the period January 1, 2008 through February 20, 2008 and the year ended December 31, 2007 (Predecessor), each has been derived from our audited consolidated financial statements at those dates and for those periods.
Consolidated Statement of Operation ($ in thousands)
(1)Since the Acquisition on February 20, 2008, ACEP is a disregarded entity for federal and state tax purposes and all the tax on its income is borne by its members. As a result, ACEP no longer records a provision for taxes on its statement of operations.
Consolidated Balance Sheet ($ in thousands)
(1)Under the Original Term Loans and the Restructured Term Loan, we were required to fund certain reserve accounts that were restricted for capital expenditures, interest, taxes and insurance. Under the indenture for the notes, there are no cash reserve requirements.
(2)Total debt, including current portion, consists of the current and long-term portions of capital lease obligations and notes payable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
With the exception of historical facts, the matters discussed in this annual report on Form 10-K are forward looking statements. Forward-looking statements may relate to, among other things, future actions, future performance generally, business development activities, future capital expenditures, strategies, the outcome of contingencies such as legal proceedings, future financial results, financing sources and availability and the effects of regulation and competition. Also, please see Risk Factors in Item 1A of this annual report on Form 10-K. When we use the words “believe,” “intend,” “expect,” “may,” “will,” “should,” “anticipate,” “could,” “estimate,” “plan,” “predict,” “project,” or their negatives, or other similar expressions, the statements which include those words are usually forward-looking statements. When we describe strategy that involves risks or uncertainties, we are making forward-looking statements.
These forward-looking statements are based on the current plans and expectations of our management and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. These factors include, but are not limited to: the size of our indebtedness, our indebtedness' effect on our business, the adverse effect of government regulation and other matters affecting the gaming industry, increased operating costs of our properties, increased competition in the gaming industry, adverse effects of economic downturns and terrorism, our failure to make necessary capital expenditures, increased costs associated with our growth strategy, the loss of key personnel, risks associated with geographical market concentration, our failure to satisfy our working capital needs from operations or our indebtedness, our inability to raise additional money, our dependence on water, energy and technology services, adverse effects of increasing energy costs, and the availability of and costs associated with potential sources of financing.
You should also read, among other things, the risks and uncertainties described in the section entitled Risk Factors in Item 1A of this annual report on Form 10-K.
We warn you that forward-looking statements are only predictions. Actual events or results may differ as a result of risks that we face. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update them.
The following discussion contains management’s discussion and analysis of financial condition and results of operations. Management’s discussion and analysis should be read in conjunction with, and is qualified in its entirety by reference to, our audited financial statements and related notes.
Overview
We own and operate four gaming and entertainment properties in Clark County, Nevada. The four properties are the Stratosphere Casino Hotel & Tower, or the Stratosphere, which is located on the Las Vegas Strip and caters to visitors to Las Vegas, two off-Strip casinos, Arizona Charlie's Decatur and Arizona Charlie's Boulder, which cater primarily to residents of Las Vegas and the surrounding communities, and the Aquarius Casino Resort, in Laughlin, Nevada, or the Aquarius, which caters to visitors to Laughlin. The Stratosphere is one of the most recognized landmarks in Las Vegas, our two Arizona Charlie’s properties are well-known casinos in their respective marketplaces and the Aquarius has the largest hotel in Laughlin. Each of our properties offers customers a value-oriented experience by providing competitive odds in our casinos, quality rooms in our hotels, award-winning dining facilities and, at the Stratosphere and Aquarius, an offering of competitive value-oriented entertainment attractions. We believe the value we offer our customers, together with a strong focus on customer service, will enable us to continue to attract customers to our properties.
We use certain key measurements to evaluate operating revenues. Casino revenue measurements include “table games drop” and “slot coin in”, which are measures of the total amounts wagered by customers. Win or hold percentage represents the percentage of table games drop or slot coin in that is won by the casino and recorded as casino revenues. Hotel revenue measurements include hotel occupancy rate, which is the average percentage of available hotel rooms occupied during a period, and average daily room rate, which is the average price of occupied rooms per day. Food and beverage revenue measurements include number of covers, which is the number of guests served, and the average check amount per guest.
Our operating results greatly depend on the volume of customers at our properties, which in turn affects our gaming revenues and the price we can charge for our non-gaming amenities. A substantial portion of our revenue is generated from our gaming operations; more specifically slot play (including video poker). Approximately 55.2% of our gross revenue in 2011 was generated from our gaming operations. Hotel and food and beverage sales generated similar percentages of our gross revenue during fiscal year 2011, with hotel sales representing 17.5% and food and beverage sales representing 18.7%. The majority of our revenue is cash-based through customers wagering with cash or paying for non-gaming amenities with cash or credit card.
Our expenses also depend on the volume of customers at our properties. The volume of customers that visit our properties directly affects our labor, which represented approximately 50.1% of our expenses during fiscal year 2011, and the amount we spend on marketing, which represented approximately 3.8% of our expenses during fiscal year 2011. However, we incur a significant amount of costs that do not vary directly with changes in the volume of customers. As a result, it is difficult to reduce costs to match reductions in demand, which results in reduced operating margins. Because our business is capital intensive, we rely heavily on the ability of our properties to generate operating cash flow to repay debt financing, fund maintenance capital expenditures and provide excess cash for future development.
The Las Vegas and Laughlin Markets
All of our properties are located in the Las Vegas and Laughlin, Nevada markets. Accordingly, our results of operations are driven by economic conditions in these markets.
Las Vegas is one of the largest entertainment markets in the country. We believe that the Las Vegas gaming market has two distinct sub-segments: the tourist market, which tends to be concentrated on the Las Vegas Strip and Downtown Las Vegas, and the local market, which includes the surrounding Las Vegas area.
According to the Las Vegas Convention and Visitors Authority, or LVCVA, the number of visitors traveling to Las Vegas has increased over the last ten years from 35.0 million visitors in 2001 to 38.9 million visitors in 2011. The number of hotel and motel rooms in Las Vegas has increased from 126,610 at the end of 2001 to 150,161 at the end of 2011, giving Las Vegas the most hotel and motel rooms of any metropolitan area in the world. Despite this significant increase in the supply of rooms, the Las Vegas hotel occupancy rate exceeded 88% for each of the years from 1999 through 2008. However during the last two years, hotel occupancy increased from 83.5% for 2010 to 86.9% for 2011, but is still well below the peak of 94.0% from 2007.
Las Vegas saw an increase in tourism in 2011 according to the LVCVA as visitor volume was approximately 38.9 million people in 2011, up 4.3% from approximately 37.3 million in 2010. Along with the increase in visitors, the hotel average daily room rate, or ADR increased by 10.7% in 2011 compared to the prior year.
Las Vegas Strip gaming revenues have grown as Las Vegas visitations and hotel room counts have grown. Between 2001 and 2011, gaming revenues on the Las Vegas Strip experienced a compound annual growth of 2.6%. Gaming revenues for 2011 totaled approximately $6.1 billion, a 5.1% increase from 2010. As was the case in 2010, baccarat play, which is favored by high-end international guests, was a significant contributor to gaming revenue growth on the Las Vegas Strip in 2011. Our properties do not target the baccarat player.
According to the LVCVA, Las Vegas has been the United States’ top-ranked destination for trade shows for the last ten years. The number of trade show and convention attendees in Las Vegas decreased from approximately 5.0 million in 2001 to 4.9 million in 2011, representing a compound annual growth rate of -0.3%. Convention attendance increased 8.8% during 2011 compared to 2010 but is down 17.5% from 2008.
We believe that the growth in the Las Vegas tourist market has been enhanced by a dedicated program of the LVCVA and major Las Vegas hotels to promote Las Vegas as an exciting vacation and convention site, the increased capacity of McCarran International Airport and the introduction of large, themed destination resorts in Las Vegas.
Nevada has enjoyed strong population growth that includes an increasing number of retirees and other active gaming customers. A majority of Nevada’s growth has occurred in Las Vegas, which is located in Clark County. The population of Clark County has grown from 1,498,278 in 2001 to an estimated 1,934,871 in 2011, a compound annual growth rate of 2.6%. In comparison, the United States population increased at a compound annual growth rate of 0.9% during this period. In 2010, median household income in Clark County was $56,258, compared with the national median household income of $51,914.
From 2010 to 2011, it is estimated that Las Vegas experienced a 0.1% decrease in population, likely the result of the combined economic factors of the local housing crisis, high foreclosure rates and high unemployment. Frozen credit markets, volatile gas prices and high unemployment contributed to a reduction of consumer confidence and spending in Las Vegas.
The Laughlin area economy is primarily dependent on the gaming and tourism industry. Visitor volume and occupancy rates have declined on an annual basis over the past several years while the number of hotel rooms has remained fairly constant. The declining trend in these primary indicators began in 1994 after nearly 10 years of economic growth in the area’s primary industry. The Laughlin gaming market consists of approximately 10,334 rooms and its gaming revenue for 2011 was $465 million, down 3.7% from 2010.
Effects of Acquisitions
Our results of operations and balance sheet have been significantly affected as a result of the Acquisition of ACEP by Holdings and Voteco in 2008.
American Casino & Entertainment Properties LLC, or ACEP, was formed in Delaware on December 29, 2003. ACEP owns and operates the Stratosphere Casino Hotel & Tower, or the Stratosphere, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder in Las Vegas, Nevada, and the Aquarius Casino Resort, or the Aquarius, in Laughlin, Nevada.
On April 22, 2007, American Entertainment Properties Corp., or AEP, our former direct parent, entered into a Membership Interest Purchase Agreement, or the Agreement, with W2007/ACEP Holdings, LLC, or Holdings, an affiliate of Whitehall Street Global Real Estate Limited Partnership 2007 and Whitehall Parallel Global Real Estate Limited Partnership 2007, collectively Whitehall 2007, funds affiliated with Goldman, Sachs & Co., to sell all of our issued and outstanding membership interests to Holdings, for approximately $1.3 billion. Pursuant to the Assignment and Assumption Agreement, dated December 4, 2007, between Holdings and W2007/ACEP Managers Voteco, LLC, or Voteco, Holdings assigned all of its rights, obligations and interests under the Agreement to Voteco. The acquisition, or the Acquisition, closed at a purchase price of $1.2 billion on February 20, 2008. On February 20, 2008, upon consummation of the Acquisition, we issued and sold 100% of our Class B membership interests, or Class B Interests, to Holdings for approximately $200.1 million. Except as otherwise expressly required by law, holders of our Class B Interests have no voting rights. We issued the Class B Interests to Holdings in reliance on the exemption from registration under the Securities Act pursuant to Section 4(2) thereof. Voteco acquired 100% of our voting securities by purchasing 100% of our newly issued Class A Interest in exchange for consideration in the amount of $30. The source of funds used by Voteco to purchase the Class A Interest were contributions of capital made to Voteco by each of its three members.
In addition, upon the closing of the Acquisition, ACEP, Voteco and Holdings entered into an Amended and Restated Limited Liability Company Agreement of ACEP, or the ACEP Operating Agreement. In connection with the closing of the Acquisition, each of the initial members of Voteco, Holdings and Voteco entered into a Transfer Restriction Agreement. Mssr.’s Rothenberg, Cramer, and Langer subsequently resigned as managers of Voteco. Mr. Rothenberg’s membership interests in Voteco were transferred to Steven Angel, and Mr. Angel became a manager of Voteco on August 20, 2009.
On December 31, 2009, Richard H. Powers and Alan Kava were appointed as managers of Voteco. Mr. Powers subsequently resigned as a manager of Voteco on January 19, 2010. On January 19, 2010, Peter A. Weidman was appointed as a manager of Voteco.
Debt Restructuring
Voteco acquired ACEP on February 20, 2008 for a purchase price of $1.2 billion and, immediately thereafter, ACEP issued all of its non-voting interests to Holdings. GSMC, an affiliate of Whitehall 2007, provided the Original Term Loans to finance the Acquisition.
On June 25, 2009, ACEP and GSMC closed the Restructuring of the Original Term Loans. In connection with the Restructuring, (i) Whitehall 2007 invested $200 million of new capital, $165 million of which was used to repay a portion of the Original Term Loans and $35 million of which was contributed to ACEP, (ii) ACEP and certain of its wholly-owned indirect subsidiaries entered into a new loan agreement with GSMC with a principal amount of $350 million evidencing the Restructured Term Loan, (iii) Holdings agreed to issue an affiliate of GSMC a 22% interest in Holdings upon receipt of necessary gaming approvals and (iv) GSMC agreed to terminate the Original Term Loans.
In connection with the Restructuring, we are required to account for the Restructured Term Loan using appropriate guidance for troubled debt restructurings. As a result, we presented our Restructured Term Loan on our balance sheet for June 30, 2009 in the amount of the Liability, which is the sum of $350 million, the principal amount of the Restructured Term Loans, and the minimum scheduled interest payments during the term of the Restructured Term Loan. We have increased our members’ equity by the principal amount of the difference between the Restructured Term Loan and the Liability, less closing costs and expenses paid in connection with the Restructuring. Due to the related party nature of the transaction, the difference was credited directly to member’s equity and had no impact on our statement of operations.
On August 14, 2009, we closed the offering of the old notes. The gross proceeds from the offering after taking into account original issue discount, and certain of GSMC’s out-of-pocket expenses incurred in connection with the repayment, were $311,250,000. The gross proceeds of the offering were used to repay the then existing balance of the Restructured Term Loan. Upon the payment of the gross proceeds from that offering, GSMC forgave the remaining balance of the Restructured Term Loan and the Restructured Term Loan was deemed repaid in its entirety.
Upon the sale of the old notes, the appropriate guidance for troubled debt restructurings no longer applies. As a result, we have increased members’ equity by $215.6 million, which is determined by the difference between the amount of the notes and the Liability, net of any fees paid at closing and the original issue discount, and report interest expense associated with the notes on the statement of operations.
Results of Operations
The following table sets forth the results of our operations for the periods indicated.
Regulation G, “Conditions for Use of Non-GAAP Financial Measures,” prescribes the conditions for use of non-GAAP financial information in public disclosures. We believe that our presentation of EBITDA is an important supplemental measure of our operating performance to investors. EBITDA is a commonly used measure of performance in our industry which we believe, when considered with measures calculated in accordance with United States Generally Accepted Accounting Principles (GAAP), gives investors a more complete understanding of operating results before the impact of investing and financing transactions and income taxes and facilitates comparisons between us and our competitors. We believe this measure will be used by investors in their assessment of our operating performance and the valuation of our Company.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Generally weak economic conditions throughout the United States stemming from a severe recession precipitated an economic slowdown that has negatively impacted tourism in Southern Nevada. Las Vegas, however, experienced some positive trends in overall demand in 2011. For the year ended December 31, 2011, the LVCVA reported year-over-year increases in visitor volume, room nights occupied and average daily hotel room rates. While gross gaming revenues have shown monthly year-over-year increases, a significant contributor was baccarat play, which is favored by high-end international guests. Our properties do not target the baccarat player. Unlike Las Vegas, Laughlin, NV continues to experience declining demand and revenues in 2011 according to the LVCVA. The Clark County and Las Vegas local economies continue to be characterized by high unemployment, declining real estate values and depressed taxable sales. As occupancies and visitor traffic to casinos decline, operators in both the tourist and local markets have become more aggressive with promotions that include gaming incentives, reduced room rates, reduced entertainment prices, and food incentives to drive traffic to their properties. All of these factors have impacted our operations.
Consolidated gross revenues increased 1.5% to $366.6 million for the year ended December 31, 2011 from $361.1 million for the year ended December 31, 2010. Consolidated income from operations and EBITDA increased 198.9% and 15.7% to $26.3 million and $64.0 million for the year ended December 31, 2011 compared to $8.8 million and $55.3 million for the year ended December 31, 2010. The increases in our gross revenues, income from operations and EBITDA are due primarily to revenue growth for our hotel division caused by higher average daily room rates and market factors, such as the increased visitation to Las Vegas. Income from operations and EBITDA for the year ended December 31, 2011 were impacted by the launch of the Elevate Your Expectations advertising campaign for the Stratosphere and an advertising campaign supporting the opening of Ron’s Steakhouse at Arizona Charlie’s Decatur. Advertising expenses for the year ended December 31, 2011 were $7.4 million compared to $4.9 million for the year ended December 31, 2010. For the year ended December 31, 2011, depreciation and amortization expense, decreased 15.7% to $39.1 million compared to $46.4 million for the year ended December 31, 2010 as many assets became fully depreciated during the first three months of 2011. During the year ended December 31, 2011, EBITDA was negatively impacted by a $1.4 million charge for the early redemption of 5% of our 11% Senior Secured Notes, of which $1.0 million was non-cash. In addition, during the year ended December 31, 2011, we recognized a non-cash loss on impairment of assets of approximately $290,000. During the year ended December 31, 2010, we recognized non-cash charges of approximately $4.3 million for a loss on the disposal of assets and recorded a $2.0 million loss on impairment of assets. We also expensed approximately $1.1 million for management fees for the year ended December 31, 2011, compared to $1.5 million for the year ended December 31, 2010. As a result, our consolidated net operating margin increased to 7.7% for the year ended December 31, 2011 compared to 2.6% for the year ended December 31, 2010.
Casino
Casino revenues consist of revenues from slot machines, table games, poker, race and sports book, bingo and keno. Casino revenues decreased 1.4% to $202.2 million for the year ended December 31, 2011, compared to $205.0 million for the year ended December 31, 2010. Decreased revenues at the two Arizona Charlie’s properties and the Aquarius were partially offset by higher revenues at the Stratosphere. The revenue declines for the two Arizona Charlie’s properties were due to lower slot and table customer counts, intense competition and high levels of promotional activity among the casinos within the Las Vegas locals market and a relatively weak local economy. The revenue decrease at the Aquarius was due largely to a decline in table drop and declines in race and sports book handle and hold. Overall, the revenue decrease was primarily due to a 2.0% decrease in slot coin-in, a 0.4% decrease in table drop and a 0.9 percentage point decrease in table hold. For the year ended December 31, 2011, slot machine revenues were 85.1% of casino revenues and table game revenues were 11.4% of casino revenues, compared to 84.3% and 11.9% of casino revenues, respectively, for the year ended December 31, 2010. Other casino revenues, consisting of race and sports book, poker, bingo and keno, decreased 9.0% for the year ended December 31, 2011 compared to the year ended December 31, 2010. Race and sports book revenues decreased 23.9% for the year ended December 31, 2011 compared to the year ended December 31, 2010 due to an 8.8% decline in handle and a 2.0 percentage point decrease in hold. The decline in race and sports book revenues were partially offset by 17.7% and 21.0% increases in bingo and poker revenues respectively for the year ended December 31, 2011 compared to the year ended December 31, 2010. Bingo revenues increased due to a 1.1 percentage point increase in hold and poker revenues increased due to higher tournament revenues. Casino operating expenses decreased 0.3% to $66.1 million, or 32.7% of casino revenues, for the year ended December 31, 2011, from $66.3 million or 32.3% of casino revenues, for the year ended December 31, 2010. This decrease was primarily due to decreased participation expenses and revenue tax expenses. Participation expense consists of fees paid to game owners for use of their games. These expense declines were partially offset by an increase of approximate $465,000 in repair and maintenance cost for the year ended December 31, 2011 compared to the year ended December 31, 2010. These expenses increased because we spent approximately $468,000 to replace bill validators and monitors on our slot machines. Due to flat labor costs and the increase in repair and maintenance expenses, our casino operating margin decreased to 67.3% for the year ended December 31, 2011 compared to 67.7% for the year ended December 31, 2010.
Hotel
Hotel revenues increased 14.5% to $64.0 million for the year ended December 31, 2011 from $55.9 million for the year ended December 31, 2010. Revenues increased at all properties for the year ended December 31, 2011 compared to the year ended December 31, 2010. Overall occupancy increased to 66.7% for the year ended December 31, 2011 compared to 65.7% for the year ended December 31, 2010, and increased for all properties except the Aquarius. Our overall average daily room rate increased 13.8% for the year ended December 31, 2011 compared to the year ended December 31, 2010. Our hotel expenses increased 3.0% to $34.3 million for the year ended December 31, 2011, compared to $33.3 million for the Year ended December 31, 2010. The increase in hotel expenses was due primarily to higher labor costs and expenses related to higher occupancy. Due to the increase in revenues, our Hotel operating margin increased to 46.4% for the year ended December 31, 2011 as compared to 40.4% for the year ended December 31, 2010.
Food and Beverage
Food and beverage revenues increased 1.9% to $68.4 million for the year ended December 31, 2011 compared to $67.1 million for the year ended December 31, 2010. Average revenue per cover for the year ended December 31, 2011 increased 4.0% compared to the year ended December 31, 2010, while food covers and beverage covers decreased 2.2% and 3.7%, respectively. Our food and beverage expenses increased 1.6% to $51.3 million for the year ended December 31, 2011 compared to $50.5 million for the year ended December 31, 2010 due primarily to rising product costs. Our food and beverage operating margin increased slightly to 25.0% for the year ended December 31, 2011 as compared to 24.7% for the year ended December 31, 2010.
Tower, Retail and Other
Tower, retail and other revenues decreased 3.3% to $32.0 million for the year ended December 31, 2011 from $33.1 million for the year ended December 31, 2010. Tower revenues increased 5.6% for the year ended December 31, 2011, compared to the year ended December 31, 2010. The primary reason for the increase in Tower revenues for year ended December 31, 2011 compared to the year ended December 31, 2010 was the introduction of the Sky Jump Las Vegas ride on April 21, 2010. Entertainment revenue declined 49.5% for the year ended December 31, 2011, compared to the year ended December 31, 2010. The decrease in revenue was due primarily to the closure of the American Superstars show at the Stratosphere on March 30, 2011 and a reduction in the number of events at the Aquarius. On November 9, 2011 we introduced a new show at the Stratosphere, Frankie Moreno Live at Stratosphere, with three performances per week. Retail revenue decreased 4.4% for the year ended December 31, 2011, compared to the year ended December 31, 2010. Retail revenues declined due to increased tenant vacancies and rent concessions. Other operating income decreased 2.5% for the year ended December 31, 2011, compared to the year ended December 31, 2010. The decrease was primarily due to lower communications and soft drink commission revenues. Other operating expenses decreased 8.4% to $12.0 million for the year ended December 31, 2011, compared to $13.1 million for the year ended December 31, 2010. This decrease was primarily due to a decrease in entertainer fees to American Superstars and outdoor events at the Aquarius.
Promotional Allowances
Promotional allowances are comprised of the retail value of goods and services provided to casino customers under various marketing programs. As a percentage of casino revenues, promotional allowances increased to 12.2% for the year ended December 31, 2011 compared to 11.9% for the year ended December 31, 2010. Increased room promotional activity due to higher average daily rates was partially offset by decreased food, beverage and show promotions.
Pre-opening Expense
We did not incur any pre-opening costs for the year ended December 31, 2011 compared to $307,000 for the year ended December 31, 2010. Pre-opening costs for the year ended December 31, 2010 were primarily comprised of marketing related expenses, labor costs and supplies for Sky Jump Las Vegas and Ron’s Steakhouse at Arizona Charlie’s Decatur. Pre-opening expenses associated with Sky Jump Las Vegas and Ron’s Steakhouse were approximately $283,000 and $24,000 respectively. Sky Jump Las Vegas opened to the public on April 21, 2010 and Ron’s Steakhouse opened to the public on December 17, 2010.
Selling, General and Administrative
Selling, general and administrative expenses are primarily comprised of payroll, marketing, advertising, utilities and other administrative expenses. These expenses decreased 3.1% to $112.5 million, or 30.7% of gross revenues, for the year ended December 31, 2011, compared to $116.1 million, or 32.2% of gross revenues, for the year ended December 31, 2010. This decrease was primarily due to a small gain on disposal of assets compared to a loss of $4.3 million in 2010 and lower utilities, asset management fees and property tax expenses. For the year ended December 31, 2010, loss on disposal of assets was primarily the result of the hotel renovation at the Stratosphere. These improvements were partially offset by increases in labor costs and advertising expenses. During the year ended December 31, 2011, we spent $7.4 million on advertising compared to $4.9 million during the year ended December 31, 2010. The majority of the increase in advertising was related to the Stratosphere’s Elevate Your Expectations campaign.
Impairment of Assets
We account for indefinite-lived intangible assets in accordance with applicable guidance; accordingly, we perform an annual impairment test of indefinite-lived intangible assets in the fourth quarter of each year and whenever a triggering event occurs which causes us to perform an impairment test. During the three months ended December 31, 2011, due to continued levels of high unemployment and reduced customer spending we revised our Arizona Charlie’s Boulder revenue forecasts. As of November 1, 2011 we performed an impairment test which resulted in the non-cash write-down of the Arizona Charlie’s Boulder trade names by $290,000. During the three months ended June 30, 2010, due to continued weakness in consumer spending, increased room supply in the Las Vegas market and decreased spending by visitors to the Stratosphere we revised our Stratosphere revenue forecasts. We considered this revision to Stratosphere’s forecasted revenues to be a triggering event. As of June 30, 2010 we performed impairment tests that resulted in the non-cash write-down of the Stratosphere trade names of $2.0 million. The impairment of these assets was due primarily to our decrease in revenues, which was an indication that these assets may not be recoverable.
Long-lived assets, which are to be held and used, including intangibles and property and equipment, are periodically reviewed by management for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. If an indicator of impairment exists, the Company compares the estimated future cash flows of the asset, on an undiscounted basis, to the carrying value of the asset. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then impairment is measured as the difference between fair value and carrying value, with fair value typically based on a discounted cash flow model. If an asset is still under development, future cash flows include remaining construction costs.
In addition, we tested our assets for recoverability. The asset recoverability test required the estimation of undiscounted future cash flows from our properties and the comparison of the aggregate total to the property carrying value. The test resulted in no impairment; however, we will continue to monitor the performance of each of our properties and, if necessary, continue to update our asset recoverability test. If future asset recoverability tests indicate our assets are impaired, we will be subject to a non-cash write-down of our assets, which could have a material adverse impact on our consolidated statements of operations.
Interest Expense
Interest expense decreased 0.9% to $45.2 million for the year ended December 31, 2011, compared to $45.6 million for the year ended December 31, 2010. The decrease was due primarily to the redemption of 5% of our 11% Senior Secured Notes on May 31, 2011.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Generally weak economic conditions throughout the United States stemming from a severe recession precipitated an economic slowdown that negatively impacted tourism in Southern Nevada. Las Vegas, however, has experienced some positive trends in overall demand in 2010. For the year ended December 31, 2010, the LVCVA reported year-over-year increases in visitor volume, room nights occupied and daily auto traffic-all major highways. While gross gaming revenues have shown monthly year-over-year increases, the increases are primarily from baccarat play, which is favored by high-end international guests. Our properties do not target the baccarat player. In addition, airline capacity and passenger counts through McCarran International Airport decreased and hotel room inventories have increased by 5.0% year-over-year resulting in lower occupancies throughout Las Vegas. Unlike Las Vegas, Laughlin, NV continued to experience declining demand and revenues in 2010 according to the LVCVA. The Clark County and Las Vegas local economies continue to be characterized by increasing unemployment, declining real estate values and depressed taxable sales. As occupancies and visitor traffic to casinos decline, operators in both the tourist and local markets have become more aggressive with promotions that include gaming incentives, reduced room rates, reduced entertainment prices, and food incentives to drive traffic to their properties. All of these factors have impacted our operations.
Consolidated gross revenues decreased 5.4% to $361.1 million for the year ended December 31, 2010 from $381.7 million for the year ended December 31, 2009. Consolidated income from operations and EBITDA decreased 50.6% and 6.4% to $8.8 million and $55.3 million for the year ended December 31, 2010 compared to $17.8 million and $59.1 million for the year ended December 31, 2009. The decrease in our gross revenues, operating income and EBITDA were due primarily to the general economic slowdown and market factors discussed previously. For the year ended December 31, 2010, depreciation and amortization expense, increased 12.3% to $46.4 million compared to $41.3 million for the year ended December 31, 2009. In addition, during the year ended December 31, 2010, we recognized non-cash charges of approximately $4.3 million for a loss on the disposal of assets and recorded a $2.0 million loss on impairment of assets, compared to $0.8 million and $7.1 million, respectively, for the year ended December 31, 2009. We also expensed approximately $1.5 million for management fees for the year ended December 31, 2010, compared to $1.8 million for the year ended December 31, 2009. As a result, our consolidated net operating margin decreased to 2.6% for the year ended December 31, 2010 compared to 5.0% for the year ended December 31, 2009.
Casino
Casino revenues consist of revenues from slot machines, table games, poker, race and sports book, bingo and keno. Casino revenues decreased 4.7% to $205.0 million for the year ended December 31, 2010, compared to $215.2 million for the year ended December 31, 2009. This decrease was primarily due to a 2.8% decrease in slot coin-in and an 8.3% decrease in table drop. For the year ended December 31, 2010, slot machine revenues were 84.3% of casino revenues and table game revenues were 11.9% of casino revenues, compared to 84.4% and 11.8% of casino revenues, respectively, for the year ended December 31, 2009. Other casino revenues, consisting of race and sports book, poker, bingo and keno, decreased 6.0% for the year ended December 31, 2010 compared to the year ended December 31, 2009. The primary reason for the decline in other casino revenues was a 29.7% decline in poker revenues; a portion of which is attributed to closing the Poker Room at the Aquarius. Casino operating expenses decreased 5.7% to $66.3 million, or 32.3% of casino revenues, for the year ended December 31, 2010, from $70.3 million or 32.7% of casino revenues, for the year ended December 31, 2009. This decrease was primarily due to decreased labor costs, participation expenses and revenue tax expenses. Participation expense consists of fees paid to game owners for use of their games.
Hotel
Hotel revenues decreased 5.7% to $55.9 million for the year ended December 31, 2010 from $59.3 million for the year ended December 31, 2009. The decrease in revenues is the result of a decrease in room occupancy to 65.7% for the year ended December 31, 2010 compared to 66.9% for the year ended December 31, 2009 and a 3.2% decrease in average daily room rate for the year ended December 31, 2010 compared to the year ended December 31, 2009. The decrease in both occupancy and average daily room rate at our Las Vegas properties was primarily a result of sharp decreases in rates across our markets and an increase in Las Vegas citywide room inventories. In addition, Stratosphere began a room renovation in July 2010. After adjusting for the rooms that were out of order, overall occupancy increases to 68.8% for the year ended December 31, 2010. Due to increased marketing and direct mail efforts comp room sales increased 17.1% and our cash room sales decreased 7.1% for the year ended December 31, 2010 compared to the year ended December 31, 2009. Our hotel expenses were $33.3 million for the year ended December 31, 2010, compared to $34.1 million for the Year ended December 31, 2009. The decline in hotel expenses was due primarily to reduced labor costs and lower repair and maintenance expenses. Due to the decline in revenues, our Hotel operating margin decreased to 40.4% for the year ended December 31, 2010 as compared to 42.5% for the year ended December 31, 2009.
Food and Beverage
Food and beverage revenues decreased 8.5% to $67.1 million for the year ended December 31, 2010 compared to $73.3 million for the year ended December 31, 2009. The decline in revenues was driven largely by the reduction in food and beverage covers at our properties. Food covers and beverage covers for the year ended December 31, 2010 decreased 13.5% and 8.8%, respectively, compared to the year ended December 31, 2009. Average revenue per cover for the year ended December 31, 2010 increased 6.0% compared to the year ended December 31, 2009. Our food and beverage expenses decreased 8.7% to $50.5 million for the year ended December 31, 2010 compared to $55.3 million for the year ended December 31, 2009 due to an overall decrease in our food and beverage costs and payroll and related expenses. Our food and beverage operating margin increased slightly to 24.7% for the year ended December 31, 2010 as compared to 24.6% for the year ended December 31, 2009.
Tower, Retail and Other
Tower, retail and other revenues decreased 2.4% to $33.1 million for the year ended December 31, 2010 from $33.9 million for the year ended December 31, 2009. Tower revenues increased 12.6% for the year ended December 31, 2010, compared to the year ended December 31, 2009. The primary reason for the increase in Tower revenues for year ended December 31, 2010 compared to the year ended December 31, 2009 was the introduction of the Sky Jump Las Vegas ride on April 21, 2010. Entertainment revenue declined 28.5% for the year ended December 31, 2010, compared to the year ended December 31, 2009. The decrease in revenue was due to reduced showroom occupancy at the Stratosphere and Aquarius and a reduction in the number of events at the Aquarius. Retail revenue decreased 20.5% for the year ended December 31, 2010, compared to the year ended December 31, 2009. Retail revenues declined due to increased tenant vacancies and rent concessions. Other operating income increased 1.2% for the year ended December 31, 2010, compared to the year ended December 31, 2009. The increase was primarily due to higher ATM and communications commission revenues. Other operating expenses decreased 1.5% to $13.1 million for the year ended December 31, 2010, compared to $13.3 million for the year ended December 31, 2009. This decrease was primarily due to a decrease in bad debt expense and entertainer fees.
Promotional Allowances
Promotional allowances are comprised of the retail value of goods and services provided to casino customers under various marketing programs. As a percentage of casino revenues, promotional allowances were 11.9% for both the years ended December 31, 2010 and December 31, 2009.
Pre-opening Expense
We incurred $307,000 in pre-opening costs for the year ended December 31, 2010. Pre-opening costs were primarily comprised of marketing related expenses, labor costs and supplies for Sky Jump Las Vegas and Ron’s Steakhouse at Arizona Charlie’s Decatur. Pre-opening expenses associated with Sky Jump Las Vegas and Ron’s Steakhouse were approximately $283,000 and $24,000 respectively. Sky Jump Las Vegas opened to the public on April 21, 2010 and Ron’s Steakhouse opened to the public on December 17, 2010.
Selling, General and Administrative
Selling, general and administrative expenses are primarily comprised of payroll, marketing, advertising, utilities and other administrative expenses. These expenses decreased 0.6% to $116.1 million, or 32.2% of gross revenues, for the year ended December 31, 2010, compared to $116.8 million, or 30.6% of gross revenues, for the year ended December 31, 2009. This decrease was primarily due to lower labor costs, marketing related expenses, asset management fees, insurance expenses, and utilities expenses which were partially offset by an increase in loss on disposal of assets. For the year ended December 31, 2010, loss on disposal of assets includes non-cash charges of approximately $4.3 million, which were primarily the result of the hotel renovation at the Stratosphere.
Impairment of Assets
We account for indefinite-lived intangible assets in accordance with applicable guidance; accordingly, we perform an annual impairment test of indefinite-lived intangible assets in the fourth quarter of each year and whenever a triggering event occurs which causes us to perform an impairment test. During the three months ended June 30, 2010, due to continued weakness in consumer spending, increased room supply in the Las Vegas market and decreased spending by visitors to the Stratosphere we revised our Stratosphere revenue forecasts. We considered this revision to Stratosphere’s forecasted revenues to be a triggering event. As of June 30, 2010 we performed impairment tests that resulted in the non-cash write-down of the Stratosphere trade names of $2.0 million. The impairment of these assets was due primarily to our decrease in revenues, which was an indication that these assets may not be recoverable.
Long-lived assets, which are to be held and used, including intangibles and property and equipment, are periodically reviewed by management for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. If an indicator of impairment exists, the Company compares the estimated future cash flows of the asset, on an undiscounted basis, to the carrying value of the asset. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then impairment is measured as the difference between fair value and carrying value, with fair value typically based on a discounted cash flow model. If an asset is still under development, future cash flows include remaining construction costs.
In addition, we tested our assets for recoverability. The asset recoverability test required the estimation of undiscounted future cash flows from our properties and the comparison of the aggregate total to the property carrying value. The test resulted in no impairment; however, we will continue to monitor the performance of each of our properties and, if necessary, continue to update our asset recoverability test. If future asset recoverability tests indicate our assets are impaired, we will be subject to a non-cash write-down of our assets, which could have a material adverse impact on our consolidated statements of operations.
Interest Expense
Interest expense increased 14.9% to $45.6 million for the year ended December 31, 2010, compared to the year ended December 31, 2009. The increase was due primarily to the restructuring of the Goldman Term Loans and issuance of our 11% Senior Secured Notes. For the year ended December 31, 2009 we did not report any interest expense related to the 2014 Term Loans on our consolidated statements of operations. Interest payments totaling $6.2 million during the year ended December 31, 2009 were accounted for as a reduction to the outstanding balance of the 2014 Term Loans.
Financial Condition
Liquidity and Capital Resources
The following liquidity and capital resources discussion contains certain forward-looking statements with respect to our business, financial condition, results of operations, dispositions, acquisitions, renovation projects and our subsidiaries, which involve risks and uncertainties that cannot be predicted or quantified, and consequently, actual results may differ materially from those expressed or implied herein. Such risks and uncertainties include, but are not limited to, financial market risks, the ability to maintain existing management, competition within the gaming industry, the cyclical nature of the hotel business and gaming business, economic conditions, regulatory matters and litigation and other risks described in our filings with the Securities and Exchange Commission. In addition, renovation projects entail significant risks, including shortages of materials or skilled labor, unforeseen regulatory problems, work stoppages, weather interference, floods, unanticipated cost increases, and disruption to business. The anticipated costs and construction periods are based on budgets, conceptual design documents and construction schedule estimates. There can be no assurance that the budgeted costs or construction period will be met. All forward-looking statements are based on our current expectations and projections about future events.
Since the Acquisition, our primary use of cash has been significantly driven by the financing needs of the Acquisition and our debt. The Goldman Term Loans included cash that was escrowed to and from specific reserve accounts and requirements for us to set up and maintain reserve accounts. Accordingly, our primary source of cash was from the operation of our properties and restricted cash escrowed upon funding the Goldman Term Loans.
In connection with the Acquisition, on February 20, 2008 we received loan proceeds of approximately $1.1 billion pursuant to the Goldman Term Loans. On June 25, 2009, we closed the restructuring of the Goldman Term Loans and the reduction of the $1.1 billion Goldman Term Loans. As part of the restructuring, (i) Holdings paid GSMC $165 million to repay a portion of the Goldman Term Loans; (ii) Holdings agreed to issue a 22% membership interest in Holdings to MTGLQ Investors, L.P., an affiliate of GSMC, upon receipt of necessary gaming approvals; (iii) ACEP and certain of its wholly-owned indirect subsidiaries entered into a new loan agreement with GSMC evidencing a five-year term loan with an aggregate principal amount of $350 million, or the 2014 Term Loans; (iv) ACEP received $35 million in cash from Holdings; and (v) GSMC agreed to terminate the remaining Goldman Term Loans. On August 14, 2009, ACEP issued $375 million aggregate principal amount of 11% Senior Secured Notes due 2014, the gross proceeds of which were used to repay a portion of the principal balance of the 2014 Term Loans. The remaining balance of the 2014 Term Loans was forgiven by GSMC.
On February 23, 2010, the Issuers completed a SEC-registered exchange offer in which the Issuers issued approximately $374.9 million aggregate principal amount of their SEC-Registered Notes in exchange for $374.9 million of their outstanding, unregistered 11% Senior Secured Notes. The SEC-Registered Notes have substantially identical terms to the 11% Senior Secured Notes, except that the SEC-Registered Notes are registered under the Securities Act and there are certain differences relating to transfer restrictions, registration rights and payment of additional interest in case of non-registration.
During the year ended December 31, 2011, our Net Cash Provided by Operating Activities was approximately $21.0 million, an increase of 9.9%, compared to $19.1 million for the year ended December 31, 2010. Cash flows used in investing activities were $12.7 million for the year ended December 31, 2011, and consisted primarily of $14.1 million of capital expenditures.
During the year ended December 31, 2011, our total capital expenditures were $15.5 million (including approximately $1.4 million in non-cash items), of which approximately $4.2 million was spent on slot machine replacements and conversions, $1.1 million on hotel room renovations and upgrades, $1.8 million was spent on a replacement fire safety system for the Stratosphere, $2.6 million for renovations of our food and beverage venues and public areas and $5.8 million on our facilities, operations and information technology. During the year ended December 31, 2010, our total capital expenditures were $36.1 million (including approximately $1.9 million in non-cash items), of which approximately $3.7 million was spent on slot machine replacements and conversions, $17.2 million on hotel room renovations and upgrades, $1.8 million was spent on the Sky Jump Las Vegas ride, $6.0 million for renovations of our food and beverage venues and public areas and $7.4 million on our facilities, operations and information technology.
Our primary cash requirements for 2012 are expected to include (i) expenses associated with ongoing day-to-day operations, (ii) interest payments on indebtedness, (iii) payments for design and development costs of future projects, and (iv) regular maintenance and other capital expenditures of approximately $18.1 million, which will be evaluated throughout the year.
Our 2012 capital expenditure budget includes approximately $5.9 million for slot machines and conversions. In addition, we are evaluating additional improvements to our properties that we believe will enhance the overall guest experience.
In addition to our capital expenditures, we will pay interest on our notes semi-annually, every June 15 and December 15 until maturity.
We may from time to time seek to retire or repurchase our outstanding 11% Senior Secured Notes through cash purchases in the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. On May 31, 2011, the Issuers elected to redeem five percent (5%) of aggregate principal amount of the 11% Senior Secured Notes. The redemption price was 102% of the principal amount, or $19.1 million, plus accrued interest to the redemption date of approximately $951,000. Interest on the 11% Senior Secured Notes called for redemption ceased to accrue on and after the redemption date. As a result of the redemption, our interest payments decreased to approximately $19.6 million every June 15 and December 15.
At December 31, 2011, we had unrestricted cash and cash equivalents of $74.2 million. We believe our cash flow from operations and our cash balances will be sufficient to fund our operations, interest payments and capital expenditures for the next 12 months. However, our ability to fund our operations, make payments on our debt and fund planned capital expenditures will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control as well as the factors described in the section entitled Risk Factors in Item 1A.
Effect of Restructured Term Loan
The Restructured Term Loan contained a number of important restrictions, including restrictions on the incurrence of debt, restrictions on our business activities, financial maintenance covenants, restrictions on asset sales and restrictions on paying dividends. The Restructured Term Loan also contained a strict cash management and reserve system. We were required at closing of the Restructured Term Loan to fund approximately $26.9 million into a capital expenditure and FF&E reserve accounts that can only be used to make payments in respect of capital expenditures at the properties, and approximately $26.9 million into an equity reserve that can be used for general corporate purposes. In addition, we were required to fund and maintain reserves in respect of FF&E and excess cash on an ongoing basis. We were also required to apply certain excess cash flow to the amortization of the Restructured Term Loan on a quarterly basis.
Effect of the Old Notes Offering and the Exchange Offer
The indenture governing the notes contains a number of restrictions similar to the restrictions contained in the Restructured Term Loan, including restrictions on the incurrence of debt and restrictions on paying dividends, but is generally more favorable to us and provides us with significantly more operational flexibility. For example, the indenture does not require us to fund or maintain any reserves or adhere to any strict cash management system. Upon the repayment of the Restructured Term Loan with the proceeds of the offering of the old notes, all reserves maintained under the Restructured Term Loan were released and became available to us for general corporate purposes. Under the terms of the notes, any modification or waiver (including any waiver of a default) would typically require an amendment to the terms of the indenture and the consent of the requisite percentage of holders of the notes thereto.
The notes are governed by the same indenture as the old notes, and, as a result, the exchange offer does not have an incremental effect on our operational flexibility.
We currently do not have a revolving credit facility. Under the indenture for the notes, if we are able to meet a certain leverage ratio, we may enter into and incur up to $20.0 million in indebtedness under a credit facility, which would share equally and ratably in the collateral securing the notes. There can be no assurance that we will be able to meet this leverage ratio at any time during the term of the notes. Even if we are able to meet this leverage ratio, there can be no assurance that we will be able to obtain a credit facility. As a result, we expect our primary source of cash to come from the operation of our properties.
Our primary cash requirements for 2012 are expected to include (i) expenses associated with ongoing day-to-day operations, (ii) interest payments on indebtedness, (iii) regular maintenance and other capital expenditures of approximately $18.1 million, which will be evaluated throughout the year, and (iv) payments for design and development costs of future projects.
We believe that our cash flows from operations, restricted cash, and existing cash balances will be adequate to satisfy our anticipated uses of capital during the next twelve months. However, our forecasts of operations and estimates of our reasonably anticipated liquidity needs may change and further deterioration in the Las Vegas, Laughlin and U.S. economies, or other unforeseen events could occur, resulting in the need to raise additional funds from outside sources. Additional financing, if needed, may not be available to us, or if available, the financing may not be on terms favorable to us.
The table below sets forth our contractual obligations as of December 31, 2011 by maturity date with “long term debt” and “interest on long term debt” presented on an as adjusted basis for the notes.
(1)Does not reflect unamortized discount of $13,897.
(2)Contractual obligations for capital leases include amounts due under a 99-year lease for storage space located at the Arizona Charlie’s Decatur property. We are currently making monthly payments for the storage space of approximately $7,600.
Off-Balance Sheet Liabilities
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. As such, we are required to make estimates and assumptions about the effects of matters that are inherently uncertain. Those estimates and assumptions are derived and continually evaluated based on historical experiences, current facts and circumstances, and changes in the business environment. However, actual results may sometimes differ materially from estimates under different conditions. We have summarized our significant accounting policies in Note 1 to our consolidated financial statements. Of the accounting policies, we believe the following may involve a higher degree of judgment and complexity.
Revenue Recognition
Casino revenue is recorded as the net win from gaming activities (the difference between gaming wins and losses). Casino revenues are net of accruals for anticipated payouts of progressive and certain other slot machine jackpots. All other revenues are recognized as the services are provided. Gross revenues include the retail value of rooms, food and beverage and other items that are provided to customers on a complimentary basis. Such amounts are then deducted as promotional allowances. Promotional allowances also include incentives for goods and services earned in our slot club and other gaming programs.
The Company collects taxes from customers at the point of sale on transactions subject to sales and other taxes. Revenues are recorded net of any taxes collected.
We also reward customers, through the use of loyalty programs, with Free Play and points based on amounts wagered, that can be redeemed for a specified period of time for cash or non-cash awards. We deduct the cash incentive amounts from casino revenue.
Slot Club Liability
We offer a program, named ace|PLAY, whereby participants can accumulate points for casino wagering that can currently be redeemed for cash, lodging, food and beverages, and merchandise. Participant points expire after thirteen months of no activity. A liability is recorded for the estimate of unredeemed points based upon redemption history at our casinos. Changes in the program, increases in membership and changes in the redemption patterns of the participants can impact this liability. Slot club liability is included in accrued expenses on the consolidated balance sheet.
Self-Insurance
We retain the obligation for certain losses related to customers’ claims of personal injuries incurred while on our properties, for the first $100,000 per claim. We accrue for outstanding reported claims, claims that have been incurred but not reported and projected claims based upon management’s estimates of the aggregate liability for uninsured claims using historical experience, and adjusting company’s estimates and the estimated trends in claim values. Although management believes it has the ability to adequately project and record estimated claim payments, it is possible that actual results could differ significantly from the recorded liabilities.
Intangible Assets and Long-Lived Assets
Our finite-lived intangible assets consist of a non-compete agreement and player loyalty plan, and our indefinite-lived intangible assets consist of trade names. Acquired assets are recorded at fair value on the date of acquisition. Finite-lived intangible assets are amortized over the estimated period to be benefited. Indefinite-lived intangible assets are not amortized, but are reviewed annually for impairment, during the fourth quarter.
We account for indefinite-lived intangible assets in accordance with applicable guidance. For indefinite-lived intangible assets, we perform an annual impairment test of these assets in the fourth quarter of each year and between annual dates in certain circumstances. For assets to be disposed of we recognize the asset at the lower of carrying value or fair market value, less costs of disposal, as estimated based on comparable asset sales, solicited offers, or a discounted cash flow model. For long-lived assets to be held and used, we review for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We then compare the estimated undiscounted future cash flows of the asset to the carrying value of the asset. The asset is not impaired if the undiscounted future cash flows exceed its carrying value. If the carrying value exceeds the undiscounted future cash flows, then an impairment charge is recorded, typically measured using a discounted cash flow model, which is based on the estimated future results of the relevant reporting property discounted using our weighted-average cost of capital and market indicators of terminal year free cash flow multiples. If an asset is under development, future cash flows include remaining construction costs. All recognized impairment charges are recorded as operating expenses.
Management must make various assumptions and estimates in performing its impairment testing. For instance, management must first determine the usage of the asset. To the extent management decides that an asset will be sold or abandoned, it is more likely that impairment may be recognized. Assets must be tested at the lowest level for which identifiable cash flows exist, which means that some assets must be grouped, and management has some discretion in the grouping of assets. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates. If our ongoing estimates of future cash flows are not met, we may have to record additional impairment charges in future accounting periods. Our estimates of cash flows are based on the current regulatory, social and economic climates, recent operating information and budgets of the various properties where we conduct operations. These estimates could be negatively impacted by changes in federal, state or local regulations, economic downturns, or other events affecting various forms of travel and access to our properties.
See Results of Operations above for a discussion of write-downs and impairment charges recorded during the years ended December 31, 2011, 2010 and 2009. The majority of the impairment charges recorded for the years ended December 31, 2011, 2010 and 2009 are primarily related to the ongoing recession, which has caused us to reduce our estimates for projected revenue and cash flows, has reduced overall industry valuations, and has caused an increase in discount rates in the credit and equity markets.
Commitments and Contingencies
On an ongoing basis, we assess the potential liabilities related to any lawsuits or claims brought against us. While it is typically very difficult to determine the timing and ultimate outcome of such actions, the Company uses its best judgment to determine if it is probable that it will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. We accrue a liability when we believe a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation, it is possible that certain matters may be resolved for amounts materially different from any provisions or disclosures that we previously made.
Recently Issued Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income. This update requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Presentation of the components of other comprehensive income as part of the statements of changes in members’ equity is no longer permitted. The new guidance requirements are effective for the fiscal years beginning after December 15, 2011 and for interim periods within those years, with early adoption permitted. We expect there to be no impact to our statement of operations or statement of members’ equity upon adoption.
In September 2011, FASB issued Accounting Standards Update 2011-08, Testing Goodwill for Impairment. This update amends prior guidance to allow an entity to first evaluate qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amended guidance is effective for annual and interim goodwill impairment tests performed for the fiscal years beginning after December 15, 2011. Adoption of this guidance did not have a material impact on our financial statements.
In September 2011, FASB issued Accounting Standards Update 2011-09, Disclosures about an Employer’s Participation in a Multiemployer Plan. This guidance is to require expanded disclosures for entities participating in multiemployer plans. The enhanced disclosures are designed to assist financial statement users in assessing the potential impact of an entity’s participation in multiemployer plans on future cash flow. This guidance is effective for reporting periods ending after December 15, 2011. We have included the expanded disclosures in Note 10. This guidance does not change the accounting for an employer’s participation in a multiemployer plan.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary risk exposure relates to interest rate risk. All of our long-term debt is subject to fixed rates of interest at 11% and does not mature until June 15, 2014.
The fair value of our debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities. The estimated fair value of the 11% Senior Secured Notes was approximately $359.8 million as of December 31, 2011.
The Goldman Term Loans would have matured on March 11, 2010 with two one-year extension options. Interest was due and payable monthly at a blended annual interest rate of LIBOR plus 3.00% during the initial term and LIBOR plus 3.25% during any extension term. In connection with the Goldman Term Loans, an interest rate cap agreement was purchased to cap LIBOR at 4.75%. The Goldman Term Loans were collateralized by substantially all fee and leasehold real property comprising the Stratosphere, the Aquarius, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder. The Goldman Term Loans were satisfied by the restructuring related to the 2014 Term Loans. Under the terms of the Goldman Term Loans we were required to maintain a capital expenditure reserve, furniture, fixtures and equipment reserve, a deferred maintenance reserve, an environmental reserve and an interest reserve. In addition, the Goldman Term Loans contained important affirmative and negative financial covenants which restricted our ability to conduct our gaming operations or pursue development opportunities if desired. Certain of our assets, including the Stratosphere Casino Hotel & Tower, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder, and the Aquarius Casino Resort, secured the Goldman Term Loans. For the year ended December 31, 2011, we incurred approximately $45.2 million in interest expense.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Members
American Casino & Entertainment Properties LLC
We have audited the accompanying consolidated balance sheets of American Casino & Entertainment Properties LLC and subsidiaries (collectively, the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, members’ equity and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Casino & Entertainment Properties LLC and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Reno, Nevada
March 22, 2012
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY
(in thousands)
See notes to consolidated financial statements.
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARs ENDED DECEMBER 31, 2011, 2010 and 2009
Note 1. Description of Business and Summary of Significant Accounting Policies
The Company
American Casino & Entertainment Properties LLC, or ACEP, was formed in Delaware on December 29, 2003. ACEP owns and operates the Stratosphere Casino Hotel & Tower, or the Stratosphere, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder in Las Vegas, Nevada, and the Aquarius Casino Resort, or the Aquarius, in Laughlin, Nevada.
On April 22, 2007, American Entertainment Properties Corp., or AEP, our former direct parent, entered into a Membership Interest Purchase Agreement, or the Agreement, with W2007/ACEP Holdings, LLC, or Holdings, an affiliate of Whitehall Street Global Real Estate Limited Partnership 2007 and Whitehall Parallel Global Real Estate Limited Partnership 2007, collectively Whitehall 2007, funds affiliated with Goldman, Sachs & Co., to sell all of our issued and outstanding membership interests to Holdings, for approximately $1.3 billion. Pursuant to the Assignment and Assumption Agreement, dated December 4, 2007, between Holdings and W2007/ACEP Managers Voteco, LLC, or Voteco, Holdings assigned all of its rights, obligations and interests under the Agreement to Voteco. The acquisition, or the Acquisition, closed at a purchase price of $1.2 billion on February 20, 2008.
On January 24, 2008, the Nevada Gaming Commission issued an order of registration of ACEP as constituted after the consummation of the Acquisition. The order (1) prohibits Voteco or Holdings, or their respective affiliates, from selling, assigning, transferring, pledging or otherwise disposing of our membership interests or any other security convertible into or exchangeable for our class A membership interests, or Class A Interests, or our class B membership interests, or Class B Interests, without the prior approval of the Nevada Gaming Commission, (2) prohibits the direct or indirect members of Voteco from selling, assigning, transferring, pledging or otherwise disposing of any direct or indirect membership interest in Voteco without the prior administrative approval of the Chairman of the Nevada State Gaming Control Board or his designee, and (3) prohibits ACEP from declaring cash dividends or distributions on any class of membership interest of ACEP beneficially owned in whole or in part by Holdings or Voteco, or their respective affiliates, without the prior approval of the Nevada Gaming Commission.
On February 20, 2008, ACEP issued and sold 100% of our Class B Interests to Holdings for approximately $200.1 million. Except as otherwise expressly required by law, holders of our Class B Interests have no voting rights.
On February 20, 2008, upon the consummation of the closing of the Acquisition, ACEP, Voteco and Holdings entered into an Amended and Restated Limited Liability Company Agreement of ACEP, or the Amended Operating Agreement.
On February 20, 2008, in connection with the closing of the Acquisition, each member of Voteco, Holdings and Voteco entered into a Transfer Restriction Agreement. The Transfer Restriction Agreement provides, among other things, that:
·Holdings has the right to acquire Class A Interests from Voteco on each occasion that Class B Interests held by Holdings would be transferred to a proposed purchaser who, in connection with such proposed sale, has obtained all licenses, permits, registrations, authorizations, consents, waivers, orders, findings of suitability or other approvals required to be obtained from, and has made all findings, notices or declarations required to be made with, all gaming authorities under all applicable gaming laws,
·A specific purchase price, as determined in accordance with the Transfer Restriction Agreement, will be paid to acquire the Class A Interests from Voteco, and
·Voteco will not transfer ownership of Class A Interests owned by it except pursuant to such option of Holdings.
Pursuant to the Amended Operating Agreement, holders of Class A Interests will be entitled to one vote per interest in all matters to be voted on by our voting members. Except as otherwise expressly required by law, holders of Class B Interests will have no right to vote on any matters to be voted on by our members. Holders of Class A Interests and Class B Interests will have no preemptive rights, no other rights to subscribe for additional interests, no conversion rights and no redemption rights, will not benefit from any sinking fund, and will not have any preferential rights upon a liquidation.
Upon consummation of the Acquisition, Voteco acquired control of ACEP from our previous direct parent, which sold all the issued and outstanding membership interests of ACEP to Voteco pursuant to the membership interest purchase agreement. The membership interests of ACEP acquired by Voteco were redeemed and canceled pursuant to the terms of the Amended Operating Agreement entered into by ACEP, Voteco and Holdings upon the consummation of the Acquisition. Voteco acquired 100% of our voting securities by purchasing 100% of our newly issued Class A Interests in exchange for consideration in the amount of $30. The source of funds used by Voteco to purchase the Class A Interests were contributions of capital made to Voteco by each of its three members. Each of the members of Voteco is party to the Transfer Restriction Agreement.
Certain of our wholly owned indirect subsidiaries obtained term loans in an aggregate amount of approximately $1.1 billion from Goldman Sachs Mortgage Company, or GSMC, pursuant to certain mortgage and mezzanine loan agreements, collectively the Goldman Term Loans. The Goldman Term Loans had an initial term of two years with two one-year extension options and a blended annual interest rate of LIBOR plus 3.00% during the initial term and LIBOR plus 3.25% during any extension term. As a condition of the Goldman Term Loans, we were required to maintain a cash management account where we deposited all cash revenues. In addition, the Goldman Term Loans contained important affirmative and negative financial covenants customary for loans of this nature.
On June 25, 2009, ACEP and GSMC closed the restructuring of the Goldman Term Loans. In connection with the restructuring, (i) Whitehall 2007 invested $200 million of new capital, $165 million of which was paid to Holdings and used to repay a portion of the Goldman Term Loans and $35 million of which was contributed in cash to ACEP, (ii) ACEP and certain of its wholly-owned indirect subsidiaries entered into a new loan agreement with GSMC evidencing a five-year term loan with an aggregate principal amount of $350 million, or the 2014 Term Loans, (iii) Holdings agreed to issue to an affiliate of GSMC a 22% interest in Holdings upon receipt of necessary gaming approvals and (iv) GSMC agreed to terminate the Goldman Term Loans.
On August 14, 2009, ACEP and ACEP Finance Corp., a wholly-owned subsidiary of ACEP, collectively the Issuers, issued $375 million aggregate principal amount of 11% Senior Secured Notes due 2014, or the 11% Senior Secured Notes. The 11% Senior Secured Notes were issued pursuant to an indenture, dated as of August 14, 2009, or, the Indenture, among the Issuers, all of the then existing subsidiaries of ACEP other than ACEP Finance Corp., as guarantors, or the Guarantors, and The Bank of New York Mellon, as trustee. The 11% Senior Secured Notes mature on June 15, 2014. The 11% Senior Secured Notes bear interest at a rate of 11% per annum. Interest on the 11% Senior Secured Notes is computed on the basis of a 360-day year composed of twelve 30-day months and is payable semi-annually on June 15 and December 15 of each year, beginning on December 15, 2009.
The obligations under the 11% Senior Secured Notes are jointly, severally and unconditionally guaranteed, or the Guarantees, by all of the subsidiaries of ACEP other than ACEP Finance Corp. and will be so guaranteed by any future domestic subsidiaries of ACEP, subject to certain exceptions. The gross proceeds from the issuance of the 11% Senior Secured Notes, approximately $311.3 million, were used to repay a portion of the then outstanding balance of the 2014 Term Loans. Upon such payment, the remaining balance, or approximately $38.8 million of the 2014 Term Loans, was forgiven by GSMC.
On February 23, 2010, the Issuers completed a United States Securities and Exchange Commission, or SEC, registered exchange offer in which the Issuers issued approximately $374.9 million aggregate principal amount of their SEC-registered 11% Senior Secured Notes due 2014, or the SEC-Registered Notes, in exchange for $374.9 million of their outstanding, unregistered 11% Senior Secured Notes. The SEC-Registered Notes have substantially identical terms to the 11% Senior Secured Notes, except that the SEC-Registered Notes are registered under the Securities Act of 1933, as amended, or the Securities Act, and there are certain differences relating to transfer restrictions, registration rights, and payment of additional interest in case of non-registration. The SEC-Registered Notes and the 11% Senior Secured Notes are collectively referred to herein as the 11% Senior Secured Notes.
Principles of Consolidation
The consolidated financial statements include the accounts of ACEP and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. All statements are presented on a consolidated basis.
Revenue Recognition and Promotional Allowances
Casino revenue is recorded as the net win from gaming activities (the difference between gaming wins and losses). Casino revenues are net of accruals for anticipated payouts of progressive and certain other slot machine jackpots. All other revenues are recognized as the goods or services are provided. Gross revenues include the retail value of rooms, food and beverage and other items that are provided to customers on a complimentary basis. Such amounts are then deducted as promotional allowances. Promotional allowances also include incentives for goods and services earned in our slot club and other gaming programs.
The Company collects taxes from customers at the point of sale on transactions subject to sales and other taxes. Revenues are recorded net of any taxes collected.
We also reward customers, through the use of loyalty programs, with Free Play and points based on amounts wagered, that can be redeemed for a specified period of time for cash. We deduct the Free Play and cash incentive amounts from casino revenue.
The estimated costs of providing complimentaries, included as casino expenses, are as follows:
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks, interest-bearing deposits, money market funds and debt instruments purchased with an original maturity of 90 days or less.
Inventories
Inventories, which consist primarily of food, beverage and operating supplies, are stated at the lower of cost or market value. Costs are determined using the first-in, first-out and the weighted average methods.
Accounts Receivable
Receivables consist primarily of gaming, hotel and other receivables, net of allowance for doubtful accounts. Receivables are non-interest bearing and are initially recorded at cost. Accounts are written off when management deems the account to be uncollectible. An estimated allowance is maintained to reduce the Company’s receivables to their expected net realizable value. The allowance is estimated based on specific reviews of customer accounts as well as historical collection experience and current economic and business conditions. Recoveries of accounts previously written off are recorded when received.
Investments Restricted
Investments-restricted consist primarily of funds pledged for Nevada sales and use tax and workers compensation benefits. These investments are certificates of deposit and approximate their fair value.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents. Cash equivalents consist of interest-bearing deposits, money market funds and debt instruments in financial institutions. Cash and cash equivalents are in excess of Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses in such accounts.
Property and Equipment
Property and equipment purchased are stated at cost. Assets held under capital leases are stated at the lower of the present value of the future minimum lease payments or fair value at the inception of the lease. Expenditures for additions, renewals and improvements are capitalized and depreciated over their useful lives. Costs of repairs and maintenance are expensed when incurred. Leasehold acquisition costs are amortized over the shorter of their estimated useful lives or the term of the respective leases once the assets are placed in service.
Depreciation and amortization of property and equipment are computed using the straight-line method over the following useful lives:
Buildings and improvements 36-39 years
Furniture, fixtures and equipment 3-15 years
Land improvements 15 years
The Company capitalizes interest incurred on debt during the course of qualifying construction projects. Such costs are added to the asset base and amortized over the related assets’ estimated useful lives. For the years ended December 31, 2011, 2010 and 2009, we capitalized interest of $326,000, $652,000 and $188,000, respectively.
Unamortized Debt Issue Costs
Debt issuance costs incurred in connection with the issuance of debt are capitalized and amortized to interest expense using the effective interest method. For the years ended December 31, 2011, 2010 and 2009, amortization of debt issue costs totaled $5.3 million, $4.8 million and $5.5 million, respectively, and are included in interest expense on the accompanying consolidated statements of operations.
Slot Club Liability
We offer a program, named ace|PLAY, whereby participants can accumulate points for casino wagering that can currently be redeemed for cash, lodging, food and beverages, and merchandise. Participant points expire after thirteen months of no activity. A liability is recorded for the estimate of unredeemed points based upon redemption history at our casinos. Changes in the program, increases in membership and changes in the redemption patterns of the participants can impact this liability. Slot club liability is included in accrued expenses on the consolidated balance sheet.
Sales, Advertising and Promotion
Sales, advertising and promotion costs are expensed as incurred and were approximately $11.9 million, $9.5 million and $9.9 million for the years ended December 31, 2011, 2010 and 2009, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
Income Taxes
Our taxable income or loss is included in Holdings’ partnership tax return (Holdings is a limited liability company and treated as a partnership for tax purposes). As a limited liability company, Holdings’ taxable income or loss is allocated to members in accordance with their respective percentage ownership. Therefore, we are not a taxable entity for federal or state income tax purposes and the tax on our income is borne by our members. Hence, no provision or liability for income taxes has been included in the financial statements. Earnings and losses are included in the income tax returns of the members of Holdings and taxed depending on their tax strategies. The Company had no uncertain tax positions at December 31, 2011 and 2010.
Holdings’ members are responsible for income taxes on their allocated share of taxable income which may differ from income for financial statement purposes due to differences in the tax basis and financial reporting basis of assets and liabilities. The net tax basis of Holdings’ assets and liabilities exceeded the reported amounts by $40.1 million, $35.0 million and $26.6 million at December 31, 2011, 2010 and 2009, respectively. Holdings files tax returns in the United States and is subject to income tax examinations for the years beginning with 2008.
Intangible Assets and Long-Lived Assets
Our finite-lived intangible assets consist of a non-compete agreement and player loyalty plan, and our indefinite-lived intangible assets consist of trade names. Acquired assets are recorded at fair value on the date of acquisition. Finite-lived intangible assets are amortized over the estimated period to be benefited. Indefinite-lived intangible assets are not amortized, but are reviewed annually for impairment, during the fourth quarter.
We account for indefinite-lived intangible assets in accordance with applicable guidance. For indefinite-lived intangible assets, we perform an annual impairment test of these assets in the fourth quarter of each year and between annual dates in certain circumstances. For assets to be disposed of we recognize the asset at the lower of carrying value or fair market value, less costs of disposal, as estimated based on comparable asset sales, solicited offers, or a discounted cash flow model. For long-lived assets to be held and used, we review for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We then compare the estimated undiscounted future cash flows of the asset to the carrying value of the asset. The asset is not impaired if the undiscounted future cash flows exceed its carrying value. If the carrying value exceeds the undiscounted future cash flows, then an impairment charge is recorded, typically measured using a discounted cash flow model, which is based on the estimated future results of the relevant reporting property discounted using our weighted-average cost of capital and market indicators of terminal year free cash flow multiples. If an asset is under development, future cash flows include remaining construction costs. All recognized impairment charges are recorded as operating expenses.
Management must make various assumptions and estimates in performing its impairment testing. For instance, management must first determine the usage of the asset. To the extent management decides that an asset will be sold or abandoned, it is more likely that impairment may be recognized. Assets must be tested at the lowest level for which identifiable cash flows exist, which means that some assets must be grouped, and management has some discretion in the grouping of assets. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates. If our ongoing estimates of future revenue and cash flows are not met, we may have to record additional impairment charges in future accounting periods. Our estimates of revenue and cash flows are based on the current regulatory, social and economic climates, recent operating information and budgets of the various properties where we conduct operations. These estimates could be negatively impacted by changes in federal, state or local regulations, economic downturns, or other events affecting various forms of travel and access to our properties.
Fair Value of Financial Instruments
The carrying value of our cash and cash equivalents, receivables and accounts payable approximates fair value primarily because of the short maturities of these instruments.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes its estimates and assumptions are reasonable under the circumstances; however, actual results may differ from these estimates.
Recently Issued Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income. This update requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Presentation of the components of other comprehensive income as part of the statements of changes in members’ equity is no longer permitted. The new guidance requirements are effective for the fiscal years beginning after December 15, 2011 and for interim periods within those years, with early adoption permitted. We expect there to be no impact to our statement of operations or statement of members’ equity upon adoption.
In September 2011, FASB issued Accounting Standards Update 2011-08, Testing Goodwill for Impairment. This update amends prior guidance to allow an entity to first evaluate qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amended guidance is effective for annual and interim goodwill impairment tests performed for the fiscal years beginning after December 15, 2011. Adoption of this guidance did not have a material impact on our financial statements.
In September 2011, FASB issued Accounting Standards Update 2011-09, Disclosures about an Employer’s Participation in a Multiemployer Plan. This guidance is to require expanded disclosures for entities participating in multiemployer plans. The enhanced disclosures are designed to assist financial statement users in assessing the potential impact of an entity’s participation in multiemployer plans on future cash flow. This guidance is effective for reporting periods ending after December 15, 2011. We have included the expanded disclosures in Note 10. This guidance does not change the accounting for an employer’s participation in a multiemployer plan.
Note 2.Accounts Receivable
Accounts receivable consists of the following:
The Company recorded bad debt expense and allowance for doubtful accounts for the years ended December 31, 2011, 2010 and 2009 as follows:
Note 3.Other Current Assets
Other current assets consist of the following:
Note 4.Property and Equipment, Net
Property and equipment consist of the following:
Assets recorded under capital leases were approximately $3.0 million at both December 31, 2011 and 2010. Such assets include buildings of approximately $541,000 and equipment of approximately $2.4 million at both December 31, 2011 and 2010, respectively. Accumulated depreciation and amortization at December 31, 2011 and 2010 includes amounts recorded for capital leases of $1,462,000 and $1,017,000, respectively.
Note 5.Accrued Expenses
Accrued expenses consist of the following:
Note 6.Leases
For the years ended December 31, 2011, 2010 and 2009, we recorded rental revenue of $4.9 million, $5.0 million and $6.3 million, respectively.
The future minimum lease payments to be received under non-cancelable operating leases for years subsequent to December 31, 2011 are as follows:
The above minimum rental income does not include contingent rental income or common area maintenance costs contained within certain retail operating leases.
The Company, as a lessee, had operating lease expenses for the years ended December 31, 2011, 2010 and 2009 of $105,000, $204,000 and $224,000, respectively.
Future minimum rental payments with respect to non-cancelable operating leases with terms in excess of one year consist of the following at December 31, 2011:
Future minimum lease payments under capital leases with initial or remaining terms of one year or more consist of the following at December 31, 2011:
Note 7.Debt
Long-term debt and capital lease obligations consist of the following:
11% Senior Secured Notes
On August 14, 2009, we issued the 11% Senior Secured Notes pursuant to the Indenture. The 11% Senior Secured Notes mature on June 15, 2014 and bear interest at a rate of 11% per annum. Interest is computed on the basis of a 360-day year composed of twelve 30-day months and is payable semi-annually on June 15 and December 15 of each year, beginning on December 15, 2009. The obligations are jointly, severally and unconditionally guaranteed by all of the subsidiaries of ACEP other than ACEP Finance and will be so guaranteed by any future domestic subsidiaries of ACEP, subject to certain exceptions. The 11% Senior Secured Notes are collateralized by substantially all fee and leasehold real property comprising the Stratosphere, the Aquarius, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder.
On February 23, 2010, the Issuers completed an exchange offer registered with the SEC in which the Issuers issued approximately $374.9 million aggregate principal amount of their SEC-Registered Notes in exchange for $374.9 million of their Unregistered Notes. The SEC-Registered Notes have substantially identical terms to the Unregistered Notes, except that the SEC-Registered Notes were issued in a transaction registered under the Securities Act.
On May 31, 2011, the Issuers completed a redemption of five percent (5%) of aggregate principal amount of the 11% Senior Secured Notes pursuant to paragraph 5(b) of the 11% Senior Secured Notes and the redemption provisions of the Indenture (Section 3.07(b)). The redemption price for the 11% Senior Secured Notes was 102% of the principal amount of the 11% Senior Secured Notes redeemed, or $19.1 million, plus accrued interest to the redemption date of approximately $951,000. Interest on the 11% Senior Secured Notes called for redemption ceased to accrue on and after the redemption date. As a result of the redemption, a loss of $1.4 million was recognized. The loss is comprised of the redemption premium of $375,000 and a proportionate write-off of debt issuance and debt discount costs of $1.0 million.
In accordance with positions established by the SEC, separate financial information with respect to the parent, co-issuer, guarantor subsidiaries and non-guarantor subsidiaries is not required as the parent and co-issuer have no independent assets or operations, the guarantees are full and unconditional and joint and several, and the total assets, stockholders’ equity, revenues, income from operations before income taxes and cash flows from operating activities of the non-guarantor subsidiaries is less than 3% of ACEP’s consolidated amounts.
The gross proceeds from the issuance of the 11% Senior Secured Notes, approximately $311.3 million, were used to repay a portion of the then outstanding balance of the 2014 Term Loans. Upon such payment, the remaining balance of the 2014 Term Loans was forgiven by GSMC. We increased Members’ Equity by $215.6 million for the gain on debt extinguishment.
The fair value of our debt is estimated based on market prices for the same or similar issues. We issued the 11% Senior Secured Notes on August 14, 2009. The estimated fair value of the 11% Senior Secured Notes was approximately $359.8 million as of December 31, 2011.
On or after June 15, 2012, we may redeem all or a part of the 11% Senior Secured Notes at the redemption prices set forth in the Indenture, plus accrued and unpaid interest to the applicable redemption date. In addition, at any time prior to June 15, 2012, we may, on one or more than one occasion, redeem some or all of the 11% Senior Secured Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed, plus a “make-whole” premium, and accrued and unpaid interest to the applicable redemption date. At any time prior to June 15, 2012, we may also redeem up to 35% of the aggregate principal amount of Notes, using the proceeds of certain qualified equity offerings, at a redemption price of 111% of the principal amount thereof, plus accrued and unpaid interest to the applicable redemption date. We may, not more than once in the 12-month period ending on June 15, 2012, redeem up to 5% of the original aggregate principal amount of the 11% Senior Secured Notes at a redemption price equal to 102% of the principal amount of the 11% Senior Secured Notes redeemed plus accrued and unpaid interest to the applicable redemption date.
If certain change of control events occur as specified in the Indenture, we must offer to repurchase the 11% Senior Secured Notes at a repurchase price equal to 101% of the principal amount of the Notes repurchased, plus accrued and unpaid interest to the applicable repurchase date.
If ACEP or its subsidiaries sell assets under certain circumstances or experience certain events of loss, we must offer to repurchase the 11% Senior Secured Notes at a repurchase price equal to 100% of the principal amount of the Notes repurchased, plus accrued and unpaid interest to the date of purchase, prepayment or redemption, as the case may be.
We are bound by certain covenants contained and defined in the Indenture that requires us to file quarterly and annual reports, and among other things, restricts our ability to:
•declare or pay dividends and distributions on our equity interests, purchase, redeem, or otherwise retire for value any equity interest, make payments on debt, or make investments;
•incur indebtedness or issue preferred stock;
•sell, create liens, or otherwise encumber our assets or equity interests; and
•enter into transactions with affiliates.
These covenants contained in the Indenture are subject to a number of important limitations and exceptions.
The Indenture provides for events of default, including, but not limited to, cross defaults to certain other debt of ACEP and its subsidiaries. In the case of an event of default arising from specified events of bankruptcy or insolvency, all outstanding 11% Senior Secured Notes will become due and payable immediately without further action or notice. Management believes that we are in compliance with the provisions of the Indenture as of year end and the date of this filing.
2014 Term Loans
On June 25, 2009, we closed the restructuring of the Goldman Term Loans. In connection with the restructuring, (i) Whitehall 2007 invested $200 million, $165 million of which was paid to Holdings and used to repay a portion of the Goldman Term Loans and $35 million of which was contributed in cash to ACEP; (ii) Holdings agreed to issue a 22% membership interest in Holdings to an affiliate of GSMC, upon receipt of necessary gaming approvals; (iii) ACEP and certain of its wholly-owned indirect subsidiaries entered into the 2014 Term Loans with GSMC evidencing a loan with an aggregate principal amount of $350 million; and (iv) GSMC agreed to terminate the Goldman Term Loans.
ACEP and certain of its wholly-owned indirect subsidiaries were co-borrowers and were jointly and severally liable under the 2014 Term Loans. The 2014 Term Loans had a term of five years and an annual interest rate of LIBOR (with a LIBOR floor of 2.5%) plus 10.00%. The 2014 Term Loans were guaranteed by all our subsidiaries and were collateralized by substantially all fee and leasehold real property comprising the Stratosphere, the Aquarius, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder.
In connection with the restructure, we were required to account for the transaction using the appropriate guidance for troubled debt restructurings. As a result, we presented our restructured debt obligation on the balance sheet as of June 30, 2009 in the amount of $571.8 million, the Liability, which was the sum of $350 million, the Note Amount, and the minimum scheduled interest payments during the term. In our case, that amount is the interest expense calculated at 12.5%. We increased our Members’ Equity by $522.1 million, which is the difference between the Goldman Term Loans and the Liability less the closing costs and expenses paid in connection with the restructure. Due to the related party nature of the transaction, the difference was credited directly to Members’ Equity and had no impact on the statement of operations. All interest payments were accounted for as a reduction to the outstanding balance of the Liability. As a result, we did not report any interest expense related to the 2014 Term Loans on our consolidated statements of operations.
The restructuring of the Goldman Term Loans is expected to result in the recognition of a significant amount of cancellation of indebtedness taxable income by our owners. However, there is no current plan for us to make tax distributions in respect of such income and the terms of the 11% Senior Secured Notes restricts our ability to make any such tax distributions.
In connection with the redemption of the 2014 Term Loans we terminated all the cash management agreements that we were required to maintain. Accordingly, the amounts recorded as restricted cash related to the cash management agreements have been released and are now included in our cash balance on the consolidated balance sheet.
Note 8.	Related Party Transactions
On February 20, 2008, in connection with the closing of the Acquisition, certain of our wholly owned indirect subsidiaries obtained the Goldman Term Loans in an aggregate amount of approximately $1.1 billion from GSMC. On June 25, 2009, the Goldman Term Loans were restructured and as a result of such restructuring, we became party to a loan with GSMC in the original principal amount of $350 million, or the 2014 Term Loans. We paid interest on the Goldman Term Loans and 2014 Term Loans (see Note 7. Debt for an explanation of the accounting treatment of interest paid on the 2014 Term Loans), collectively, of approximately $26.2 million for the year ended December 31, 2009. We paid GSMC $7.0 million and Goldman Sachs and affiliated entities approximately $700,000 in fees and reimbursement of expenses related to the issuance of the 2014 Term Loans. For the year ended December 31, 2010, we incurred expenses of approximately $35,000 for reimbursed project expenses.
On August 14, 2009, we issued an aggregate principal amount of $375 million of 11% Senior Secured Notes. Goldman Sachs was the initial purchaser of the 11% Senior Secured Notes. We used the gross proceeds from the offering of the 11% Senior Secured Notes, approximately $311.3 million, to repay the 2014 Term Loans, which were held by GSMC, an affiliate of Goldman Sachs and Whitehall 2007, owners of a majority of our indirect interests. Upon such payment, the remaining balance of 2014 Term Loans was forgiven by GSMC. Due to the related party nature of the transaction, the difference between the carrying amount of the 2014 Term Loans and the aggregate principal amount of the 11% Senior Secured Notes was credited directly to Members Equity. Goldman Sachs has advised us that they intend to make a market in the 11% Senior Secured Notes.
As of November 29, 2007, the Stratosphere entered into a master room agreement with Consolidated Resorts, Inc., or CRI, which was effective from January 1, 2008 through December 31, 2008. Even though it had expired, the parties continued to operate under the agreement in a month-to-month arrangement. CRI was approximately 75% owned by Whitehall 2007. Whitehall 2007 is affiliated with Holdings, the 100% holder of our Class B membership interests, and Goldman Sachs. On July 10, 2009, CRI filed under Chapter 7 of the U.S. Bankruptcy Code in United States Bankruptcy Court for the District of Nevada, and it is therefore unlikely that we will be able to collect amounts owed to us by CRI. Under the agreement, CRI purchased a minimum number, which varied by month, of room nights from the Stratosphere. In addition, CRI was required to purchase promotional incentives such as show, restaurant and gaming packages for each guest. Revenues for promotional incentives are included in Casino revenues, Food and beverage revenues and Tower, retail and other revenues. There was also a sales incentive component whereby CRI was to pay us a fee for the resultant of net timeshare sales generated by CRI guests divided by total monthly tours solicited at the property when in excess of $2,499 per solicited tour. There were no sales incentives earned during the year ended December 31, 2009. We received approximately $397,000 in Hotel revenues, $66,000 in Casino revenues, $97,000 in Food and beverage revenues, and $238,000 in Tower, retail, and other revenues for the year ended December 31, 2009. CRI also leased space from the Stratosphere for three marketing kiosks. The lease agreement was effective from July 1, 2008 through September 30, 2011. The base rent was $125,000 per month plus common area maintenance charges. The Stratosphere received additional rent for tours over 1,250 guests per month that originate from the Stratosphere. Stratosphere received Tower, retail, entertainment and other revenues of $750,000 for rent under the lease agreement for the year ended December 31, 2009. CRI owed us $184,000 as of December 31, 2009, which was fully reserved on the consolidated balance sheets. The amount was written off during 2010.
On February 20, 2008 we entered into a consulting agreement with Highgate Hotels, L.P., or Highgate, pursuant to which Highgate provides asset management consulting services to us. The agreement was amended to reduce fees payable thereunder on June 25, 2009 and Highgate converted amounts due them from ACEP to contributed capital in Holdings. Highgate owns a less than 5% membership interest in Holdings. The consulting agreement expires on June 20, 2013. Highgate is entitled to receive a $1.5 million per year base consulting fee for the periods through February 20, 2011 and a $1.0 million per year consulting fee for the periods after February 20, 2011, additional consulting fees up to $500,000 per year for periods after February 20, 2011 based on EBITDA results at the properties and development fees at 4% of the aggregate costs of any agreed upon development projects. We incurred Highgate fees of approximately $1.1 million for the year ended December 31, 2011 compared to $1.5 million and $1.8 million for the years ended December 31, 2010 and 2009, respectively. For the year ended December 31, 2011, we did not provide any IT consulting services to Highgate, compared to approximately $4,000 for the year ended December 31, 2010. As of December 31, 2011 and December 31, 2010, we owed Highgate $0. As of December 31, 2011 and December 31, 2010, Highgate owed us approximately $0 and $4,000, respectively.
On June 16, 2008, we entered into an agreement with Travel Tripper LLC, or TTL, to utilize their technology for online hotel reservations. TTL is owned by an affiliate of Goldman Sachs (9%), an affiliate of Highgate (9%) and an employee of Highgate (40%). TTL was paid 4% of room revenues booked utilizing its system. As of August 1, 2010, the fee paid to TTL was reduced to 2%. We expensed fees of approximately $198,000 for the year ended December 31, 2011 compared to $314,000 and $518,000 for the years ended December 31, 2010 and 2009, respectively. As of December 31, 2011 and December 31, 2010, we owed TTL approximately $11,000 and $10,000, respectively.
Archon Group, LP, or Archon, an affiliate of Goldman Sachs, provides various services to us such as cash management and insurance brokers. We expensed fees of approximately $391,000 for the year ended December 31, 2011 compared to $426,000 and $84,000 for the years ended December 31, 2010 and 2009, respectively. In addition, we provided construction management services to Archon for hotels managed by them. We recorded the services as a reduction of general & administrative expenses of approximately $590,000 for the year ended December 31, 2011 compared to approximately $280,000 for the year ended December 31, 2010. As of December 31, 2011 and December 31, 2010, we owed Archon $0. As of December 31, 2011 and December 31, 2010, Archon owed us approximately $196,000 and $89,000, respectively. Additionally, Archon was the administrative agent under the 2014 Term Loans.
On October 3, 2008, we entered into a participation agreement with Nor1, Inc., or Nor1, to utilize their technology to help sell perishable suite and room inventories. Nor1 gives the guest who books on-line the opportunity to book a non-guaranteed suite or upgraded rooms at a discounted rate if such is available at check-in. If the suite or upgraded room is awarded, Nor1 is paid 25% of the upgrade fee. Goldman Sachs owns less than 5% of Nor1. We expensed fees of approximately $44,000 for the year ended December 31, 2011 compared to $37,000 and $36,000 for the years ended December 31, 2010 and 2009, respectively. As of December 31, 2011 and December 31, 2010, we owed Nor1 $2,000 and $2,000, respectively.
We follow a related party transaction approval policy for reviewing related person transactions. These procedures are intended to ensure that transactions with related persons are fair to us and in our best interests. If a proposed transaction appears to or does involve a related person, the transaction is presented to our audit committee for review. The audit committee is authorized to retain and pay such independent advisors as it deems necessary to properly evaluate the proposed transaction, including, without limitation, outside legal counsel and financial advisors to determine the fair value of the transaction.
Note 9. Intangible Assets
Pursuant to authoritative guidance, indefinite-lived intangible assets are subject to an annual assessment for impairment during the fourth quarter, or more frequently if there are indications of possible impairment, by applying a fair-value-based test.
Our finite-lived acquired intangible assets include our player loyalty plan and a non-compete agreement. Our infinite-lived acquired intangible assets include trade names. Acquired assets are recorded at fair value on the date of acquisition and finite-lived assets are amortized over the estimated period to be benefited.
As of December 31, 2011 and 2010, we had the following intangible assets.
We perform an annual impairment test of indefinite-lived intangible assets in the fourth quarter of each year and whenever a triggering event occurs which causes us to perform an impairment test. During the three months ended December 31, 2011, due to continued levels of high unemployment and reduced customer spending we revised our Arizona Charlie’s Boulder revenue forecasts. As of November 1, 2011 we performed an impairment test which resulted in the non-cash write-down of the Arizona Charlie’s Boulder trade names of $290,000. During the three months ended June 30, 2010, due to continued weakness in consumer spending, increased room supply in the Las Vegas market and decreased spending by visitors to the Stratosphere we revised our Stratosphere revenue forecasts. We considered this revision to Stratosphere’s forecasted revenues to be a triggering event. As of June 30, 2010, we performed impairment tests that resulted in the non-cash write-down of the Stratosphere trade names of $2.0 million. The impairment of these assets was due primarily to our decrease in revenues, which was an indication that these assets may not be recoverable. The fair value of the trade names was determined using the relief-from-royalty method.
We completed our 2009 annual impairment test of indefinite-lived intangible assets. As a result of this analysis, we recognized a non-cash impairment charge of approximately $7.1 million related to trade names in the fourth quarter of 2009. The primary reason for this impairment charge relates to the ongoing recession, which caused us to reduce our estimates for projected revenue and cash flows, has reduced overall industry valuations, and has caused an increase in discount rates in the credit and equity markets.
Amortization expense relating to finite lived intangible assets was $1.8 million, $1.8 million and $1.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. Future amortization expense is expected to be approximately $1.8 million in 2012 and $0.3 million in 2013.
Note 10. Employee Benefit Plans
As of December 31, 2011 approximately 40% of the Company’s employees are members of various unions and covered by union-sponsored, collectively bargained, multi-employer health and welfare and defined benefit pension plans. The Company recorded expenses for such plans of $8.7 million, $8.8 million and $9.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. The Company has no obligation for funding the plans beyond payments made based upon hours worked. The risks of participating in multiemployer pension plans are different from single-employer plans in the following aspects:
a) Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers;
b) If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers;
c) If an entity chooses to stop participating in some of its multiemployer plans, the entity may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company considers the following multiemployer pension plans to be significant:
1)The Pension Protection Act of 2006 requires plans that are certified as endangered (yellow) or critical (red) to develop and implement a funding improvement plan.
2)Both plans were separately certified as endangered (yellow), however in accordance with the provisions of the Worker, Retiree, and Employer Recovery Act of 2008, both plans separately elected to temporarily freeze the plan's status to be the same as the 2008 status. As a result, both plans elected to be treated as neither endangered or critical for the 2009 plan year and as such were not required to develop a funding improvement plan.
For the years ended December 31, 2011, 2010 and 2009, our contributions to multiemployer pension plans were as follows:
For the 2010 plan year, the latest period for which plan data is available, contributions by the Company were less than 5% of total contributions for all multiemployer pension plans the Company contributes to.
The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code covering its non-union employees. The plan allows employees to defer, within prescribed limits, up to 75% of their income on a pre-tax basis through contributions to the plan. The Company matched, within prescribed limits, 50% of eligible employees’ contributions up to 6% of any individual’s earnings. As of April 5, 2009, the Company suspended the 401(k) match program. The Company recorded $0, $0 and $0.2 million, for matching contributions for the years ended December 31, 2011, 2010 and 2009, respectively.
Note 11. Commitments & Contingencies
Legal Proceedings
We are, from time to time, parties to various legal proceedings arising out of our businesses. We believe, however, that there are no proceedings pending or threatened against us, which, if determined adversely, would have a material adverse effect upon our business financial conditions, results of operations or liquidity.
Sales and use tax on complimentary meals
In March 2008, the Nevada Supreme Court ruled, in a case, Sparks Nugget, Inc. vs. The State of Nevada Ex Rel. Department of Taxation, that food and non-alcoholic beverages purchased for use in providing complimentary meals to customers and to employees were exempt from sales and use tax. The Company paid use tax on these items through February 2008 and has filed for refunds for the periods from February 2005 to February 2008 related to this matter. The Company is claiming the exemption on sales and use tax returns for periods after February 2008 in light of this Nevada Supreme Court decision and as such has not accrued or paid any sales or use tax for those periods. In January 2012, the Nevada Department of Taxation has asserted that gaming companies should pay sales tax on customer complimentary meals and employee meals on a prospective basis. This position stems from a recent Nevada Tax Commission decision concerning another gaming company which states that complimentary meals provided to customers are subject to sales tax at the retail value of the meal and employee meals are subject to sales tax at the cost of the meal. The other gaming company filed in Clark County District Court a petition for judicial review of the Nevada Tax Commission decision. The Company is currently evaluating whether or not to accrue tax prospectively as it disagrees with the position asserted by the Nevada Department of Taxation.
Note 12. Selected Quarterly Financial Information (Unaudited)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer, based on their evaluation of our disclosure controls and procedures (as such terms are defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this annual report on Form 10-K, have concluded that our disclosure controls and procedures are effective for ensuring that information required be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management is required to base its assessment of the effectiveness of our internal control over financial reporting on a suitable, recognized control framework, such as the framework developed by the Committee of Sponsoring Organizations (COSO). The COSO framework, published in Internal Control-Integrated Framework, is known as the COSO Report. Our Management has chosen the COSO framework on which to base its assessment. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2011.
This annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report on Form 10-K.
There were no changes in our internal control over financial reporting that occurred during the last quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS and Corporate Governance
Identification of Directors and Officers
The following table sets forth certain information as of March 22, 2012 concerning our directors, executive officers and key employees:
Name
Age
Position
Alan Kava
Board Member
Peter Weidman
Board Member
Frank V. Riolo
Chief Executive Officer and Board Member
Edward W. Martin III
Chief Financial Officer, Treasurer and Board Member
Name
Age
Position
Phyllis A. Gilland
Vice President, General Counsel and Secretary
Ronald P. Lurie
Executive Vice President, General Manager - Arizona Charlie’s Decatur
Paul Hobson
Vice President, General Manager- Stratosphere Casino Hotel & Tower
Sean Hammond
General Manager - Aquarius Casino Resort
Mark Majetich
Senior Vice President, General Manager - Arizona Charlie’s Boulder
Alan Kava has served as a director since December 31, 2009. Mr. Kava is a member of the audit committee and compensation committee. He is a Managing Director and Partner of Goldman, Sachs & Co. where he is co-head for the Americas of the Real Estate Principal Investment Area. He is a member of the Investment Committees of The Whitehall Street Real Estate Funds, Goldman Sachs Real Estate Mezzanine Partners and the Caribbean Property Fund. Mr. Kava is a member of the Northeast Board of Directors for the Diabetes Research Institute and a director of Hilton Corporation. Prior to joining Goldman, Sachs & Co., Mr. Kava was an associate attorney in the corporate and real estate departments of Simpson Thacher & Bartlett from 1990-1997.
Peter A. Weidman became a director on January 19, 2010. Mr. Weidman has been a managing director of Goldman, Sachs & Co. since 2007, where he works in the Real Estate Principal Investment Area. Prior to joining Goldman, Sachs & Co. in 1999, Peter worked as an analyst in the Real Estate Investment Banking Group at Salomon Brothers and then at Averstar Capital Partners, a real estate development and private equity firm in New York.
Frank V. Riolo has served as our Chief Executive Officer since April 2008 and as a director since September 2008. Prior to joining American Casino & Entertainment Properties LLC, Mr. Riolo operated Riolo Group, LLC, assisting private companies with strategic planning and operational reorganization. He also served as Chief Executive Officer of Viejas Enterprises, from 2002 to 2007, a Native American gaming company operating in the State of California.
Edward W. Martin III has served as our Chief Financial Officer and Treasurer since October 2008 and as a director since March 2009. From September 2003 to May 2008, Mr. Martin was Vice President of Gaming Development for Station Casinos, Inc. In that capacity, he was actively involved in acquisitions, real estate planning and development, new business development in the United States and internationally. He was a member of the Station Casinos development team that created the master plans for four casino hotel projects. From September 2000 to August 2003, Mr. Martin was Senior Vice President of Finance and Strategic Planning for Silverton Casino, LLC, where he worked actively with the principals and operating departments to reposition the Silverton Casino Hotel into one of Las Vegas’ first casino resorts identified with a “life-style” brand. Mr. Martin was Chief Financial Officer of the Maloof Companies from May 1994 to September 2000. As Chief Financial Officer of Maloof Companies, he was responsible for all financial areas of the organization, which included the beverage distribution, hotel, casino and professional sports industries. He worked with the principals and executed multiple debt, equity, real estate and derivative transactions that allowed the company to divest of non-strategic assets and build an organization that now includes such well-known assets as The Palms Casino Resort in Las Vegas, Sacramento Kings NBA franchise and the 17,000 seat Arco Arena in Sacramento, CA.
Phyllis A. Gilland has served as our Vice President, General Counsel and Secretary since October 2008. Ms. Gilland is the corporate Compliance Officer, oversees corporate legal issues and is responsible for the retail, risk management and security investigations departments. Ms. Gilland has developed and implemented the legal strategy for many companies in the areas of regulatory and business compliance, corporate governance, claim management, real estate matters, risk management and mergers and acquisitions. Prior to joining ACEP, from 2000 to 2007 Ms. Gilland served as general counsel and chief financial officer for Taylor Construction Group Companies, headquartered in Des Moines, Iowa with affiliates around the country, including Las Vegas, Nevada and with several of their subsidiaries. Prior to Taylor Construction, she served as general counsel for Principal International, Inc. from 1999 through 2000 and associate general counsel for Principal Financial Group from 1994 through 1999. In addition, Ms. Gilland has held positions with the Resolution Trust Corporation and KPMG.
Ronald P. Lurie has served as Executive Vice President and General Manager of Arizona Charlie’s Decatur since January 1999. From November 1990 until January 1999, Mr. Lurie held various positions at Sunset Coin, an affiliate of Arizona Charlie’s, Inc., including as General Manager of Sunset Coin. In addition to his more than 25 years in the gaming industry, Mr. Lurie served as a Las Vegas City Councilman from 1973 to 1987 and as the Mayor of Las Vegas from June 1987 to June 1991.
Paul Hobson has served as General Manager of Stratosphere Casino, Hotel & Tower since January 2011. He also served as the General Manager of Aquarius Casino Resort from December 2008 to December 2010. From 1998 to 2008, he was a member of Primm Valley Casino Resorts executive team; most recently as Senior Vice President of Operations in Primm, Nevada. During his tenure there, his areas of responsibility expanded while in the employment of the Primadonna Co., LLC, MGM MIRAGE and Herbst Gaming. His responsibilities included strategic planning and oversight of three fully appointed casino resorts, two championship golf courses and other areas of the resort complex. Mr. Hobson brings more than 20 years of gaming and hospitality experience, and has also held financial management positions with both Caesars Palace in Las Vegas, Nevada and Caesars Tahoe in South Lake Tahoe, Nevada.
Mark Majetich has served as Senior Vice President and General Manager of Arizona Charlie’s Boulder since April 2004, and Vice President and General Manager for Arizona Charlie’s Boulder since May 2001. He served as Director of Operations at Arizona Charlie’s Boulder from February 2001 until May 2001. From June 2000 until January 2001, he was Director of Hotel Operations for the Stratosphere. From November 1992 until August 1999, Mr. Majetich held various positions at the Excalibur Hotel/Casino, including most recently, Hotel Manager. He has more than 25 years of experience in the gaming industry.
Sean Hammond has served as General Manager of the Aquarius Casino Resort since January 2011. From August 2009 to January 2011, he held the position of Vice President of Marketing and Player Development. Mr. Hammond joined the Aquarius in May of 2006 when he was hired as Vice President of Player Development. Prior to his employment at the Aquarius, he worked at the Tropicana Express (formerly Ramada Express) in Laughlin, Nevada from February 1990 through May of 2006 as Director of Player Development & Casino Events.
Qualifications of Board of Directors
The board of directors has concluded that, based on each director‘s experience, qualifications, attributes or skills on an individual basis and in combination with those of the other directors, each director should serve as a director. Among other attributes common to all directors are their ability to review critically, evaluate, question and discuss information provided to them, to interact effectively with the various service providers to the Company, and to exercise reasonable business judgment in the performance of their duties as directors. In addition, the board of directors has taken into account the actual service and commitment of the directors during their tenure in concluding that each should continue to serve. A director‘s ability to perform his or her duties effectively may have been attained through a director‘s educational background or professional training; business, consulting, public service or academic positions; experience from service as a director of the Company, public companies, or non-profit entities or other organizations; or other experiences. Also, set forth below is a brief discussion of the specific experience qualifications, attributes or skills of each director that led the board of directors to conclude that he or she should serve as a director.
Alan Kava was selected to be a director of the Company given his experience as co-head for the Americas of the Real Estate Principal Investment Area and as a member of the Investment Committees of The Whitehall Street Real Estate Funds, Goldman Sachs Real Estate Mezzanine Partners and the Caribbean Property Fund, as well as a director of Hilton Hotels Corporation, his previous experience as an associate attorney in the corporate and real estate departments of Simpson Thacher & Bartlett, and his experience in the real estate, hotel and gaming industries.
Peter Weidman was selected to be a director of the Company given his experience as a managing director of Goldman, Sachs & Co. and his work in their Real Estate Principal Investment Area, his experience as an analyst in the Real Estate Investment Banking Group at Salomon Brothers and then at Averstar Capital Partners, and his experience in the real estate, hotel and gaming industries.
Frank V. Riolo was selected to be a director of the Company given his experience operating Riolo Group, LLC and serving as Chief Executive Officer of Viejas Enterprises, as well as his experience serving as our Chief Executive Officer and his experience in the real estate, hotel and gaming industries
Edward W. Martin, III was selected to be a director of the Company given his experience as Vice President of Gaming Development for Station Casinos, Inc., Senior Vice President of Finance and Strategic Planning for Silverton Casino, LLC, and Chief Financial Officer of the Maloof Companies, as well as his experience serving as our Chief Financial Officer and Treasurer and his experience in the real estate, hotel and gaming industries.
Family Relationships
No family relationships exist between any directors or executive officers of ACEP.
Audit Committee
On September 30, 2008, our Board of Directors had established an audit committee initially consisting of Mr. Rothenberg, Mr. Cramer and Mr. Langer through December 31, 2008. Mr. Rothenberg resigned from our Board on March 9, 2009. On March 19, 2009, Mr. Angel became a director and was appointed to the audit committee. Mr. Cramer resigned from our Board on September 11, 2009. Mr. Langer resigned from our Board on December 31, 2009. On December 31, 2009, Mr. Kava became a director and was appointed to the audit committee. On January 19, 2010, Mr. Weidman became a director and was appointed to the audit committee. Mr. Angel resigned from our Board of June 11, 2010.
Our Board of Directors did not have an “audit committee financial expert”, within the meaning of Item 407(d)(5) of Regulation S-K, serving on the audit committee. The Board believed that each member of the audit committee was financially literate and possessed sufficient experience, both professionally and by virtue of his service as a director and member of the audit committee, to be fully capable of discharging his duties as a member of the audit committee. However, none of the members of the audit committee had a professional background in accounting or “preparing, auditing, analyzing or evaluating financial statements”.
If the audit committee determined that it requires additional financial expertise, it would have either engaged professional advisers or sought to recruit a member who would qualify as an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K.
Audit Committee Report
The audit committee has confirmed that: (1) the audit committee reviewed and discussed our 2011 audited financial statements with management, (2) the audit committee has discussed with our independent auditors the matters required to be discussed by SAS 114, The Auditors Communication With Those Charged With Governance, (3) the audit committee has received the written disclosures and the letter from the independent accountant required by applicable requirements of the PCAOB regarding the independent accountant’s communications with the audit committee concerning independence, and has discussed with the independent accountant the independent accountant’s independence, and (4) based on the review and discussions referred to in clauses (1) (2) and (3) above, the audit committee recommended to the Board of Directors that our 2011 audited financial statements be included in this annual report on Form 10-K.
This report is provided by the following directors, who constitute the audit committee:
Alan Kava
Peter Weidman
Code of Ethics
We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, and other senior officers, or persons performing similar functions. The Code of Business Conduct and Ethics is included herewith as Exhibit 14.1.
Corporate Governance Guidelines
Our Corporate Governance Guidelines may be obtained without charge, by writing to American Casino & Entertainment Properties LLC, 2000 Las Vegas Boulevard South Las Vegas, NV, 89104, attention: Investor Relations.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC reports of ownership of, and transactions in, certain classes of our equity securities. Such directors, executive officers and 10% owners are also required to furnish us with copies of all Section 16(a) reports they file.
On March 26, 2009, our Chief Executive Officer and our Chief Financial Officer each filed Form 3 with the SEC due to their status as executive officers of the Company. These filings, which were due to be filed with the SEC upon their becoming our executive officers, did not report any beneficial ownership of our equity securities. Based solely upon our review of Forms 3 and 4 filed with the SEC for our Company with the SEC, we do not believe there were any other late filings or known failures to file under Section 16(a) during our most recent fiscal year or prior fiscal years.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Committee Report
Our Board of Directors reviewed and discussed the Compensation Discussion and Analysis contained in this annual report on Form 10-K with management. Based on that review and discussion, the Board of Directors recommended that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.
This report is provided by the following directors, who constitute the compensation committee:
Alan Kava
Peter Weidman
Compensation Committee Interlocks and Insider Participation
During our 2011 fiscal year, none of our officers or former officers (a) participated in deliberations concerning executive compensation of our Board of Directors, or (b) served on the board of directors or compensation committee (or other board committee performing equivalent functions) of another entity, one of whose executive officers served on our Board of Directors.
Compensation Discussion and Analysis
Overview
Our Board has established a standing compensation committee. The entire compensation committee participates in deliberations concerning executive compensation and annually reviews the performance, salary and bonus of our Chief Executive Officer and Chief Financial Officer. Our Chief Executive Officer reviews the performance, salary and bonus of the other executive officers. The conclusions reached and the recommendations based on these reviews, including with respect to salary adjustments and annual bonus awards, if any, are then presented to the Board. We feel it is beneficial to have our entire Board participate in discussions and decision-making concerning executive compensation. The Board does not delegate the authority to establish executive officer compensation to any other person and has not retained any compensation consultants to determine or recommend the amount or form of executive and director compensation. Instead, the Board has relied on recommendations from our human resources personnel, Chief Executive Officer and appropriate, legal, tax and accounting advisors.
Compensation Philosophy and Objectives
Our executive compensation philosophy is designed to support our key business objectives while maximizing value. The objectives of our compensation structure are to attract and retain valuable employees, assure fair and internally equitable pay levels and provide a mix of base salary and variable bonuses that provides motivation and awards performance. At the same time, we seek to optimize performance and manage compensation costs.
The primary components of our executive compensation are base salary and annual bonus, payable in cash. Base salary and bonus are determined based on job function and each executive’s contribution to our performance and achievement of our overall business objectives.
We are a limited liability company with two members, and our securities are not publicly traded. Therefore, we do not pay compensation in options, units or other equity-based awards.
Individual Performance Measurement
Our board of directors sets performance goals for our executive officers, including operational, growth and leadership goals for the organizations they manage. At the end of each year, the board of directors, with input from our chief executive officer, assess each executive’s performance against his or her pre-established goals. The board of directors uses this assessment to inform its discretion in determining the individual component of the cash bonus. This performance appraisal process is largely subjective, with much discretion exercised by our board of directors and performance review by our chief executive officer. There is no specific weight given to any one individual goal or performance criterion. The assessment is based on our board of directors’ and chief executive officer’s determinations regarding how well the executive performed his or her job, and such assessment is qualitative, not quantitative, in nature. For example, when determining how well each of the executive’s grew his or her organization, they placed more importance on the quality of the new hires than on the number or percentage of people hired. The performance appraisal process is the same for each of our executive officers.
Base Salary
We view executive officer base salaries as a tool that provides executives with a reasonable base level of monthly income relative to the jobs they are doing and market-competitive salaries. The compensation committee participates in deliberations with respect to base salary, and then makes recommendations to the board of directors for the compensation of the chief executive officer, chief financial officer and other executive officers as it may determine. The entire board of directors then sets final salaries for the chief executive officer and the chief financial officer. Base salary is paid for ongoing performance throughout the year and is determined based on job function and each executive’s contribution to our performance and achievement of our overall business objectives.
Bonus
Our annual bonuses are intended to reward particular achievement during the year, motivate future performance and attract and retain highly qualified key employees. Although we intend for performance-based incentives and rewards to be substantial when warranted, these incentives are secondary to career growth, work environment and engaging work opportunities. We seek to develop a highly-motivated and collaborative workforce that pursues achievements for the sake of progress and innovation before individual gain. When ACEP as a whole, as well as individual executive officers, achieve our goals, we ensure that appropriately significant economic rewards follow.
All of our executive officers are eligible to receive discretionary cash bonuses.
Perquisites Benefits
Our executive officers, like our other employees, participate in various employee benefit plans, including medical and dental care plans; flexible spending accounts for healthcare; life, accidental death and dismemberment and disability insurance; employee assistance programs (e.g., confidential counseling); and paid time off. Like our other employees, we also pay life insurance premiums for the benefit of our executive officers. Our offering of benefits is designed to enable us to attract and retain our workforce in a competitive environment.
The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code covering its non-union employees. The plan allows employees to defer, within prescribed limits, up to 75% of their income on a pre-tax basis through contributions to the plan. The Company matched, within prescribed limits, 50% of eligible employees’ contributions up to 6% of any individual’s earnings. As of April 5, 2009, the company suspended the 401(k) match program. The Company recorded $0, $0 and $0.2 million, for matching contributions for the years ended December 31, 2011, 2010 and 2009, respectively.
The total value of all perquisites provided to each of our executive officers is less than $10,000.
Executive Compensation
The following table sets forth the compensation earned during the years ended December 31, 2011, 2010 and 2009, as applicable, by our Chief Executive Officer, or PEO, Chief Financial Officer, or PFO, and our three other most highly compensated executive officers and key employees for services rendered in all capacities for the year.
ANNUAL COMPENSATION (1)
(1) Pursuant to applicable regulations, certain columns of the Summary Compensation Table and each of the remaining tables required by applicable SEC regulations have been omitted, if there was no compensation awarded to, or earned by or paid to any of the named executive officers by us.
(2) For the year 2011, represents amounts approved by the Board, upon recommendation of the compensation committee, on February 1, 2012, related to 2011. The amounts were paid in 2012. For the year 2010, represents amounts approved by the Board, upon recommendation of the compensation committee, on December 22, 2010, related to 2010. The amounts were paid in 2011. For the year 2009, represents amounts approved by the Board, upon recommendation of the compensation committee, on February 2, 2010, related to 2009. The amounts were paid in 2010.
(3) Includes contributions by ACEP to 401(k) plans, dollar value of insurance premiums and other compensation related to health insurance payments. For 2011 it also includes an auto allowance of $3,932 for Mr. Riolo. For 2010 it also includes auto allowances of $2,815 and $3,000 for Mr. Riolo and Mr. Hobson, respectively and for Mr. Moore a $160,000 consulting fee and $4,524 in health premiums under COBRA. It also includes for 2009 auto allowances of $2,817 and $4,200 for Mr. Riolo and Mr. Hobson, respectively. Contributions to 401(k) plans by ACEP are only applicable for 2009. As of April 5, 2009, the Company suspended the 401(k) match program.
Potential Payments Upon Termination or Change in Control
We have arrangements with certain of our Named Executive Officers that may provide them with compensation following termination of employment. These arrangements are discussed below under “Employment Agreements”.
Plan-Based and Equity Awards
We do not have any stock award, option or non-equity incentive plans.
Option Grants in Last Fiscal Year
We have not implemented a stock option or other similar plan.
Employment Agreements
We have entered into agreements with certain of our current executive officers and key personnel that regulate their employment with us, their compensation and potential severance packages.
Our employment agreement with our General Manager of the Aquarius, Sean Hammond expired March 9, 2012 and the parties have not entered into a new agreement. Mr. Hammond continues to serve as our General Manager of the Aquarius. He receives an annual base salary of $200,000 and is eligible to receive an annual bonus, as may, from time to time, be determined in the sole discretion of our Board. Mr. Hammond is also entitled to receive certain healthcare and similar employee welfare benefits comparable to those received by our employees at a similar pay level and/or position.
Our employment agreement with our Chief Executive Officer, Frank Riolo expired on April 29, 2011 and the parties have not entered into a new agreement. Mr. Riolo continues to serve as our Chief Executive Officer. He receives an annual base salary of $600,000 and is eligible to receive an annual bonus, as may, from time to time, be determined in the sole discretion of our Board. Mr. Riolo is also entitled to receive certain healthcare and similar employee welfare benefits comparable to those received by our employees at a similar pay level and/or position.
Our employment agreement with our General Manager of the Stratosphere, Paul Hobson expired March 9, 2012 and the parties have not entered into a new agreement. Mr. Hobson continues to serve as our General Manager of the Stratosphere. He receives an annual base salary of $250,000 and is eligible to receive an annual bonus, as may, from time to time, be determined in the sole discretion of our Board. Mr. Hobson is also entitled to receive certain healthcare and similar employee welfare benefits comparable to those received by our employees at a similar pay level and/or position.
Our employment agreement with our President of Stratosphere Development, LLC, Thomas I. Moore expired March 9, 2012 and the parties have not entered into a new agreement. Mr. Moore continues to serve as our President of Stratosphere Development, LLC. Mr. Moore receives an annual base salary of $400,000 and is eligible to receive an annual bonus, as may, from time to time, be determined in the sole discretion of our Board. Mr. Moore is also entitled to receive certain healthcare and similar employee welfare benefits comparable to those received by our employees at a similar pay level and/or position.
On September 24, 2008 and September 25, 2008, Edward W. Martin, III, was appointed as our Chief Financial Officer and Treasurer, respectively, as previously reported in our Current Report on Form 8-K, filed with the SEC on October 1, 2008 (SEC File No. 000-52975). Our employment agreement with Mr. Martin expired on October 22, 2011 and the parties have not entered into a new agreement. Mr. Martin continues to serve as our Chief Financial Officer and Treasurer. He receives an annual base salary of $400,000 and is eligible to receive an annual bonus, as may, from time to time, be determined in the sole discretion of our Board. Mr. Martin is also entitled to receive certain healthcare and similar employee welfare benefits comparable to those received by our employees at a similar pay level and/or position.
Compensation of Directors
Alan Kava and Peter Weidman did not receive any compensation for their service as members of our Board in 2011 or 2010.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Voteco owns 100% of our issued and outstanding Class A Interest. Holdings owns 100% of our issued and outstanding Class B Interest. The address of Voteco is 200 West Street, New York, NY 10282 and the address of Holdings is 200 West Street, New York, NY 10282.
Messrs. Kava and Weidman own 100% of the membership interests of Voteco. In connection with his resignation from our Board, Mr. Rothenberg also resigned as a manager of Voteco and renounced any voting or management rights he may have as a member of Voteco. Mr. Angel acquired 100% of Mr. Rothenberg’s membership interest in Voteco on August 20, 2009. As a result of the resignation of Mr. Langer as manager of Voteco on December 31, 2009, Messrs. Kava and Powers were appointed as managers of Voteco. Upon Mr. Power’s resignation from the Board on January 19, 2010, Mr. Weidman was appointed as manager of Voteco. As of October 14, 2010, Messrs. Kava and Weidman are the managers of Voteco.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
On February 20, 2008, in connection with the closing of the Acquisition, certain of our wholly owned indirect subsidiaries obtained the Goldman Term Loans in an aggregate amount of approximately $1.1 billion from GSMC. On June 25, 2009, the Goldman Term Loans were restructured and as a result of such restructuring, we became party to a loan with GSMC in the original principal amount of $350 million, or the 2014 Term Loans. We paid interest on the Goldman Term Loans and 2014 Term Loans (see Note 7. Debt for an explanation of the accounting treatment of interest paid on the 2014 Term Loans), collectively, of approximately $26.2 million for the year ended December 31, 2009. We paid GSMC $7.0 million and Goldman Sachs and affiliated entities approximately $700,000 in fees and reimbursement of expenses related to the issuance of the 2014 Term Loans. For the year ended December 31, 2010, we incurred expenses of approximately $35,000 for reimbursed project expenses.
On August 14, 2009, we issued an aggregate principal amount of $375 million of 11% Senior Secured Notes. Goldman Sachs was the initial purchaser of the 11% Senior Secured Notes. We used the gross proceeds from the offering of the 11% Senior Secured Notes, approximately $311.3 million, to repay the 2014 Term Loans, which were held by GSMC, an affiliate of Goldman Sachs and Whitehall 2007, owners of a majority of our indirect interests. Upon such payment, the remaining balance of 2014 Term Loans was forgiven by GSMC. Due to the related party nature of the transaction, the difference between the carrying amount of the 2014 Term Loans and the aggregate principal amount of the 11% Senior Secured Notes was credited directly to Members Equity. Goldman Sachs has advised us that they intend to make a market in the 11% Senior Secured Notes.
As of November 29, 2007, the Stratosphere entered into a master room agreement with Consolidated Resorts, Inc., or CRI, which was effective from January 1, 2008 through December 31, 2008. Even though it had expired, the parties continued to operate under the agreement in a month-to-month arrangement. CRI was approximately 75% owned by Whitehall 2007. Whitehall 2007 is affiliated with Holdings, the 100% holder of our Class B membership interests, and Goldman Sachs. On July 10, 2009, CRI filed under Chapter 7 of the U.S. Bankruptcy Code in United States Bankruptcy Court for the District of Nevada, and it is therefore unlikely that we will be able to collect amounts owed to us by CRI. Under the agreement, CRI purchased a minimum number, which varied by month, of room nights from the Stratosphere. In addition, CRI was required to purchase promotional incentives such as show, restaurant and gaming packages for each guest. Revenues for promotional incentives are included in Casino revenues, Food and beverage revenues and Tower, retail and other revenues. There was also a sales incentive component whereby CRI was to pay us a fee for the resultant of net timeshare sales generated by CRI guests divided by total monthly tours solicited at the property when in excess of $2,499 per solicited tour. There were no sales incentives earned during the year ended December 31, 2009. We received approximately $397,000 in Hotel revenues, $66,000 in Casino revenues, $97,000 in Food and beverage revenues, and $238,000 in Tower, retail, and other revenues for the year ended December 31, 2009. CRI also leased space from the Stratosphere for three marketing kiosks. The lease agreement was effective from July 1, 2008 through September 30, 2011. The base rent was $125,000 per month plus common area maintenance charges. The Stratosphere received additional rent for tours over 1,250 guests per month that originate from the Stratosphere. Stratosphere received Tower, retail, entertainment and other revenues of $750,000 for rent under the lease agreement for the year ended December 31, 2009. CRI owed us $184,000 as of December 31, 2009, which was fully reserved on the consolidated balance sheets. The amount was written off during 2010.
On February 20, 2008 we entered into a consulting agreement with Highgate Hotels, L.P., or Highgate, pursuant to which Highgate provides asset management consulting services to us. The agreement was amended to reduce fees payable thereunder on June 25, 2009 and Highgate converted amounts due them from ACEP to contributed capital in Holdings. Highgate owns a less than 5% membership interest in Holdings. The consulting agreement expires on June 20, 2013. Highgate is entitled to receive a $1.5 million per year base consulting fee for the periods through February 20, 2011 and a $1.0 million per year consulting fee for the periods after February 20, 2011, additional consulting fees up to $500,000 per year for periods after February 20, 2011 based on EBITDA results at the properties and development fees at 4% of the aggregate costs of any agreed upon development projects. We incurred Highgate fees of approximately $1.1 million for the year ended December 31, 2011 compared to $1.5 million and $1.8 million for the years ended December 31, 2010 and 2009, respectively. For the year ended December 31, 2011, we did not provide any IT consulting services to Highgate, compared to approximately $4,000 for the year ended December 31, 2010. As of December 31, 2011 and December 31, 2010, we owed Highgate $0. As of December 31, 2011 and December 31, 2010, Highgate owed us approximately $0 and $4,000, respectively.
On June 16, 2008, we entered into an agreement with Travel Tripper LLC, or TTL, to utilize their technology for online hotel reservations. TTL is owned by an affiliate of Goldman Sachs (9%), an affiliate of Highgate (9%) and an employee of Highgate (40%). TTL was paid 4% of room revenues booked utilizing its system.As of August 1, 2010, the fee paid to TTL was reduced to 2%. We expensed fees of approximately $198,000 for the year ended December 31, 2011 compared to $314,000 and $518,000 for the years ended December 31, 2010 and 2009, respectively. As of December 31, 2011 and December 31, 2010, we owed TTL approximately $11,000 and $10,000, respectively.
Archon Group, LP, or Archon, an affiliate of Goldman Sachs, provides various services to us such as cash management and insurance brokers.We expensed fees of approximately $391,000 for the year ended December 31, 2011 compared to $426,000 and $84,000 for the years ended December 31, 2010 and 2009, respectively. In addition, we provided construction management services to Archon for hotels managed by them. We recorded the services as a reduction of general & administrative expenses of approximately $590,000 for the year ended December 31, 2011 compared to approximately $280,000 for the year ended December 31, 2010. As of December 31, 2011 and December 31, 2010, we owed Archon $0. As of December 31, 2011 and December 31, 2010, Archon owed us approximately $196,000 and $89,000, respectively. Additionally, Archon was the administrative agent under the 2014 Term Loans.
On October 3, 2008, we entered into a participation agreement with Nor1, Inc., or Nor1, to utilize their technology to help sell perishable suite and room inventories. Nor1 gives the guest who books on-line the opportunity to book a non-guaranteed suite or upgraded rooms at a discounted rate if such is available at check-in. If the suite or upgraded room is awarded, Nor1 is paid 25% of the upgrade fee. Goldman Sachs owns less than 5% of Nor1. We expensed fees of approximately $44,000 for the year ended December 31, 2011 compared to $37,000 and $36,000 for the years ended December 31, 2010 and 2009, respectively. As of December 31, 2011 and December 31, 2010, we owed Nor1 $2,000 and $2,000, respectively.
Other Relationships and Policies
We follow a related party transaction approval policy for reviewing related person transactions. These procedures are intended to ensure that transactions with related persons are fair to us and in our best interests. If a proposed transaction appears to or does involve a related person, the transaction is presented to our audit committee for review. The audit committee is authorized to retain and pay such independent advisors as it deems necessary to properly evaluate the proposed transaction, including, without limitation, outside legal counsel and financial advisors to determine the fair value of the transaction.
Director Independence
We believe that Messrs. Kava and Weidman are not “independent” as defined in the currently applicable listing standards of the New York Stock Exchange, or NYSE, because they are the beneficial owners of 100% of the Class A Interests. ACEP has no securities listed on the NYSE and, therefore, are not subject to the NYSE listing standards.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the approximate aggregate fees incurred by our principal accountants for 2011 and 2010 services:
Grant Thornton, LLP, did not provide any services related to financial information systems design and implementation during 2011 or 2010.
(1)Other fees include fees for work related to our debt restructure.
(2)Fees related to the preparation of the consolidated tax return for the years ended December 31, 2010 and 2009.
It is the policy of the Audit Committee to pre-approve all engagements and fees of the independent public accountant and during 2011 and 2010 all such engagements and fees were pre-approved.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1. Financial Statements
3. 	List of Exhibits
EXHIBITS INDEX
EXHIBIT NO.
DESCRIPTION
3.1
Second Amended and Restated Certificate of Formation of American Casino & Entertainment Properties LLC (ACEP) (incorporated by reference to Exhibit 3.1 to ACEP’s Form S-4 (SEC File No. 333-118149), filed on August 12, 2004).
3.2
Amended and Restated Limited Liability Company Agreement of ACEP (incorporated by reference to Exhibit 3.1 to ACEP’s Form 8-K (SEC File No. 000-52975), filed on February 26, 2008).
4.1
Indenture, dated as of August 14, 2009, among American Casino & Entertainment Properties LLC, ACEP Finance Corp., the guarantors listed on the signature pages thereto and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.6 of the American Casino & Entertainment Properties LLC current report on Form 8-K (SEC File No. 000-52975), filed on August 19, 2009).
4.2
Registration Rights Agreement, dated as of August 14, 2009, among American Casino & Entertainment Properties LLC, ACEP Finance Corp., the guarantors listed on the signature pages thereto and the initial purchaser of American Casino & Entertainment Properties LLC’s and ACEP Finance Corp.’s 11% Senior Secured Notes due 2014 (incorporated by reference to Exhibit 4.7 of the American Casino & Entertainment Properties LLC current report on Form 8-K (SEC File No. 000-52975), filed on August 19, 2009).
4.3
Pledge and Security Agreement, dated as of August 14, 2009, by and among, American Casino & Entertainment Properties LLC, ACEP Finance Corp., the other subsidiaries of American Casino & Entertainment Properties LLC listed on the signature pages thereof and The Bank of New York Mellon, as collateral trustee (incorporated by reference to Exhibit 4.8 of the American Casino & Entertainment Properties LLC current report on Form 8-K (SEC File No. 000-52975), filed on August 19, 2009).
4.4
Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing,, dated as of August 14, 2009, by and among W2007 Stratosphere Propco, L.P., W2007 Stratosphere Land Propco, L.P., W2007 Aquarius Propco, L.P., W2007 Arizona Charlie’s Propco, L.P. and W2007 Fresca Propco, L.P., as grantors, Fidelity National Title Agency of Nevada, Inc., as trustee and The Bank of New York Mellon, as beneficiary (incorporated by reference to Exhibit 4.9 of the American Casino & Entertainment Properties LLC current report on Form 8-K filed (SEC File No. 000-52975), on August 19, 2009).
4.5
Collateral Trust Agreement, dated as of August 14, 2009, by and among American Casino & Entertainment Properties LLC, ACEP, Finance Corp., the guarantors from time to time party thereto, The Bank of New York Mellon, as trustee, the other secured debt representatives from time to time party thereto, and The Bank of New York Mellon , as collateral trustee (incorporated by reference to Exhibit 4.10 of the American Casino & Entertainment Properties LLC current report on Form 8-K (SEC File No. 000-52975), filed on August 19, 2009).
4.6
Transfer Restriction Agreement, dated February 20, 2008, among Stuart Rothenberg, Brahm Cramer, Jonathan Langer, 2007/ACEP Holdings, LLC and W2007/ACEP Managers Voteco, LLC (incorporated by reference to Exhibit 4.01 to ACEP’s Form 8-K (SEC File No. 000-52975), filed on February 26, 2008).
10.1
Service Mark License Agreement, by and between Becker Gaming, Inc. and Arizona Charlie’s, Inc., dated as of August 1, 2000 (incorporated by reference to Exhibit 10.10 to ACEP’s Form 10-K (SEC File No. 333-118149), filed on March 16, 2006).
*10.2
Amended Management Incentive Plan, effective January 1, 2005, revised June 25, 2007, of ACEP and Atlantic Coast Entertainment Holdings, Inc. (incorporated by reference to Exhibit 10.1 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on June 29, 2007).
*10.3
Employment Agreement, effective October 23, 2008, by and between ACEP and Edward W. Martin III (incorporated by reference to Exhibit 10.2 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on October 30, 2008).
*10.4
Employment Agreement, effective October 23, 2008, by and between ACEP and Phyllis A. Gilland.
*10.5
Economic Participation Agreement, dated as of October 23, 2008, between W2007 Finance Sub LLC, Whitehall Parallel Global Real Estate Limited Partnership 2007 and Edward W. Martin, III (incorporated by reference to Exhibit 10.4 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on October 30, 2008).
*10.6
Economic Participation Agreement, dated as of October 23, 2008, between W2007 Finance Sub LLC, Whitehall Parallel Global Real Estate Limited Partnership 2007 and Phyllis A. Gilland.
*10.7
Employment Agreement, effective March 9, 2010, by and between ACEP and Frank V. Riolo (incorporated by reference to Exhibit 10.01 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on March 12, 2010).
*10.8
Employment Agreement, effective March 9, 2010, by and between Aquarius Gaming LLC and Paul Hobson (incorporated by reference to Exhibit 10.03 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on March 12, 2010).
*10.9
Employment Agreement, effective March 9, 2010, by and between ACEP and Thomas I. Moore (incorporated by reference to Exhibit 10.02 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on March 12, 2010).
14.1
Code of Business Conduct and Ethics.
21.1
Subsidiaries
31.1
Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*
Denotes a management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
By: /s/ Frank V. Riolo
Frank V. Riolo
Chief Executive Officer
Date: March 22, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities indicated with respect to the Board of Directors of American Casino & Entertainment Properties LLC, on behalf of the Registrant in the capacities and on the dates indicated:
/s/ Frank V. Riolo
Frank V. Riolo
Chief Executive Officer
March 22, 2012
(Principal Executive Officer)
/s/ Edward W. Martin III
Edward W. Martin III
Chief Financial Officer, Treasurer
(Principal Financial and Accounting Officer)
March 22, 2012
/s/ Alan Kava
Alan Kava
Board Member
March 22, 2012
/s/ Peter Weidman
Peter Weidman
Board Member
March 22, 2012
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
We have not sent any annual reports to security holders covering the year ended December 31, 2011. We have not sent proxies, form of proxy or other proxy soliciting material to our security holders with respect to any annual or other meeting of security holders and will not be doing so subsequent to the filing of this Form 10-K.