ITEM 1. BUSINESS
General
ALST Casino Holdco, LLC (the “Company,” “Successor,” “we,” “us” or “our”), a Delaware limited liability company, was formed on May 11, 2011. We were formed to acquire substantially all of the equity interests of Aliante Gaming, LLC (“Aliante Gaming” or “Predecessor”) pursuant to a joint plan of reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”). The reorganization was completed on November 1, 2011 (the “Effective Date”), resulting in Aliante Gaming, the owner and operator of the Aliante Casino + Hotel, previously known as Aliante Station Casino + Hotel, located in North Las Vegas, Nevada (the “Casino”), becoming our wholly owned subsidiary. Prior to the Effective Date, we conducted no operations and had no material assets or liabilities.
Our principal executive offices are located at 7300 Aliante Parkway, North Las Vegas, NV 89084. The telephone number for our executive offices is (702) 692-7777. Our internet address is www.aliantegaming.com.
Background
Prior to the Effective Date, Aliante Gaming was a wholly owned subsidiary of Aliante Holding, LLC (“Aliante Holding”), which was a 50/50 joint venture partnership between Aliante Station, LLC (“Aliante Station”), a wholly owned subsidiary of Station Casinos, Inc. (“Old Station”) and G.C. Aliante, LLC (“GC Aliante”), an affiliate of the Greenspun Corporation.
Aliante Gaming experienced lower than expected operating results as a result of macroeconomic conditions, including the economic downturn in the Las Vegas area and low consumer confidence levels. As a result, Aliante Gaming failed to (i) remain in compliance with certain financial maintenance covenants set forth in its $430.0 million credit facility (the “Previous Facility”) and (ii) make scheduled principal or interest payments under the Previous Facility beginning April 2009.
On April 12, 2011 (the “Petition Date”), Aliante Gaming, together with Aliante Holding and Aliante Station, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code (the “Chapter 11 Case”), in the United States Bankruptcy Court for the District of Nevada, Northern Division (the “Bankruptcy Court”) to preserve their assets and the value of their estates. The Chapter 11 Case was jointly administered with certain subsidiaries of Old Station and Green Valley Ranch Gaming, LLC under the lead case In re Station Casinos, Inc., et. al. originally filed on July 28, 2009 (Jointly Administered Case No. 09-52477). Old Station emerged from Chapter 11 on June 17, 2011 as Station Casinos LLC (“New Station,” and collectively with Old Station, “Station”).
On May 20, 2011, Aliante Gaming, along with Aliante Holding, Aliante Station and certain other affiliates of Old Station, filed with the Bankruptcy Court an amended joint plan of reorganization (the “Plan”) resulting from negotiations with lenders (the “Lenders”) under the Previous Facility and its International Swaps and Derivatives Association master agreement (the “Swap Agreement”). Under the Plan, Aliante Gaming and the Lenders agreed to enter into a series of restructuring transactions pursuant to which the Lenders received new equity and issued new debt to Aliante Gaming, as reorganized, as of the Effective Date.
On the Effective Date, (i) 100% of the equity interest in Aliante Gaming previously held by Aliante Holding were cancelled and ceased to be outstanding, (ii) each Lender received, on account and in full satisfaction of its claims against Aliante Gaming arising under the Previous Facility and the Swap Agreement, its pro rata share of (a) 100% of the equity interests in Aliante Gaming (the “New Aliante Equity”), which were contributed to the Company in exchange for 432,003 units of our issued and outstanding membership interests (“Common Units”) resulting in the Lenders becoming our “Members” and (b) 100% of $45.0 million in aggregate principal amount of senior secured term loans of Aliante Gaming (the “Senior Secured Loans”) under a new senior secured credit facility (the “Senior Secured Credit Facility”), (iii) the Previous Facility and the Swap Agreement were canceled (clauses (i), (ii) and (iii) referred to herein as the “Restructuring Transactions”) and (iv) each creditor holding an unsecured claim was paid in full.
Management Agreement
On November 1, 2011, the Company entered into a management agreement (the “Management Agreement”) with New Station pursuant to which New Station agreed to manage the Casino and provide certain transition services should the Management Agreement be terminated. Under the terms of the Management Agreement, we were obligated to pay New Station (i) a monthly base management fee equal to 1% of the gross revenues from the Casino, (ii) an annual incentive management fee payable quarterly equal to 7.5% of positive earnings before interest, taxes, depreciation and amortization (“EBITDA”) up to and including $7.5 million and 10% of EBITDA in excess of $7.5 million, and (iii) subject to certain limitations, reimbursement of certain expenses including shared services expenses. Effective November 14, 2011, the Company and New Station agreed to terminate the Management Agreement. Pursuant to the transition services sections of the Management Agreement, New Station continued to operate and manage the Casino until October 31, 2012. Effective November 1, 2012, Aliante Gaming assumed management and established its own internal management team to oversee the operations of the Casino.
Narrative Description of Business
Our business focuses on attracting and fostering repeat business from local gaming patrons at our Casino. Local patrons are typically sophisticated gaming customers who seek a convenient location, the latest gaming products and a pleasant atmosphere.
The Casino is located in the Aliante master-planned community (the “Aliante Community”) and is situated on approximately 40 acres within the 1,905-acre Aliante Community. The Casino is located adjacent to an 18-hole championship course (not owned by us) and has convenient access to major freeways connecting it to points throughout Las Vegas. The Casino opened in November 2008 and is a full-service casino and hotel offering high quality accommodations, gaming, dining, entertainment, attractive promotions, retail and other resort amenities. The Casino is considered to be one of the premier locals-oriented casinos in the North Las Vegas, Nevada market today.
The Casino features a full-service Scottsdale-modern, desert-inspired casino and resort with approximately 82,000 square feet of gaming space, 202 hotel rooms including suites, 1,838 slot machines, 36 gaming tables, and a 200-seat bingo room. The ultra-modern 170-seat race and sports book rivals any in Las Vegas and also includes a sports bar and viewing patio. Non-gaming amenities include a 16-screen movie theater complex, a 650-seat showroom, an entertainment lounge, a spa and a resort style pool with cabanas.
The Casino can accommodate both large groups and intimate gatherings in its 14,000-square feet of event and banquet space divided among four ballrooms and six meeting and conference rooms. The Casino’s six full-service restaurants include MRKT Sea & Land, Bistro 57, The Salted Lime, TGI Friday’s, Medley Buffet and the Farm, a 24 hour cafe. The Casino also offers a variety of fast-food outlets to enhance the customers’ dining selection.
Operating Strategy
The Casino caters primarily to North Las Vegas residents. Our operating strategy emphasizes attracting and retaining customers from the local and repeat visitor markets. We attract customers through:
· innovative, frequent and high-profile promotional programs directed towards the local market;
· focused marketing efforts and a convenient location;
· aggressive marketing to the repeat visitor market; and
· the development of strong relationships with specifically targeted travel wholesalers in addition to convention business.
Although perceived value will initially attract a customer to the Casino, actual value generates customer satisfaction and loyalty. We believe that actual value becomes apparent during the customer’s visit through an enjoyable, affordable and high-quality entertainment experience. North Las Vegas, which had been one of the fastest-growing cities in the United States, had been characterized by a historically strong economy and demographics, which include an increasing number of retirees and other active gaming customers; however, the city continues to be adversely affected by the national economic downturn. The economic downturn continues to have an adverse impact on the population growth and economy of North Las Vegas, resulting in significant declines in the local housing market and continuing high unemployment which has negatively affected consumer spending and customer visits to the Casino.
Provide a High-Value Experience
Because we target the repeat customer, we are committed to providing a high-value entertainment experience for our customers in the restaurants, hotel, casino and other entertainment amenities, which include movie theaters and a resort-like pool facility. In addition, we believe the value offered by our restaurants is a major factor in attracting local gaming customers, as dining is a primary motivation for casino visits by many locals. Through its restaurants, each of which has a distinct style of cuisine, the Casino offers generous portions of high-quality food at reasonable prices. In addition, our operating strategy focuses on slot and video poker machine play. Our target market consists of frequent gaming patrons who seek a friendly atmosphere and convenience. Because locals and repeat visitors demand variety and quality in their slot and video poker machine play, the Casino strives to offer the latest in slot and video poker technology.
As part of our commitment to providing a quality entertainment experience for our patrons, we are dedicated to ensuring a high level of customer satisfaction and loyalty by providing attentive customer service in a friendly, casual atmosphere. We recognize that consistent quality and a comfortable atmosphere stem from the collective care and friendliness of each of our employees. Toward this end, we take a hands-on approach through active and direct involvement with employees at all levels.
Marketing and Promotion
We employ an innovative marketing strategy that utilizes frequent high-profile promotional programs in order to attract customers and establish a high level of name recognition. In addition to aggressive marketing through radio and newspaper advertising, we are creating new gaming promotions.
In November 2012, we introduced our own player loyalty program, the Aliante Players Club, which allows participants to redeem points earned from their gaming activity at the Casino for complimentary slot play, food, beverages, hotel rooms, spa treatments, movie passes, entertainment tickets or merchandise from the gift shop. Under the player loyalty program, participants may accumulate points over time that can be redeemed at their discretion under the terms of the Aliante Players Club.
Intellectual Property
We use a variety of trade names, service marks and trademarks (collectively, “Marks”) in our operations and believe that we have all licenses for the third-party Marks necessary to conduct our continuing operations. We have registered several composite Marks (as described in the following paragraph) with the United States Patent and Trademark Office or otherwise acquired the licenses to use those which are material to our business.
We use the “ALIANTE” mark pursuant to a license agreement, dated January 6, 2006, with North Valley Enterprises, LLC (“North Valley”) (an affiliate of GC Aliante). Under the agreement, North Valley grants us a non-exclusive, non-transferable, non-sublicensable, royalty-free license to use certain Marks owned by North Valley in connection with the Casino. The license agreement is perpetual, provided that North Valley may terminate the license if we fail to meet the quality standards applicable to the use of the Marks and fail to cure any such failure within thirty days. The license provides that we will own all right, title and interest in any composite Marks consisting of “ALIANTE” (or another Mark licensed by North Valley under the agreement); provided, that upon termination of the license agreement, we must cease and desist using all such composite Marks and immediately cancel or withdraw any trademark applications or registrations for any composite Marks. If we are required to cease and desist using the “ALIANTE” mark or any composite Marks for any reason, we may be unable to obtain a license to use such Marks on favorable terms, or at all.
Seasonality
Our cash flows from operating activities are seasonal in nature. Our operating results are traditionally the strongest in the first quarter and the fourth quarter, and traditionally the weakest during the third quarter.
Competition
We face competition from all the 176 non-restricted gaming locations in the Clark County area and more specifically from the 12 non-restricted gaming locations, as well as the restricted gaming locations (locations with 15 or fewer slot machines) in the North Las Vegas area. We compete with other gaming locations by focusing on repeat customers and attracting these customers through innovative marketing programs. Our value-oriented, high-quality approach is designed to generate repeat business. The Casino is strategically located and designed to permit convenient access and ample parking, which are critical factors in attracting local visitors and repeat patrons.
We also compete for local gaming customers with other locals-oriented casino-hotels in Las Vegas. We believe that these properties compete on the basis of the desirability of location and gaming product, personalized service, casino promotions, comfort and value of restaurants and hotel rooms and the variety and value of entertainment offerings. The construction of new casinos or the expansion of existing casinos near the Casino could have a negative impact on our casino operations.
To a lesser extent, we compete with gaming operations in other parts of the state of Nevada, such as Mesquite, Reno, Laughlin and Lake Tahoe, and other gaming markets throughout the United States and in other parts of the world; with state sponsored lotteries; on-and-off-track wagering on horse and other races; card rooms; online gaming and other forms of legalized gambling. The gaming industry also includes land-based casinos, dockside casinos, riverboat casinos, racetracks with slots and casinos located on Native American land. There is intense competition among companies in the gaming industry, some of which have significantly greater resources than we do. Several states are currently considering legalizing casino gaming in designated areas. Legalized casino gaming in such states and on Native American land could result in increased competition and could adversely affect our operations, particularly to the extent that such gaming is conducted in areas close to our operations.
Regulation and Licensing
The ownership and operation of casino gaming facilities in Nevada are subject to the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, the “Nevada Act”), and various local regulations. We are subject to the licensing and regulatory control of the Nevada Gaming Commission (the “Gaming Commission”), the Nevada State Gaming Control Board (the “Gaming Board”), the Clark County Liquor and Gaming Licensing Board (the “Clark County Board”), the City of North Las Vegas and other local regulatory authorities (collectively, the “Gaming Authorities”). The laws, regulations and supervisory procedures of the Gaming Authorities are based upon declarations of public policy which are concerned with, among other things:
· the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity;
· the establishment and maintenance of responsible accounting practices and procedures;
· the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Gaming Authorities;
· the prevention of cheating and fraudulent practices; and
· providing a source of state and local revenues through taxation and licensing fees.
Changes in these laws, regulations and procedures could have an adverse effect on our gaming operations.
Entities, including our subsidiary Aliante Gaming, that own and operate casinos in Nevada are required to be licensed by the Gaming Authorities. A gaming license for such activities requires the periodic payment of fees and taxes and is not transferable. We have received all necessary licenses from the Gaming Authorities for Aliante Gaming to conduct non-restricted gaming operations at the Casino. No person may become a holder of more than a 5% interest in or receive any percentage of gaming revenue from Aliante Gaming, without first obtaining licenses and approvals from the Gaming Authorities. No person may become a holder of a 5% or less interest in Aliante Gaming without registering with the Gaming Authorities.
The Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, us in order to determine whether such individual is suitable or should be licensed as a business associate of an entity that has applied for a gaming license or for registration. Certain officers, managers and key employees of the Company must file applications with the Gaming Authorities and are required to be licensed or found suitable by the Gaming Authorities. The Gaming Authorities may deny, limit or condition a grant of any license, registration, finding of suitability or other approval for any cause that they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. Changes in licensed positions must be reported to the Gaming Authorities and, in addition to their authority to deny an application for a license or finding of suitability, the Gaming Authorities have jurisdiction to disapprove any change in corporate position.
If the Gaming Authorities were to find an officer, manager or key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would have to sever all relationships with that person. In addition, the Gaming Commission may require us to terminate the employment of any person who refuses to file the appropriate applications. Determinations of suitability or decisions pertaining to licensing are not subject to judicial review in Nevada.
The Company is required to submit detailed financial and operating reports to the Gaming Authorities. Substantially all material loans, leases, sales of securities and similar financing transactions by the Company must be reported to, and/or approved by, the Gaming Authorities.
In the event the Company was determined to have violated the Nevada Act, the Gaming Commission could limit, condition, suspend or revoke any license, registration, finding of suitability or other approval subject to compliance with certain statutory and regulatory procedures. In addition, the Company and the individuals involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Gaming Commission. Further, the Gaming Commission could seek court appointment of a supervisor to operate the Casino and, under certain circumstances, earnings generated during the supervisor’s appointment (except for the reasonable rental value of the Casino) could be forfeited to the State of Nevada. The limitation or suspension of any gaming license or registration, or the appointment of a supervisor, would materially adversely affect our operations.
Any beneficial holder of the Company’s membership units, regardless of the number of Common Units owned, may be required to file an application, be investigated and have his or her suitability as a beneficial holder of the Company’s equity securities determined if the Gaming Commission has reason to believe that such ownership would be inconsistent with the declared policies of the State of Nevada. If such beneficial holder, who must be found suitable, is a corporation, partnership, trust or other form of business organization, it must submit detailed business and financial information including a list of its beneficial owners. The applicant must pay all costs of the investigation incurred by the Gaming Authorities in connection with conducting such investigation.
Moreover, given that the Company is a registered public company under the Nevada Act any person who acquires more than 5% of the Company’s voting securities must be reported to the Gaming Commission. The Nevada Act requires beneficial owners of more than 10% of a registered public company’s voting securities apply to the Gaming Commission for a finding of suitability within 30 days after the Chairman of the Gaming Board mails the written notice requiring such filing. However, an “institutional investor,” as defined in the Nevada Act, that acquires more than 10%, but not more than 25%, of a registered public company’s voting securities (and if any such voting securities were acquired other than through a debt restructuring) may apply to the Gaming Commission for a waiver of a finding of suitability if that institutional investor holds the voting securities for investment purposes only. An institutional investor that has obtained a waiver may hold more than 25%, but not more than 29%, of a registered public company’s voting securities and maintain its waiver if the additional ownership results from equity repurchase by such registered company. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors or managers of the registered public company, any change in the
corporate charter, bylaws, management, policies or operations of the registered public company, or any of its gaming affiliates or any other action which the Gaming Commission finds to be inconsistent with holding such registered company’s voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include:
· voting on all matters voted on by equity holders;
· making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and
· other activities as the Gaming Commission may determine to be consistent with such investment intent.
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Gaming Commission or by the Chairman of the Gaming Board may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any equity holder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the equity of a registered public company beyond the period of time as may be prescribed by the Gaming Commission may be guilty of a criminal offense. The Company may become subject to disciplinary action if, after receipt of notice that a person is unsuitable to be an equity holder or to have any other relationship with the Company or Aliante Gaming, the Company:
· pays that person any dividend or interest upon voting securities;
· allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person;
· pays remuneration in any form to that person for services rendered or otherwise; or
· fails to pursue all lawful efforts to require the unsuitable person to relinquish his voting securities for cash at fair market value.
We are required to disclose to the Gaming Board and the Gaming Commission the identities of all holders of our debt securities. The Gaming Commission may, in its discretion, require the holder of any debt or similar security of a registered public company to file applications, be investigated and be found suitable to own the debt or other security of such a registered company. If the Gaming Commission determines that a person is unsuitable to own the security, then pursuant to Nevada law, the registered public company can be sanctioned, including the loss of its approvals, if without the prior approval of the Gaming Commission, it:
· pays to the unsuitable person any dividend, interest, or any distribution whatsoever;
· recognizes any voting right by the unsuitable person in connection with debt securities;
· pays the unsuitable person remuneration in any form; or
· makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction.
We are required to maintain a current membership interest ledger in Nevada, which may be examined by the Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial holder to the Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. We are also required to render maximum assistance in determining the identity of the beneficial owner. The Gaming Commission has the power to require our securities to bear a legend indicating that the securities are subject to the Nevada Act.
We also may not make a public offering of securities without the prior approval of the Gaming Commission if the proceeds from the offering are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for those purposes or similar transactions. Furthermore, any such approval, if granted, does not constitute a finding, recommendation or approval by the Gaming Commission or the Gaming Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful.
Changes in the control of the Company through merger, consolidation, equity or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby that person obtains control (including foreclosure on the pledged equity interests), may not occur without the prior approval of the Gaming Commission. Entities seeking to acquire control or ownership of a registered public company must satisfy the Gaming Board and Gaming Commission in a variety of stringent standards prior to assuming control of such registered company. The Gaming Commission may also require the equity holders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defensive tactics affecting Nevada corporate gaming licensees and registered public companies that are affiliated with those operations may be injurious to stable and productive corporate gaming. The Gaming Commission has established regulations to
ameliorate the potentially adverse effects of these business practices upon Nevada’s gaming industry and to further Nevada’s policy to: (1) assure the financial stability of corporate gaming licensees and their affiliates; (2) preserve the beneficial aspects of conducting business in the corporate form; and (3) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Gaming Commission before the registered public company can make exceptional repurchases of voting securities above the current market price and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the registered public company’s board of directors or managers in response to a tender offer made directly to such registered company’s equity holders for the purposes of acquiring control of the registered public company.
License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada, Clark County and City of North Las Vegas. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either:
· a percentage of the gross revenues received;
· the number of gaming devices operated; or
· the number of table games operated.
In addition, the Company pays live entertainment tax on admission fees for live entertainment provided at the property and on any sales of food, beverage and merchandise made in connection with taxable live entertainment.
Any person who is licensed, required to be licensed, registered, required to be registered or is under common control with such persons (collectively, “Licensees”), and who is, or who proposes to become, involved in a gaming venture outside of Nevada, is required to deposit with the Gaming Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Gaming Board of the Licensees’ participation in foreign gaming. The revolving fund is subject to increase or decrease at the discretion of the Gaming Commission. Thereafter, Licensees are also required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Gaming Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to a foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities, or enter into associations, that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ, contract with or associate with a person in the foreign operation who has been denied a license or a finding of suitability in Nevada on the grounds of personal unsuitability.
The sale of alcoholic beverages by the Company on the premises of the Casino is subject to licensing, control and regulation by the applicable local authorities. The Company has obtained gaming and liquor licenses from the City of North Las Vegas. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any such licenses, and any such disciplinary action could, and revocation of such licenses would, have a material adverse effect upon the results of operations of the Company.
Environmental Matters
Compliance with federal, state and local laws enacted for the protection of the environment to date had no material effect upon our capital expenditures, earnings or competitive position and we do not anticipate any material adverse effects in the future based on the nature of our operations.
Employees
As of January 31, 2014, Aliante Gaming had 879 employees. Aliante Gaming is not currently subject to any collective bargaining agreement or similar arrangement with any union. However, union activists have actively sought to organize employees at the Casino in the past, and we believe that such efforts are ongoing at this time.
Financial Information
The primary source of our revenue and income is from our casino operations, although we view the hotel rooms, restaurants, bars, entertainment and services on the premises to be important adjuncts to our casino operations. Please refer to “Item 6. Selected Financial Data” and “Item 7. Discussion and Analysis of Financial Condition and Results of Operations” for information about our revenues, operating results and total assets and liabilities and to “Item 8. Financial Statements and Supplementary Data” for our financial statements and accompanying footnotes.
Available Information
We are a reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and file annual reports, quarterly reports and other documents with the Securities and Exchange Commission (the “SEC”). You may read and copy any materials filed by the Company with the SEC at its Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings will also be available to the public from commercial document retrieval services and at the world wide web site maintained by the SEC at http://www.sec.gov.
Our internet website address is www.aliantegaming.com.
ITEM 1A.
ITEM 1A. RISK FACTORS.
The following risk factors should be considered carefully in addition to the other information contained in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those contained in the forward-looking statements. Factors that may cause such differences include, but are not limited to, those discussed below as well as those discussed elsewhere in this Annual Report on Form 10-K. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected.
Risks Related to Our Business
The bankruptcy filing has had a negative impact on the Casino’s image which may negatively impact our business going forward.
As a result of the Chapter 11 Case, the Casino has been the subject of negative publicity which has had an impact on its image. This negative publicity may have an effect on the terms under which some customers and suppliers are willing to continue to do business with us and could materially adversely affect our business, financial condition and results of operations. The impact of this negative publicity cannot be accurately predicted or quantified.
We have limited liquidity and capital resources and may be unable to generate sufficient cash flows to finance all operating expenses, working capital needs and capital expenditures.
We have a limited amount of cash and we do not have a credit facility upon which to draw funds. We generated operating income of $1 thousand for the year ended December 31, 2013, and we may incur operating losses in the future. We may be unable to generate sufficient revenues and cash flows to meet our debt service obligations, to finance capital expenditures, meet our operational needs and finance the expected significant costs of transitioning away from New Station, our previous manager. Any one of these failures may preclude us from, among other things:
· maintaining or enhancing our current customer offerings;
· taking advantage of future opportunities;
· growing our businesses; or
· responding to competitive pressures.
Further, our failure to generate sufficient revenues and cash flows could lead to cash flow and working capital constraints, which may require us to seek additional working capital. We may not be able to obtain such working capital when it is required, and we will be restricted from incurring additional debt pursuant to the terms of the Senior Secured Credit Facility. Further, even if we were able to obtain additional working capital, it may only be available on unfavorable terms. For example, we may be required to take on additional debt, the interest costs of which could adversely affect our results of operations and financial condition. If any such required capital is obtained in the form of equity, the equity interests of the holders of our Common Units could be diluted.
Limited liquidity and working capital may also restrict our ability to effectively continue the transition away from New Station and maintain and update the Casino’s facilities, which could put us at a competitive disadvantage to casinos offering more modern and better maintained facilities.
We are entirely dependent on one property for all of our cash flow, which subjects us to greater risks than a gaming company with more operating properties.
We do not have material assets or operations other than the Casino and, therefore, we are entirely dependent upon the Casino for all of our cash flow. As a result, we are subject to a greater degree of risk than companies with multiple properties. The risks to which we have a greater degree of exposure include, but are not limited to:
· global and local economic and competitive conditions;
· changes in local and state governmental laws and regulations;
· natural and other disasters and terrorism; and
· the outbreak of an infectious disease.
Any of the factors outlined above, amongst others, could negatively affect our results of operations.
As part of a master planned community, the property is subject to certain covenants, conditions and restrictions with respect to transfers and use.
As part of a master planned community, the property owned by Aliante Gaming is subject to covenants, conditions and restrictions (set forth in recorded instruments) with respect to transfers, and the use, improvement, restoration, maintenance and repair, of the property. Subject to certain exceptions, the City of North Las Vegas has approval rights over transfers of the property (or transfers of more than 40% in the aggregate of the equity interests in Aliante Gaming) to third parties. An architectural committee has approval rights over, among other things, the design and location of any improvements and the installation and maintenance of any signage on the property.
We may be forced to cancel certain of our material registered trademarks.
We use a variety of Marks in our operations pursuant to a license agreement with North Valley. Under the terms of the North Valley license, we will own all right, title and interest in, and may register with the United States Patent and Trademark Office, any composite trademarks consisting of “ALIANTE” (or another Mark); provided, that upon termination of either of the license agreements, we must cease and desist using all such composite Marks and immediately cancel or withdraw any trademark applications or registrations for any composite Marks. In addition, if we have to cease and desist using the “ALIANTE” Mark due to a legal challenge to the validity of our licenses, or for any reason, we may be unable to obtain a new license to use such Marks on favorable terms, or at all, which could affect the goodwill associated with the Casino’s operations and negatively impact our business.
The infringement of intellectual property used in our business could adversely affect our business.
We own or have licenses to use key intellectual property used in our business, including consumer information. We will take steps to safeguard this intellectual property from infringement by third parties, such as prosecuting trademark and copyright violations, if and when necessary, and limiting access to the proprietary customer information. Despite such measures, we cannot provide assurance that we will be successful in defending against the infringement of intellectual property used in our business or that the proprietary information used in our business will not be disseminated to our competitors and any such infringement or dissemination could have an adverse effect on the results of our operations.
The economic downturn may be protracted in our key market and may continue to negatively impact our revenues and other operating results.
We draw a substantial number of customers from the Las Vegas valley, as well as certain geographic areas, including Southern California, Arizona and Utah. The economies of these areas have been, and may continue to be, negatively impacted due to a number of factors, including the credit crisis and a decrease in consumer confidence levels. The resulting severe economic downturn and adverse conditions in the local markets have negatively affected the Casino’s operations, and may continue to negatively affect our operations in the future. According to the Nevada State Gaming Control Board, gaming revenues in North Las Vegas for the twelve months ended December 31, 2013, decreased from the prior year by 5.5%. North Las Vegas gaming revenues were severely negatively impacted by the economic downturn and there can be no assurance that gaming revenues will not continue to decrease in future periods. In addition, the residential real estate market in the United States, and in particular North Las Vegas, has experienced a significant downturn due to declining real estate values. Individual consumers are experiencing higher delinquency rates on various consumer loans and defaults on indebtedness of all kinds have increased. In addition, North Las Vegas and our other target markets continue to experience high rates of unemployment. According to the United States Bureau of Labor Statistics, in 2012 and 2013, Nevada had the second highest unemployment rate in the country with 2013 at 9.8% compared to the national average of 7.4%. As of December 31, 2013, Nevada’s unemployment rate was 9.0%. All of these factors have materially and adversely affected the Casino’s results of operations. Further declines in real estate values in Las Vegas and the United States, continued high rates of unemployment and continuing credit and liquidity concerns could continue to have an adverse effect on our results of operations.
Gaming and other leisure activities that we offer represent discretionary expenditures and participation in such activities have been particularly adversely impacted as a result of the economic downturn because consumers have less disposable income to spend on discretionary activities. The weak economic conditions adversely affected consumer spending at the Casino and may continue to adversely affect our business.
Furthermore, other uncertainties, including national and global economic conditions, other global events, or terrorist attacks or disasters in or around Southern Nevada could have a significant adverse effect on our business, financial condition and results of operations. In addition, due to the existing uncertainty in the capital and credit markets, we may not be able to refinance our existing debt or obtain additional credit facilities on terms acceptable to us or at all in order to meet these challenges.
Our business is sensitive to reductions in discretionary consumer spending as a result of downturns in the economy.
Consumer demand for casino hotel properties, such as the Casino, is 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 and customer confidence in the economy, unemployment, the current housing and credit crisis, the impact of high energy and food costs, the potential for continued bank failures, perceived or actual changes in disposable consumer income and wealth, effects or fears of war and future acts of terrorism could further reduce customer demand for the amenities that we offer and materially and adversely affect our business and results of operations. The current housing crisis and economic slowdown in the United States has resulted in significant unemployment in the Las Vegas market and a significant decline in the amount of tourism and spending in Las Vegas. This decline adversely affected Aliante Gaming, and may continue to adversely affect our financial condition, results of operations and liquidity.
Our operations may be adversely impacted by increases in energy prices.
The Casino uses significant amounts of electricity, natural gas and other forms of energy. While no shortages of energy have been experienced, the substantial increases in the cost of electricity, natural gas and gasoline in the United States in general, and in Southern Nevada in particular, may negatively affect our operating results. In addition, further energy price increases in such areas could result in a decline in disposable income of potential customers and a corresponding decrease in visitation and spending at the Casino, which could negatively impact revenues.
The casino, hotel and resort industry is capital intensive and we may not be able to finance expansion and renovation projects, which could put us at a competitive disadvantage.
Casino properties have an ongoing need for renovations and other capital improvements to remain competitive, including replacement, from time to time, of furniture, fixtures and equipment. We may also need to make capital expenditures to comply with applicable laws and regulations.
Renovations and other capital improvements of a casino property such as the Casino require significant capital expenditures. In addition, renovations and capital improvements of a casino property usually generate little or no cash flow until the project is completed. We may not be able to fund such projects solely from cash provided from operating activities. Consequently, we may be required to rely upon the availability of debt or equity capital to fund renovations and capital improvements and our ability to carry them out will be limited if we cannot obtain satisfactory debt or equity financing, which will depend on, among other things, market conditions. No assurances can be made that we will be able to obtain additional equity or debt financing or that we will be able obtain such financing on favorable terms. Our failure to renovate the Casino, as necessary, may put us at a competitive disadvantage to casinos offering more modern and better maintained facilities.
We will depend on the North Las Vegas locals and repeat visitor market as our key market. As a result, we may not be able to attract a sufficient number of guests and gaming customers to make our operations profitable.
Our operating strategies emphasize attracting and retaining customers from the North Las Vegas local and repeat visitor market. We are dependent upon attracting North Las Vegas residents. We cannot be sure that we will be able to attract a sufficient number of guests, gaming customers and other visitors in North Las Vegas to make our operations profitable. During the economic downturn, North Las Vegas has not experienced population growth at the expected rates or at the same rates as it experienced prior to the economic downturn. There can be no assurance that population growth in North Las Vegas will return to historic levels or that we will be able to successfully adapt our business strategy to the current economic downturn or any further economic slowdown.
We may face intense competition and experience a loss of market share.
The gaming industry is highly competitive. We compete for local gaming customers with other locals-oriented casino-hotels including New Station and other casinos located in the vicinity of the Casino. If our competitors operate more successfully or if additional competitors are established in and around the locations in which we conduct business, we may lose market share. New Station competes directly with Aliante Gaming in the Las Vegas locals-oriented casino-hotel marketplace. In addition, New Station has had access to the Aliante Gaming database of customers. There can be no assurance that we will be successful in retaining the
loyalty of shared customers, nor is there any assurance that we will be successful in competing for other locals-oriented casino customers.
The concentration and evolution of the slot machine manufacturing industry could impose additional costs on us.
A majority of our gaming revenue is attributable to slot machines. To be competitive it is important that the Casino offers the most popular and technologically advanced slot machine games to its customers. We believe that a substantial majority of the slot machines sold in the United States in recent years were manufactured by a limited number of companies. A deterioration in our commercial arrangements with any of these slot machine manufacturers could hinder our ability to acquire the slot machines desired by our customers, or could result in manufacturers significantly increasing the cost of these machines. Alternatively, significant industry demand for new slot machines may result in us being unable to acquire the desired number of new slot machines or result in manufacturers’ increasing the cost of these machines. The inability to obtain new and up-to-date slot machine games could impair our competitive position and result in decreased gaming revenues. In addition, increases in the costs associated with acquiring slot machine games could adversely affect our profitability.
In recent years, the prices of new slot machines have risen more rapidly than the domestic rate of inflation. Furthermore, in recent years, slot machine manufacturers have frequently refused to sell slot machines featuring the most popular games, instead requiring gaming operators to execute participation lease arrangements in order for them to be able to offer such machines to customers. Participation slot machine leasing arrangements typically require the payment of a fixed daily rental fee. Such agreements may also include a percentage payment to the manufacturer of “coin-in” or “net win.” Generally, a slot machine participation lease is more expensive over the long term than the cost of purchasing a new slot machine.
For competitive reasons, we may be forced to purchase new, more contemporary slot machines or enter into participation lease arrangements that are more expensive than the costs currently associated with the continued operation of the Casino’s existing slot machines. If the newer slot machines do not result in sufficient incremental revenues to offset the increased investment and participation lease costs, our profitability could be adversely affected.
In addition, if any of the slot machine manufacturers that Aliante Gaming contracts with were to experience financial distress and fail to provide the agreed upon products or services to us, our business and operations may be adversely affected.
We may incur losses that are not adequately covered by insurance which may harm our results of operations.
Although we maintain insurance customary and appropriate for our business, we cannot assure 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.
We may be subject to litigation resulting from our operations which, if adversely determined, could result in substantial losses.
We will be, from time to time, during the ordinary course of operating our businesses, subject to various litigation claims and legal disputes, including contract, lease, employment and regulatory claims as well as claims made by visitors to the Casino. Certain litigation claims may not be covered entirely or at all by our insurance policies or our insurance carriers may seek to deny coverage. In addition, litigation claims can be expensive to defend and may divert our attention from the operations of our businesses. Further, litigation involving visitors to the Casino, even if without merit, can attract adverse media attention. As a result, litigation can have a material adverse effect on our businesses and, because we cannot predict the outcome of any action, it is possible that adverse judgments or settlements could significantly reduce our earnings or result in losses.
Union organization activities could disrupt our business by discouraging patrons from visiting the Casino, causing labor disputes or work stoppages, and, if successful, could significantly increase our labor costs.
We are not currently subject to any collective bargaining agreement or similar arrangement with any union. However, union activists have actively sought to organize employees at the Casino in the past, and we believe that such efforts are ongoing at this time and will continue to occur in the future. Accordingly, there can be no assurance that the Casino will not ultimately be unionized. Union organization efforts that may occur in the future could cause disruptions and discourage patrons from visiting the Casino and may cause us to incur significant costs, any of which could have a material adverse effect on our results of operations and financial condition. In addition, union activities may result in labor disputes, including work stoppages, which could have a material adverse effect on our business, financial condition and results of operation. Furthermore, unfavorable union contract settlements or collective bargaining agreements, should they be entered into, could cause significant increases in our labor costs, which could have a material adverse effect on the business of the Casino and our financial condition and results of operation.
Our financial results are affected by the adoption of fresh-start reporting and may not reflect historical trends.
We were formed for the purpose of acquiring substantially all of the equity interest of Aliante Gaming pursuant to the Plan. The Restructuring Transactions resulted in the Company becoming a new reporting entity and adopting fresh-start reporting in accordance with Accounting Standards Codification (“ASC”) Topic 852, Reorganizations (“ASC Topic 852”) as of the Effective Date. As required by fresh-start reporting, the historical net book value of Aliante Gaming’s assets and liabilities were adjusted to fair value by allocating the entity’s reorganization value to its assets and liabilities pursuant to the accounting guidance for business combinations. Certain assets and liabilities not previously recognized in Aliante Gaming’s financial statements were recognized under fresh-start reporting. Accordingly, our financial condition and results of operations subsequent to November 1, 2011, may not be comparable to the financial condition and results of operations reflected in Aliante Gaming’s historical financial statements.
We depend on the continued services of key employees. If we do not retain our key personnel or attract and retain other highly skilled employees, our business may suffer.
Our ability to maintain our competitive position will be dependent to a large degree on the services of our senior management team and other key personnel. The loss of the services of our senior managers, or the inability to attract and retain additional senior management personnel could have a material adverse effect on our business.
Members of our Board of Managers are likely to devote some of their time to other businesses, which could have a negative impact on the Company’s management.
Members of our Board of Managers are not required to commit their full time to the Company’s affairs, which could create a conflict when allocating their time between Company matters and their other commitments. All of the members of our Board of Managers are engaged in several other business endeavors aside from their commitments to the Company. In addition, members of our Board of Managers are not obligated to devote any specific number of hours to the Company’s affairs. If the other business affairs of members of our Board of Managers require them to devote more time to such affairs, it could limit their ability to devote time to the Company’s affairs and could have a negative impact on the quality of the Company’s governance. We cannot assure that these time conflicts will be resolved in the Company’s favor.
We are subject to extensive state and local regulation and licensing, and gaming authorities will have significant control over our operations, which could have an adverse effect on our business.
We are subject to extensive regulation by the state, county and city in which we operate. These laws, regulations and ordinances generally concern the responsibility, financial stability and character of the owners and managers of gaming operations as well as persons financially interested or involved in gaming operations. As such, Gaming Authorities can require us to disassociate ourselves from suppliers or business partners found unsuitable by the regulators or, alternatively, cease operations. Holders of our Common Units who fail to obtain any licenses, authorizations, qualifications or findings of suitability, as may be required by Gaming Authorities, will not be entitled to exercise any rights of ownership with respect to, or receive any income from, our Common Units.
For a summary of gaming and other regulations that will affect our business, see “Item 1. Business - Regulation and Licensing.” The regulatory environment may change in the future and any such change could have a material adverse effect on our results of operations.
Changes to the gaming tax laws could have an adverse effect on results of operations by increasing the cost of operating our business.
The gaming industry represents a significant source of tax revenue, particularly to the State of Nevada and its counties and municipalities. From time to time, various state legislators and officials have proposed changes in taxes, or in the administration of tax laws, affecting the gaming industry. The Nevada Legislature meets every two years for 120 days and when special sessions are called by the Governor. The 2013 legislative session ended on June 3, 2013. There were no specific proposals during the recent legislative session to increase gaming taxes, however there are no assurances an increase in gaming taxes will not be proposed and passed by the Nevada Legislature, or that other taxes impacting gaming licenses or other businesses in general will not be enacted during future legislative sessions. It is not possible to determine with certainty the likelihood of possible changes in tax law or in the administration of such law, regulations or compact provisions. Such changes, if adopted, could have a material adverse effect on our results of operations.
Risks Related to Our Indebtedness
We have significant indebtedness.
As of December 31, 2013, we had $58.5 million in outstanding principal amount of debt which includes $55.7 million in outstanding principal under the Senior Secured Credit Agreement. We have no ability to draw on the Senior Secured Credit Facility. Our substantial indebtedness could:
· make it more difficult to satisfy obligations with respect to the instruments governing our outstanding indebtedness;
· increase vulnerability to general adverse economic and industry conditions;
· require us to dedicate a substantial portion of cash flow from operations to debt service, thereby reducing the availability of cash flow to fund working capital, capital expenditures and other general corporate purposes;
· limit flexibility in planning for, or reacting to, competitive pressures and changes in the business and the industry in which we operate;
· place us at a competitive disadvantage compared to our competitors that have less debt; and
· limit, among other things, our ability to borrow additional funds.
Our indebtedness imposes restrictive covenants on us that will limit our flexibility in operating our business and may adversely affect our ability to compete or engage in favorable business or financing activities.
The debt issued pursuant to the Plan has covenants that impose operational and financial restrictions on the Company and our subsidiary, Aliante Gaming. Pursuant to the Senior Secured Credit Facility, we are required to be a passive holding company and our actions will be limited to, among other things, owning the equity interests of Aliante Gaming, maintaining our legal existence as a public company, participating in administrative matters and performing our obligations in connection with the Senior Secured Credit Facility and other agreements entered into in connection therewith. In addition, the Senior Secured Credit Facility imposes various restrictions on Aliante Gaming and any future subsidiaries, including, among other restrictions, limitations on the ability to:
· incur additional debt;
· make payments on subordinated obligations;
· make distributions and repurchase equity;
· make investments;
· grant liens on our property to secure debt;
· enter into certain transactions with affiliates;
· sell assets or enter into mergers or consolidations;
· sell equity interests in subsidiaries;
· create dividend and other payment restrictions affecting subsidiaries; and
· change the nature of our line of business.
The Senior Secured Credit Facility also imposes various customary affirmative covenants on Aliante Gaming and its subsidiaries including, among others, reporting covenants, covenants to maintain insurance, and maintain properties and other covenants customary in senior credit financings of this type.
As a result of these covenants, we are limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs. The restrictions caused by such covenants could also place us at a competitive disadvantage to less leveraged competitors. A failure to comply with the covenants contained in the Senior Secured Credit Facility, or other indebtedness that we may incur in the future, could result in an event of default, which, if not cured or waived, could result in the acceleration of the indebtedness and have a material adverse effect on our business, financial condition and results of operations.
If we are unable to repay amounts owing under the Senior Secured Credit Facility when due, the Lenders, or affiliates thereof, under the Senior Secured Credit Facility could proceed against the collateral. If the indebtedness under the Senior Secured Credit Facility were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full. Moreover, in the event that such indebtedness is accelerated, there can be no assurance that we will be able to refinance it on acceptable terms, or at all. In addition, the Lenders under the Senior Secured Credit Facility are also our Members, see “Risks Related to our Common Units - Potential conflicts of interest may exist, or may arise, based on debt and management interests of the principal equity holders of the Company.”
Our ability to service all of our indebtedness depends on our ability to generate cash flow, which is subject to factors that are beyond our control.
Our ability to make any scheduled payments on, or to refinance, our debt obligations depends on our financial condition and operating performance, which is subject to general economic, financial, competitive and other factors that are beyond our control. In addition, deterioration in the economic performance of the Casino may cause us to reduce or delay investments and capital expenditures, or to sell assets. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations.
The volatility and disruption of the capital and credit markets and adverse changes in the global economy may negatively impact our ability to access financing.
Although we believe that we will have sufficient funds for our capital needs, there can be no assurance that we will not need additional capital in the future. Due to the continuing uncertainty in the capital and credit markets and the recent global recession, our access to capital may not be available on terms that are attractive or at all.
Risks Related to Our Common Units
As a “publicly traded corporation” under the Nevada Act, each holder of more than 10% of our voting securities must be found suitable by the Gaming Authorities or we may be required to sever all relationships with such equity holder.
As a “publicly traded corporation” under the Nevada Act, persons who acquire beneficial ownership of more than 5% of our voting securities will be required to report their acquisition to the Gaming Authorities and persons who acquire beneficial ownership of more than 10% of our voting securities will be required to apply to the Gaming Authorities for a finding of suitability. Notwithstanding these provisions, under the Nevada Act, the Gaming Authorities may at any time, in their discretion, require the holder of any of our securities to file applications, be investigated and be found suitable to own our securities if they have reason to believe that the security ownership would be inconsistent with the declared policies of Nevada. Typically, so long as we are a “publicly traded corporation” under the Nevada Act, the Gaming Authorities will require only our equity holders having beneficial ownership of more than 10% of our voting securities to be found suitable.
If we cease to be a “publicly traded corporation” under the Nevada Act, or if required by the Gaming Authorities, each of our equity holders would be required to be found suitable by the Gaming Authorities. If any equity holder fails to be found suitable, we may be required to sever all relationships, including through redemption of Common Units, with such equity holder, which may have a material adverse effect on our business and our equity holders. In addition, such holders of Common Units who fail to obtain necessary licenses, authorizations, qualifications or findings of suitability will not be entitled to exercise any rights of ownership with respect to, or receive any income from, the Common Units.
The transferability of our Common Units is very limited and subject to the prior approval of our Board of Managers.
There is currently no established public trading market for our Common Units, and there are no plans, proposals, arrangements or understandings with any person with regard to the development of a trading market for our Common Units. In addition, our limited liability company agreement requires the approval of our Board of Managers prior to certain transfers of our Common Units. It is expected that the Board of Managers will only consent to transfers of Common Units in very limited circumstances. Accordingly, we do not expect a public market will develop for our Common Units.
We currently have no plans to pay dividends on our Common Units, so holders of our Common Units may not receive funds without selling their Common Units.
We currently have no plans to pay dividends on our Common Units and our ability to make distributions on our Common Units may be restricted by the terms of our Senior Secured Credit Facility and by the Gaming Authorities. Any payment of future dividends will be at the discretion of our Board of Managers and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends, and other considerations that our Board of Managers deems relevant. The terms governing our outstanding debt also include limitations on the ability of Aliante Gaming to pay dividends to the Company. Accordingly, our holders may have to sell some or all of their Common Units in order to generate cash flow from their investment in us.
Potential conflicts of interest may exist, or may arise, based on debt and management interests of the principal equity holders of the Company.
Pursuant to the governance structure of the Company, a majority of our managers will primarily be persons designated by certain Lenders holding greater than 10% of our Common Units (“Principal Lenders” or “Principal Members”). In addition, many major actions require approval of a majority of the managers which include those managers designated by the Principal Members. The Principal Members may have interests that are different than, or in addition to, other equity holders of the Company, which could adversely affect such equity holders.
The Lenders under the Senior Secured Credit Facility may have an incentive for the Company to act or omit to act, in each case, in a manner that enhances the ability of the Company to service its indebtedness or the Lenders to recover on the Senior Secured Credit Facility, rather than seeking to maximize the value of the equity of the Company.
The interests of the Principal Members could conflict with or differ from the interests of other holders of our Common Units. For example, the concentration of ownership held by the Principal Members could delay, defer or prevent a change of control of the Company or impede a merger, takeover or other business combination that other holders of our Common Units may otherwise view favorably. So long as the Principal Members continue to beneficially own a significant amount of our equity, even if such amount is less than 50%, they may be able to strongly influence or effectively control our decisions. For example, our operating agreement requires a majority of our Board of Managers to vote on any matter and our Principal Members have the right to designate three of four managers.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
We own the land and building on which the Casino is located in North Las Vegas, Nevada. Substantially all of the property that we own is subject to liens to secure borrowings under the Senior Secured Credit Facility.
The Casino is an approximately 700,000 square foot casino and hotel facility situated on approximately 40 acres that we own within the 1,905 acre Aliante master-planned community. The property lies between three of the main thoroughfares that run through the master-planned community with Elkhorn Road to the north, the Las Vegas Beltway to the South and North Aliante Parkway to the west. See “Item 1. Business - Narrative Description of Business” for a further description of the facility.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently a party to litigation arising in the ordinary course of business. In the opinion of management, all pending legal matters will not have a material effect on the business, financial position or results of operations of the Company.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
All of our outstanding Common Units are privately held and there is no established public trading market for our Common Units.
Holders
As of February 28, 2014, there were 13 holders of record of our Common Units.
Dividends
There were no dividends paid during the years ended December 31, 2013 and 2012. We did not make, and do not anticipate making in the foreseeable future, any distributions on our Common Units. The Senior Secured Credit Facility restricts our ability to declare or make distributions on our Common Units.
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding our securities authorized for issuance under equity compensation plans is included under “Item 12. - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.
Recent Sales of Unregistered Securities
In May 2012, 75 Common Units were issued to Ellis Landau and 56.25 Common Units were issued to Eugene I. Davis representing one-third of their compensation as members of the Board of Managers for the period from November 1, 2011 through March 31, 2012. In July 2012, 45 Common Units were issued to Ellis Landau and 33.75 Common Units were issued to Eugene I. Davis representing one-third of their compensation as members of the Board of Managers for the period from April 1, 2012 through June 30, 2012. The offer, sale and issuance of the Common Units to the members of the Board of Managers are exempt from Section 5 of the Securities Act of 1933, or the Securities Act, and from any other state or local law requiring registration or licensing of an issuer of a security, pursuant to Section 4 of the Securities Act.
Issuer Purchases of Equity Securities
There were no purchases of our Common Units made by, or on behalf of us during the year ended December 31, 2013.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
On November 1, 2011, Aliante Gaming, the owner and operator of the Casino, became our wholly owned subsidiary pursuant to the Plan. Prior to November 1, 2011, we conducted no operations and had no material assets or liabilities. As a result, the following selected financial data presents our financial results as of and for the years ended December 31, 2013, and 2012, the period from November 1, 2011 through December 31, 2011 (the “Successor Period”) and for the Predecessor, Aliante Gaming, for the period from January 1, 2011 through October 31, 2011, and as of and for the years ended December 31, 2010 and 2009 (the “Predecessor Period”). The historical financial results for the Predecessor are not comparable to our current financial condition or our future results of operations following November 1, 2011 due to the adoption of fresh-start reporting in accordance with ASC Topic 852. The selected financial data presented below have been derived from our and the Predecessor’s financial statements which, except for 2010 and 2009 are contained elsewhere in this Annual Report on Form 10-K. The selected financial data set forth below are qualified in their entirety by, and should be read in conjunction with, “Item 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Background
We were formed on May 11, 2011 to acquire substantially all of the equity interests of Aliante Gaming pursuant to the Plan. The reorganization of Aliante Gaming was completed on November 1, 2011, resulting in Aliante Gaming, the owner and operator of Aliante Casino + Hotel, previously known as Aliante Station Casino + Hotel, in North Las Vegas, Nevada, becoming our wholly owned subsidiary. Aliante Casino + Hotel is a full-service casino and hotel offering high quality accommodations, gaming, dining, entertainment, retail and other resort amenities. Prior to November 1, 2011, we conducted no operations and had no material assets or liabilities.
On November 1, 2011, we entered into the Senior Secured Credit Facility, as further described under “- Liquidity and Capital Resources”. In addition, on November 1, 2011, 100% of the outstanding equity interests of Aliante Gaming, which were previously owned by Aliante Holding, were cancelled, and new equity of Aliante Gaming, as reorganized, was issued to the Lenders. The Lenders contributed 100% of the new equity interests in Aliante Gaming to the Company in consideration for the issuance of the Senior Secured Loans under the Senior Secured Credit Facility and 100% of the Company’s Common Units.
Additionally, on November 1, 2011, we adopted fresh-start reporting in accordance with ASC Topic 852, which resulted in a new reporting entity for accounting purposes. Accordingly, the carrying values of Aliante Gaming’s assets and liabilities were adjusted to their estimated fair values as of the November 1, 2011. As a result, the historical financial results of Aliante Gaming are not indicative of our current financial condition or our results of operations following November 1, 2011. In addition, our future results of operations will be subject to significant business, economic and competitive uncertainties and contingencies, some of which are beyond our control.
On November 1, 2012, New Station ceased providing management services to Aliante Gaming.
Overview
Our revenues are primarily derived from gaming revenues, which include revenues from slot machines and table games. Gaming revenues are generally defined as gaming wins less gaming losses. Our largest component of gaming revenues is from slot machines. Promotional allowances consist primarily of free slot play and complimentary food and beverages furnished to customers. Upon redemption, the retail value of such services is included in the respective revenue classifications and is then deducted as promotional allowances. We calculate income from operations as net revenues less total operating costs and expenses. Income from operations represents only those amounts that relate to operations and excludes interest income, interest expense and other non-operating income and expenses.
We consider various performance measures in assessing financial condition and results of operations including fluctuations in revenues, expenses and margins as compared to prior periods and internal plans. Additionally, we measure changes in selling, general and administrative expenses as a percent of net revenue, which indicate management’s ability to control costs. We also evaluate our profitability based upon Adjusted EBITDAM (see “Results of Operations” for additional information), which represents earnings before interest, taxes, depreciation and amortization, management fees, preopening expenses, lease termination, gain (loss) on disposal of assets, net, impairment loss, restructuring and other charges, reorganization items, net and other non-recurring items, as applicable. The measures listed above are not a comprehensive list of all factors considered by us in assessing our financial condition and operating performance, and we may consider other individual measures as required by trends and discrete events arising in a specific period, but they are the key indicators.
We are organized as a limited liability company and are not subject to federal income taxes. Accordingly, a provision for income taxes is not included in our financial statements.
The following discussion and analysis should be read in conjunction with “Item 6. Selected Financial Data” and our financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
Presentation
References in this Annual Report on Form 10-K to “Successor” refers to the Company on or after November 1, 2011, after giving effect to the Restructuring Transactions and the application of fresh-start reporting. References to “Predecessor” refer to Aliante Gaming prior to November 1, 2011.
Due to the adoption of fresh-start reporting, the financial statements for the Company are required to be presented separately from those of the Predecessor. As a result, the financial statements for the year ended December 31, 2011 are presented for two periods: November 1, 2011 through December 31, 2011 (the “Successor Period”) and January 1, 2011 through October 31, 2011 (the “Predecessor Period”). For purposes of analysis and comparison of current year and prior year operating results, certain operating results for the Successor Period and the Predecessor Period are presented on a combined basis in this Management’s Discussion and Analysis. Please see footnote (a) immediately following the tables below for important information about this combined presentation. Because we conducted no operations prior to November 1, 2011, we have presented the results of Aliante Gaming for the Predecessor Period January 1, 2011 through October 31, 2011 for comparison purposes.
Results of Operations
The following table highlights the results of operations and reconciles Adjusted EBITDAM to net (loss) income for the Successor and the Predecessor (in thousands, except percentages):
n/m = not meaningful
(a) The results for the year ended December 31, 2011, which we refer to as “Combined 2011”, were derived by the mathematical addition of the results of the Company for the Successor Period and the results of the Predecessor for the Predecessor Period, resulting in combined results for the year ended December 31, 2011. The presentation herein of combined financial information for the Successor Period and the Predecessor Period may yield results that are not fully comparable on a year-by-year basis, particularly depreciation, amortization, interest expense, management fees and reorganization items primarily due to the impact of the Restructuring Transactions. The presentation of results for Combined 2011 does not comply with Generally Accepted Accounting Principles (“GAAP”) or with the SEC rules for pro forma presentation; however, it is presented because we believe that it provides the most meaningful comparison of operating results for the year ended December 31, 2011 to operating results
for the prior years. Accordingly, for the year ended December 31, 2011, the discussion of “combined” results refers to the results of Combined 2011.
(b) EBITDA, earnings before interest, taxes, depreciation and amortization, is a widely used measure of operating performance in the gaming industry. We have traditionally adjusted EBITDA when evaluating our property operating performance because we believe that the inclusion or exclusion of certain non-cash recurring, non-recurring items and management fees is necessary to present the most accurate measure of our property operating results and as a means to assess results period over period. We refer to the financial measure that adjusts for these items as Adjusted EBITDAM. We believe, when considered with measures calculated in accordance with GAAP, Adjusted EBITDAM is a useful financial performance measurement for assessing our property operating performance and is used by management in making financial and operational decisions. In this regard, Adjusted EBITDAM is a key metric used by us in our budgeting process, when calculating returns on investment of existing and proposed projects and in the evaluation of incentive compensation related to property management. Adjusted EBITDAM consists of net (loss) income plus interest, taxes, depreciation and amortization, management fees, preopening expenses, lease termination, loss on disposal of assets, net, impairment loss, restructuring and other charges, reorganization items, net and other non-recurring items, as applicable. We believe that while items excluded from Adjusted EBITDAM may be recurring in nature and should not be disregarded in evaluation of our property operating performance, it is useful to exclude such items when analyzing current property results and trends compared to other periods because these items can vary significantly depending on specific underlying transactions, the ability of the property to control such items or events and may not be comparable between the periods being presented. Also, we believe excluded items may not relate specifically to current property operating trends or be indicative of future results. For example, lease terminations will be significantly different in periods when we terminate a lease agreement and it is not expected to be comparable period over period, nor is the amount expected to follow any particular trend from period-to-period. In addition, management fees, while previously recurring in nature, are based on the operating results of the property and as such, the amount of management fees will vary in each period and are not considered property operating expenses. Therefore, we use Adjusted EBITDAM as the primary measure of our property operating performance. We believe that our debt stakeholders use Adjusted EBITDAM as an appropriate financial measure in determining the value of their investment. To evaluate Adjusted EBITDAM and the trends it depicts, the components should be considered. The impact of interest, taxes, depreciation and amortization, management fees, preopening expenses, lease termination, loss on disposal of assets, net, impairment loss, restructuring and other charges and reorganization items, net and other non-recurring items, as applicable, each of which can significantly affect our results of operations and liquidity, should be considered in evaluating our operating performance, and cannot be determined from Adjusted EBITDAM. Adjusted EBITDAM is used in addition to, and in conjunction with, GAAP measures and should not be considered as an alternative to net (loss) income, or any other GAAP operating performance measure. To compensate for the inherent limitations of the disclosure of Adjusted EBITDAM, we provide relevant disclosure of our depreciation and amortization, interest and other items in our reconciliations to GAAP financial measures and financial statements, all of which should be considered when evaluating our performance. In addition, it should be noted that not all gaming companies that report Adjusted EBITDAM or adjustments to such measures, may calculate Adjusted EBITDAM, or such adjustments, in the same manner as us, and therefore, our measure of Adjusted EBITDAM may not be comparable to similarly titled measures used by other gaming companies. The following table highlights the various sources of revenues and expenses for the Successor and Predecessor as compared to the prior year (in thousands, except percentages):
(a) The results for the year ended December 31, 2011, which we refer to as “Combined 2011”, were derived by the mathematical addition of the results of the Company for the Successor Period and the results of the Predecessor for the Predecessor Period, resulting in combined results for the year ended December 31, 2011. The presentation herein of combined financial information for the Successor Period and the Predecessor Period may yield results that are not fully comparable on a year-by-year basis, particularly depreciation, amortization, interest expense, management fees and reorganization items primarily due to the impact of the Restructuring Transactions. The presentation of results for Combined 2011 does not comply with GAAP or with the SEC rules for pro forma presentation; however, it is presented because we believe that it provides the most meaningful comparison of operating results for the year ended December 31, 2011 to operating results for the prior year. Accordingly, for the year ended December 31, 2011, the discussion of “combined” results refers to the results of Combined 2011.
Casino. Casino revenues decreased 12.0% to $47.5 million for the year ended December 31, 2013, as compared to $53.9 million for the year ended December 31, 2012, primarily due to a decrease in slot revenue. Until November 1, 2012, Aliante Gaming was managed by New Station Casinos under the Station Casinos brand, during which time the casino had access to the Station Casinos database and participated in the Station Casinos corporate marketing programs. Effective November 1, 2012, Aliante Gaming became “self-managed” and no longer enjoyed the marketing benefits of the Station Casinos database of customers, or the Station Casinos marketing programs resulting in the decline in slot volume.
Casino revenues increased 2.0% to $53.9 million for the year ended December 31, 2012, as compared to $52.9 million for Combined 2011, primarily due to an increase in table games and slot volume. Casino expenses decreased 1.5% to $22.9 million for the year ended December 31, 2012, as compared to $23.2 million for Combined 2011, primarily as a result of a $0.3 million decrease in payroll and related expenses. The casino operating margin improved to 57.6% for the year ended December 31, 2012, as compared to 56.1% for Combined 2011 as a result of the increased casino revenues and lower casino expenses.
Food and Beverage. For the year ended December 31, 2013, food and beverage revenues decreased 2.6% to $12.9 million as compared to $13.3 million for the year ending December 31, 2012, primarily due to a decrease in visitation associated with the decline in slot volume. Food and beverage expenses increased by 15.6%, or $1.6 million, for the year ended December 31, 2013 due to certain one-time costs associated with the transition of the Company’s food and beverage outlets away from Station Casinos branded restaurants and the unavailability of volume purchase discounts previously enjoyed while the company was managed by New Station.
For the year ended December 31, 2012, food and beverage revenues decreased to $13.3 million as compared to $13.5 million for Combined 2011 as a result of a 1.5% decrease in the number of food and beverage guests served for the year ended December 31, 2012, as compared to Combined 2011, partially offset by a 2.1% increase in average guest check. Food and beverage expenses decreased 5.3%, or $0.6 million, for the year ended December 31, 2012, compared Combined 2011, due to a decrease in the number of
food and beverage guests served as discussed above. Operating margin improved to 24.6% for the year ended December 31, 2012 as compared to 21.9% for Combined 2011 as a result of lower food and beverage expenses.
Room. The following table shows key information about hotel operations:
(a) The results for the year ended December 31, 2011, which we refer to as “Combined 2011”, were derived by the mathematical addition of the results of the Company for the Successor Period and the results of the Predecessor for the Predecessor Period, resulting in combined results for the year ended December 31, 2011. The presentation herein of combined financial information for the Successor Period and the Predecessor Period may yield results that are not fully comparable on a year-by-year basis, particularly depreciation, amortization, interest expense, management fees and reorganization items primarily due to the impact of the Restructuring Transactions. The presentation of results for Combined 2011 does not comply with GAAP or with the SEC rules for pro forma presentation; however, it is presented because we believe that it provides the most meaningful comparison of operating results for the year ended December 31, 2011 to operating results for the prior year. Accordingly, for the year ended December 31, 2011, the discussion of “combined” results refers to the results of Combined 2011.
Room revenues decreased by 11.9% to $5.3 million for the year ended December 31, 2013, as compared to $6.0 million for the year ended December 31, 2012. The $0.7 million decrease is primarily as a result of decrease in room product demand from the travel and leisure segments. Occupancy declined from 86% in the year ended December 31, 2012 to 82% in the year ended December 31, 2013. Room expenses increased 17.1% to $2.5 million, for the year ended 2013, as compared to $2.1 for the year ended December 31, 2012 due to increases in the cost of room amenities, linens and laundry, plus the addition of a reservations department.
Room revenues decreased by 1.2% to $6.0 million for the year ended December 31, 2012 as compared to $6.1 million for Combined 2011. The $0.1 million decrease in room revenues for the year ended December 31, 2012 is the result of a decrease in occupancy, partially offset by a $0.2 million increase attributable to an improvement in the average daily rate. Room occupancy decreased to 86% for the year ended December 31, 2012 as compared to 90% for Combined 2011 while average daily rate increased to $83 for the year ended December 31, 2012 as compared to $80 for Combined 2011. The increase in the average daily rate is primarily due to maximization of room rates during peak periods. The decrease in occupancy for the year ended December 31, 2012, as compared to Combined 2011 is related to reduced demand for hotel rooms in the North Las Vegas area. Room expenses increased 5.3% to $2.1 million, for the year ended December 31, 2012, as compared to $2.0 million for Combined 2011 due primarily to increases in the cost of room amenities, linens and laundry services.
Other Revenues and Expenses. Other revenues primarily include revenues from leased outlets, the gift shop, the spa and entertainment. Other revenues did not vary significantly during the three year period ended December 31, 2013. Other expenses increased by $90,000 for the year ended December 31, 2013, as compared to the year ended December 31, 2012, due to the establishment of a call center following the termination of the management agreement with New Station.
Selling, General and Administrative (“SG&A”). Selling, general and administrative expenses decreased 16.7% to $21.4 million for the year ended December 31, 2013, as compared to $25.7 million for the year ended December 31, 2012, primarily due to a decrease in amounts expended to transition away from New Station following the termination of the management agreement with New Station. Selling, general and administrative expenses increased 14.4% to $25.7 million for the year ended December 31, 2012, as compared to $22.4 million for Combined 2011. The increase in SG&A expenses is primarily due to the transition away from New Station.
Adjusted EBITDAM. Adjusted EBITDAM decreased 48.2% to 4.5 million for the year ended December 31, 2013, and decreased 18.0% to $8.7 million for the year ended December 31, 2012, as a result of the factors discussed above for casino, food and beverage, room, other revenues and expenses and SG&A.
Depreciation and Amortization. Depreciation and amortization increased 45.3% to $4.7 million for the year ended December 31, 2013, as compared to $3.2 million for the year ended December 31, 2012 as a result of additional first year depreciation of 2013 capital expenditures and additional depreciation on capital assets acquired at the end of 2012 in support of the transition away from management by New Station. The resetting of the carrying values of our assets and liabilities in fresh-start reporting resulted in changes in the carrying values of our depreciable property, plant and equipment and the establishment of definite-lived intangible assets. As a result, depreciation and amortization expense for the Successor and the Predecessor is not comparable. Depreciation and
amortization expense for the year ended December 31, 2012 and the Successor Period was $3.2 million and $0.5 million, respectively which reflects the valuation of our property and equipment and intangible assets under fresh-start reporting.
Restructuring and Other Charges. Restructuring and other charges represent expenses related to the evaluation of financial and strategic alternatives and primarily include legal, consulting and other professional services associated with the Predecessor’s reorganization efforts prior to the filing of the Chapter 11 Case on the Petition Date, including preparation for the bankruptcy filing.
Operating Income. As a result of the factors discussed above, the operating income for the year ended December 31, 2013 was $1 thousand and operating income was $3.9 million and $1.7 million for the year ended December 31, 2012 and Combined 2011, respectively.
Interest Expense. As a result of the Restructuring Transactions, interest expense, net, for the Successor is not comparable to that of the Predecessor. Our outstanding principal indebtedness at December 31, 2013 was approximately $58.5 million compared to approximately $54.3 million as of December 31, 2012 and $50.4 million as of December 31, 2011. Interest expense, net for the year ended December 31, 2013 was related to our Senior Secured Credit Facility. The Senior Secured Loans bear interest at a rate to be elected by Aliante Gaming, such rate being either (i) 10% per annum, which interest will be added to the principal amount of the Senior Secured Loans quarterly in arrears and subsequently treated as principal of the Senior Secured Loans, or (ii) 6% per annum, which interest will be payable in cash quarterly in arrears. For the years ended December 31, 2013 and 2012, the Company did not elect the cash interest payment option, resulting in the outstanding principal amount under the Senior Secured Loans of $55.7 million and $50.5 million as of December 31, 2013 and 2012, respectively. In addition, interest expense during the year ended December 31, 2013 and December 31, 2012 was offset by approximately $0.6 million and $0.9 million related to an increase in the debt discount incurred in fresh-start reporting as a result of the application of the effective interest method, respectively.
In establishing the amortization of the debt discount on its Senior Secured Loans in November 2011, the Company expected that it would elect the cash interest payment option beginning in the first quarter of 2013. During the first quarter of 2013, this was subsequently revised to assume cash interest payments would begin during the second quarter of 2013. During the second quarter, the Company further evaluated the date it would commence the cash interest payment option, determining the Company would instead elect to defer the cash interest option until contractually required to do so beginning in November 2014. As a result of this change in the expected method of payment, the Company recorded an adjustment to its accrual during the second quarter of 2013 to increase interest expense by $518,326 using the retrospective approach. Under the retrospective approach, a new effective interest rate is computed to reflect the modified estimated cash flows as if such modified cash flows were known at inception. The carrying amount is adjusted to reflect the amount that would have been presented had the adjusted effective rate have been applied since inception.
As a result of the bankruptcy filing on April 12, 2011, the Predecessor did not accrue for, or make, any interest payments on its Previous Facility subsequent to the Petition Date. In accordance with ASC Topic 852, interest expense is recognized only to the extent that it will be paid during the bankruptcy proceeding or that it is probable that it will be an allowed claim in the bankruptcy proceedings. Interest expense, net for the Predecessor Period was $8.5 million.
Reorganization Items. Reorganization items were $373.0 million for the Predecessor Period and represent amounts incurred after the Petition Date that were directly related to the Restructuring Transactions. Reorganization items include the discharge of liabilities subject to compromise and the revaluation of assets and liabilities to fair value in addition to legal and advisory fees incurred in connection with the Restructuring Transactions.
Net (Loss) Income. As a result of the factors discussed above, net loss was $5.3 million for the year ended December 31, 2013 and $0.1 million for the year ended December 31, 2012 as compared to net income of $365.6 million for Combined 2011.
Liquidity and Capital Resources
Our cash flows will be affected by a variety of factors, many of which are outside of our control, including recovery of the local gaming market, recovery of the housing market and community surrounding the Casino, competition and other general business conditions. We believe that our available cash and cash flows from our operations will provide sufficient liquidity to fund our cash requirements and capital expenditures for 2014, see “Risk Factors - We have limited liquidity and capital resources and may be unable to generate sufficient cash flows to finance all operating expenses, working capital needs and capital expenditures”. We will endeavor to fund future capital expenditures for maintenance of the Casino through improvements in operating results. However, we cannot provide assurance that we will generate sufficient income and liquidity to meet all of our liquidity requirements and other obligations. Our results for future periods are subject to numerous uncertainties which may result in liquidity problems, which could in turn affect our ability to meet our obligations while attempting to meet competitive pressures or adverse economic conditions.
Senior Secured Credit Facility
On November 1, 2011, the Company and Aliante Gaming entered into the Senior Secured Credit Facility, which provided for $45.0 million in principal amount of Senior Secured Loans, which were deemed made on the same date without any funding being
provided. The Senior Secured Credit Facility represented an already outstanding obligation of Aliante Gaming as of November 1, 2011. From November 1, 2011 through November 1, 2014, the Senior Secured Loans bear interest at a rate to be elected by Aliante Gaming, such rate being either (i) 10% per annum, which interest will be added to the principal amount of the Senior Secured Loans quarterly in arrears and subsequently treated as principal of the Senior Secured Loans, or (ii) 6% per annum, which interest will be payable in cash quarterly in arrears. Following November 1, 2014, the Senior Secured Loans will bear interest at the rate of 6% per annum, which interest will be payable in cash quarterly in arrears. The outstanding principal amount of the Senior Secured Loans and all accrued and unpaid interest thereon will be payable on the maturity date, which shall be the earlier of November 1, 2018 or the acceleration of the Senior Secured Loans in accordance with the terms of the Senior Secured Credit Facility. The Senior Secured Loans may be prepaid in certain minimum amounts without the payment of any prepayment premium or fee. Aliante Gaming did not elect the cash interest payment option, resulting in $55.7 million in principal outstanding under the Senior Secured Credit Facility as of December 31, 2013. All amounts available under the Senior Secured Credit Facility were deemed outstanding on November 1, 2011 and there is currently no ability to draw on the Senior Secured Credit Facility.
The Senior Secured Credit Facility is guaranteed by the Company and by each domestic wholly owned subsidiary of Aliante Gaming and is secured by a first-priority (a) pledge of 100% of the Company’s equity interest in Aliante Gaming, (b) pledge of 100% of the equity interests in Aliante Gaming’s domestic subsidiaries (if any) and 65% of the equity interests of Aliante Gaming’s “first-tier” foreign subsidiaries (if any) and (c) security interest in substantially all of Aliante Gaming’s tangible and intangible assets, as well as those of each subsidiary guarantor (if any), in each case, other than any assets that may not be pledged pursuant to applicable gaming laws and subject to customary exceptions. The Senior Secured Credit Facility includes various covenants and mandatory prepayments which are customary for similar types of financings and does not contain any financial maintenance covenants.
In establishing the amortization of the debt discount on its Senior Secured Loans in November 2011, the Company expected that it would elect the cash interest payment option beginning in the first quarter of 2013. During the first quarter of 2013, this was subsequently revised to assume cash interest payments would begin during the second quarter of 2013. During the second quarter, the Company further evaluated the date it would commence the cash interest payment option, determining the Company would instead elect to defer the cash interest option until contractually required to do so beginning in November 2014. As a result of this change in the expected method of payment, the Company recorded an adjustment to its accrual during the second quarter of 2013 to increase interest expense by $518,326 using the retrospective approach. Under the retrospective approach, a new effective interest rate is computed to reflect the modified estimated cash flows as if such modified cash flows were known at inception. The carrying amount is adjusted to reflect the amount that would have been presented had the adjusted effective rate have been applied since inception.
Year Ending December 31, 2014
Our primary cash requirements for 2014 are expected to include approximately $2.5 million for maintenance capital expenditures and $2.0 million for principal and interest payments on indebtedness. We do not expect to make distributions to the Members for 2014. Our cash flow may be affected by a variety of factors, many of which are outside our control, including regulatory issues, competition, financial markets and other general business conditions. We cannot assure that we will possess sufficient income and liquidity to meet all of our liquidity requirements and other obligations. Although we believe that cash flows from operations will be adequate to meet our financial and operating obligations in 2014, our results for future periods are subject to numerous uncertainties. We may encounter liquidity problems, which could affect our ability to meet our obligations while attempting to meet competitive pressures or adverse economic conditions.
Cash Flows Summary
The following table summarizes our historical cash flows (in thousands):
(a) The results for the year ended December 31, 2011, which we refer to as “Combined 2011”, were derived by the mathematical addition of the results of the Company for the Successor Period and the results of the Predecessor for the Predecessor Period, resulting in combined results for the year ended December 31, 2011. The presentation herein of combined financial information for the Successor Period and the Predecessor Period may yield results that are not fully comparable on a year-by-year basis, particularly depreciation, amortization, interest expense, management fees and reorganization items primarily due to the impact of the Restructuring Transactions. The presentation of results for Combined 2011 does not comply with Generally Accepted Accounting Principles (“GAAP”) or with the SEC rules for pro forma presentation; however, it is presented because we believe that it provides the most meaningful comparison of operating results for the year ended December 31, 2011 to operating results for the prior years. Accordingly, for the year ended December 31, 2011, the discussion of “combined” results refers to the results of Combined 2011.
Year Ended December 31, 2013
For the year ended December 31, 2013 operating activities provided $2.7 million in cash flows as compared to $7.6 million for the year ended 2012. The decrease in cash flows provided by operating activities is primarily related to the decrease in operating income as well as other operating uses of cash, primarily representing changes in net working capital. There were no distributions to Members during the year ended December 31, 2013.
Year Ended December 31, 2012
For the year ended December 31, 2012, operating activities provided $7.6 million in cash flows as compared to $2.2 million in Combined 2011. The increase in cash flows provided by operating activities is primarily related to a decrease of $4.8 million in cash paid for reorganization items during Combined 2011 as well as decreases in other operating uses of cash, primarily representing changes in net working capital. Net cash used in investing activities for the year ended December 31, 2012 consisted of $5.1 million of capital expenditures. Net cash used in financing activities for the year ended December 31, 2012 consisted of $0.9 million of principal debt payments. There were no distributions to Members during the year ended December 31, 2012.
Combined 2011
For Combined 2011, operating activities provided $2.2 million in cash flows compared to cash used in operating activities of $0.6 million for the year ended December 31, 2010. The increase in cash flows provided by operating activities primarily related to an increase in our net revenues of $5.1 million for Combined 2011 as compared to the year ended December 31, 2010 offset by other operating uses of cash, primarily representing changes in net working capital. For Combined 2011, cash used in investing activities was $1.6 million which consisted of capital expenditures. For Combined 2011, cash used in financing activities was $0.9 million, primarily representing principal payments on debt. There were no distributions to the Members during Combined 2011.
Inflation
We do not believe that inflation has had a significant impact on our or the Predecessor’s revenues, results of operations or cash flows in the last three fiscal years.
Off Balance Sheet Arrangements
As of December 31, 2013, we did not have any off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
The following table summarizes our contractual obligations and commitments (in thousands):
(a) Amounts represent the principal amount outstanding as of December 31, 2013, payable on the maturity date which shall be the earlier of November 1, 2018 or the acceleration of the Senior Secured Loans in accordance with the terms of the Senior Secured Credit Facility.
(b) The amounts shown represent paid-in-kind interest payments based on a fixed interest rate of 10% per annum through November 1, 2014. Following November 1, 2014, the Senior Secured Loans will bear interest at a rate of 6% per annum, which interest will be payable in cash quarterly in arrears. The outstanding principal amount of the Senior Secured Loans and all accrued and unpaid interest thereon will be payable on the maturity date, which shall be the earlier of November 1, 2018 or the acceleration of the Senior Secured Loans in accordance with the terms of the Senior Secured Credit Facility.
(c) Other debt includes principal payments on equipment financing and special improvement district assessment.
(d) Includes interest payments on equipment financing and special improvement district assessment.
Critical Accounting Policies
The preparation of our financial statements requires management to adopt accounting policies and make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. Our business and industry is highly regulated. The majority of our revenue is cash-based and therefore is not subject to any significant or complex estimation procedures. A description of our accounting policies can be found in our financial statements which are included elsewhere in this Annual Report on Form 10-K.
We have determined that the following accounting policies and related estimates are critical to the preparation of our financial statements:
Fresh-Start Reporting
On November 1, 2011, we adopted fresh-start reporting in accordance with ASC Topic 852. The adoption of fresh-start reporting results in a new reporting entity. Under fresh-start reporting, generally all assets and liabilities are recorded at their fair values and the Predecessor’s accumulated deficit is eliminated. In addition, upon adoption of fresh-start reporting, the Company was required to determine its reorganization value, which represents the fair value of the entity before considering its interest-bearing debt.
Property and Equipment
Property and equipment are initially recorded at cost, other than fresh-start reporting adjustments which are recorded at fair value. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or the terms of the capitalized lease, whichever is less, beginning the month after the respective assets are placed in service. Costs of major improvements are capitalized, while costs of normal repairs and maintenance are charged to expense as incurred.
We make estimates and assumptions when accounting for capital expenditures. Whether an expenditure is considered a maintenance expense or a capital asset is a matter of judgment. Our depreciation expense is highly dependent on the assumptions made about the assets estimated useful lives. We determine the estimated useful lives based on experience with similar assets, engineering studies and our estimate of the usage of the asset. Whenever events or circumstances occur which change the estimated useful life of an asset, we account for the change prospectively.
Intangible Assets
We account for intangible assets in accordance with ASC Topic 350, Intangibles - Goodwill and Other (“ASC Topic 350”). Our finite-lived intangible assets include trademark, customer relationship and reservation backlog intangibles. Finite-lived intangible assets are amortized over their estimated useful lives which is the period over which the asset is expected to contribute directly or indirectly to future cash flows. Management periodically evaluates the remaining useful lives of these intangible assets to determine whether events and circumstances warrant a revision to the remaining period of amortization. Management reviews our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
Impairment of Long-Lived Assets
We evaluate our long-lived assets including property and equipment, finite-lived intangible assets and other long-lived assets for impairment in accordance with the accounting guidance in the Impairment or Disposal of Long-Lived Assets Subsections of ASC Topic 360-10, Property, Plant and Equipment. Assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We measure recoverability of these assets by comparing the estimated future cash flows of the asset, on an undiscounted basis, to its carrying value. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, impairment is measured based on fair value compared to carrying value, with fair value typically based on a discounted cash flow model or market comparables, when available. For assets to be disposed of, we recognize the asset to be sold at the lower of carrying value or fair value less costs of disposal. Fair value of assets to be disposed of is generally estimated based on comparable asset sales, solicited offers or a discounted cash flow model.
Inherent in the calculation of fair values are various estimates. 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 impairment charges in future accounting periods. Our estimates of cash flows are based on the current regulatory, political and economic climates, recent operating information and budgets of the Casino. 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 the Casino.
Player Reward Program
The Casino’s player reward program, or Program, allows participants to redeem points earned from their gaming activity for complimentary slot play, food, beverages, hotel rooms, movie passes, entertainment tickets or merchandise from gift shops. Under the Program, participants may accumulate points over time that can be redeemed at their discretion under the terms of the Program. At the time points are redeemed for complimentaries under the Program, the retail value is recorded as revenue with a corresponding offsetting amount included in promotional allowances. The estimated departmental costs of providing such promotional allowances are included in casino costs and expenses on our statements of operations.
We record a liability for the estimated cost of the outstanding points under the Program that we believe will ultimately be redeemed. The estimated cost of the outstanding points under the Program is calculated based on the total number of points earned but not yet achieving necessary redemption levels, converted to a redemption value, times the average cost. The redemption value is estimated based on the average number of points needed to redeem for rewards. The average cost is the incremental direct departmental cost for which the points are anticipated to be redeemed. When calculating the average cost we use historical point redemption patterns to determine the redemption distribution between gaming, food, beverage, rooms, entertainment and merchandise, as well as estimated breakage.
Income Taxes
We are a limited liability company disregarded as an entity separate from its owners for income tax purposes and as such, are a pass-through entity and not liable for income tax in the jurisdiction in which we operate. As a result, no provision for income taxes has been made in our financial statements.
Recently Issued Accounting Standards
In February 2013, the FASB issued Accounting Standards Update 2013-04, Liabilities (Topic 402)-Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. This amendment provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing accounting guidance. Examples of obligations within this guidance are debt arrangements, other contractual obligations, and settled litigation and judicial rulings. Upon adoption, the guidance is required to be applied retrospectively to all prior periods presented for any obligations that exist at the beginning of an entity’s fiscal year of adoption which are within its scope. This guidance will be effective for the Company for the first quarter of 2014, and early adoption is permitted. The Company
will adopt this guidance during the first quarter of 2014, and does not expect the adoption to have a material impact on its financial position and results of operations.
In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2012-02, Intangibles - Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-02 amends the impairment test for indefinite-lived intangible assets by allowing companies to first assess the qualitative factors to determine if it is more likely than not that an indefinite-lived intangible asset might be impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The changes are effective prospectively for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance did not have a material impact on its Consolidated Financial Statements.
A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, that the implementation of such proposed standards would have on our financial statements.
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. We are not subject to market risk only with respect to interest rates on outstanding debt as all of our outstanding debt as of December 31, 2012 bears interest at fixed interest rates. As of December 31, 2013, we had principal amounts outstanding of $55.7 million in Senior Secured Loans at a fixed interest rate of 10% per annum (or if Aliante Gaming elects to pay interest in cash, 6% per annum), approximately $2.0 million in interest bearing debt at a fixed interest rate of 2.5% per annum and approximately $0.8 million in interest bearing debt at a fixed interest rate of 5.8% per annum. However, if additional debt is incurred to refinance the Senior Secured Loans, or otherwise, future earnings and cash flow may be affected by changes in interest rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 15 are included in this Annual Report on Form 10-K beginning on page
.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, an evaluation was carried out by the Company’s management, with the participation of its Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). The design of any system of control is based in part upon certain assumptions about the likelihood of future events, and we cannot provide assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by the Company in reports that it files, or submits, under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer to allow timely decisions regarding required disclosure. The evaluation conducted did not include an evaluation of the Predecessor.
Management Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Managers regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further because of changes in conditions, the effectiveness of internal controls may vary over time.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated 1992 Framework. Based on our assessment we believe that, as of December 31, 2013, the Company’s internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by the Company’s registered public accounting firm pursuant to Item 308 of Regulation S-K under the Securities Act that permits the Company to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Managers and Executive Officers
Pursuant to the terms of the Amended and Restated Operating Agreement of the Company (the “Operating Agreement”), our Board of Managers is comprised of four members designated as follows: (i) the three Lenders who are a holders of greater than 10% of our Common Units are each entitled to designate one individual to serve on the Board of Managers; and (ii) the Lenders who are holders of less than 10% of our Common Units are entitled to vote on the election of one individual to serve on the Board of Managers.
In accordance with the terms of the Operating Agreement, the Board of Managers may appoint executive officers at any time. On November 1, 2011, the Board of Managers appointed Soohyung Kim as Chief Executive Officer and Secretary and Nicholas J. Singer as Chief Financial Officer and Assistant Secretary. On February 6, 2012, Nicholas J. Singer resigned as Chief Financial Officer and Assistant Secretary and the Board of Managers appointed Ellis Landau as President and Treasurer. On March 7, 2013, the Board of Managers appointed Robert Schaffhauser as Chief Financial Officer.
The following table sets forth the members of the Board of Managers and executive officers of the Company and provides their respective ages and positions with the Company.
Set forth below is a description of the backgrounds, including business experience, for each member of the Board of Managers and executive officers of the Company as of March 25, 2014.
Soohyung Kim. On November 1, 2011, Mr. Kim was appointed to the Company’s Board of Managers in accordance with the terms of the Operating Agreement. In addition, on November 1, 2011, the Board of Managers appointed Mr. Kim as Chief Executive Officer and Secretary. Mr. Kim is the Managing Partner of Standard General, a New York-based investment manager. Mr. Kim was formerly Director of Research and Founding Partner of Cyrus Capital Partners. Prior to that, he was a Principal at Och-Ziff Capital Management where he helped launch its fixed income business. Mr. Kim is a member of the Board of Directors of New Young Broadcasting. He is also a member of the Board of Directors of the following charities: Greenwich House and the Stuyvesant Alumni Association. He graduated with an A.B. from the Wilson School of Public and International Affairs at Princeton University. Mr. Kim brings to our Board of Managers his operating and leadership experience as Chief Investment Officer of an investment firm. Through his involvement with Standard General he has provided leadership to companies that have been in distressed and turn-around situations and are undergoing dramatic changes. He brings to our Board of Managers extensive experience in finance, business development, mergers and acquisitions, and business restructuring and integration.
Ellis Landau. On November 1, 2011, Mr. Landau was appointed to the Company’s Board of Managers in accordance with the terms of the Operating Agreement. On February 6, 2012, Mr. Landau was appointed President and Treasurer. In 2006, Mr. Landau retired as Executive Vice President and Chief Financial Officer of Boyd Gaming Corporation, a position he held since he joined the company in 1990. Mr. Landau previously worked for Ramada Inc., later known as Aztar Corporation, where he served as Vice President and Treasurer, as well as U-Haul International in Phoenix and the Securities and Exchange Commission in Washington, D.C. From 2007 to 2011, Mr. Landau was a member of the Board of Directors of Pinnacle Entertainment, Inc., a leading gaming company. He served as Chairman of the Audit Committee and as a member of its Nominating and Governance Committee, and on its Compliance Committee. In addition, Mr. Landau is active in non-profit organizations. He is the Chair of the Las Vegas Regional Board of the Anti-Defamation League and a member of the National Executive Commission, the Budget Committee, and a Trustee of the ADL Foundation and he is a Member of the Board and serves as Treasurer of the Las Vegas Philharmonic. He received his Bachelor of Arts in economics from Brandeis University in 1965 and his M.B.A. in finance from Columbia University Business School in 1967. He served in the United States Army Reserve from 1967 to 1973. Mr. Landau has served as a member of the board of directors of a national gaming company and an executive officer of another gaming company bringing his experience in the industry to our Board of Managers. Mr. Landau has achieved success in the personal field and has demonstrated integrity and high personal and professional ethics, sound business judgment, and willingness to devote the time to his duties on our Board of Managers, in order to contribute to the Company’s overall corporate goals. Mr. Landau is currently a member of the Board of Managers of Data Driven Delivery Systems, a private, early stage medical service and management company based in New York City. He serves as Chairman of the Audit Committee and member of the Standing Committee of that company. In addition, Mr. Landau serves as a member of the Board of Directors of A-Mark Precious Metals Inc., a public, full service precious metals trading company based in Santa Monica, California. For A-Mark he serves as Chairman of the Audit Committee and a member of the Compensation Committee.
Eugene I. Davis. On November 1, 2011, Mr. Davis was appointed to the Company’s Board of Managers in accordance with the terms of the Operating Agreement. Since 1999, Mr. Davis has served as Chairman and Chief Executive Officer of PIRINATE Consulting Group, LLC, a privately held consulting firm specializing in turnaround management, merger and acquisition consulting and hostile and friendly takeovers, proxy contests and strategic planning advisory services for domestic and international public and private business entities. Since forming PIRINATE in 1997, Mr. Davis has advised, managed, sold, liquidated and served as a Chief Executive Officer, Chief Restructuring Officer, Director, Committee Chairman and Chairman of the Board of a number of businesses operating in diverse sectors such as telecommunications, automotive, manufacturing, high-technology, medical technologies, metals, energy, financial services, consumer products and services, import-export, mining and transportation and logistics. Previously, Mr. Davis served as President, Vice Chairman and Director of Emerson Radio Corporation and Chief Executive Officer and Vice Chairman of Sport Supply Group, Inc. He began his career as an attorney and international negotiator with Exxon Corporation and Standard Oil Company (Indiana) and as a partner in two Texas-based law firms, where he specialized in corporate/securities law, international transactions and restructuring advisory. Mr. Davis holds a bachelor’s degree from Columbia College, a master of international affairs degree (MIA) in international law and organization from the School of International Affairs of Columbia University, and a Juris Doctorate from Columbia University School of Law. Mr. Davis is also a director of Atlas Air Worldwide Holdings, Inc., Spectrum Brands, Inc., WMI Holdings Corp., and U.S. Concrete, Inc. He is also a director of Trump Entertainment Resorts, Inc. and Harbinger Group, Inc. During the past five years, Mr. Davis has also been a director of Ambassadors International, Inc., American Commercial Lines Inc., Delta Airlines, Foamex International Inc., Dex One Corp., Footstar, Inc., Granite Broadcasting Corporation, GSI Group, Inc., Ion Media Networks, Inc., Knology, Inc., Media General, Inc., Mosaid Technologies, Inc., Ogelbay Norton Company, Orchid Cellmark, Inc., PRG-Schultz International Inc., Roomstore, Inc., Rural/Metro Corp., SeraCare Life Sciences, Inc., Silicon Graphics International, Smurfit-Stone Container Corporation, Solutia Inc., Spansion, Inc., Tipperary Corporation, Viskase, Inc. and YRC Worldwide, Inc.
Charles Atwood. On July 26, 2012, Mr. Atwood was appointed to the Company’s Board of Managers in accordance with the terms of the Operating Agreement. Mr. Atwood retired in December 2008 as Vice Chairman of the Board of Directors for Harrah’s Entertainment, Inc., now Caesars Entertainment, Inc. Mr. Atwood joined Harrah’s in 1979 and held numerous finance and development positions during his tenure. He was named Chief Financial Officer in 2001, joined Harrah’s Board of Directors in July 2005, and became Vice Chairman in 2006. Mr. Atwood is the Lead Trustee of the Board of Trustees for Equity Residential, a REIT listed on the New York Stock Exchange. He is also a member of the board of directors of Gala Coral Group, a London-based company. Mr. Atwood is a Member Emeritus of The Smith Center for the Performing Arts in Las Vegas and is a Member Emeritus of the Tulane University Business School Council. Mr. Atwood was named the Edward P. Bass Distinguished Visiting Professor at the Yale Architecture School for the fall semester of 2008 and currently serves on the Dean’s Council at the Yale Architecture School. Mr. Atwood received a Bachelor of Science Degree in Business Administration from the University of Southern Mississippi and a Masters of Business Administration Degree in Finance from Tulane University.
Robert Schaffhauser. Mr. Shaffhauser was appointed Chief Financial Officer on March 7, 2013. Mr. Schaffhauser has served as the Chief Financial Officer for Aliante Gaming, an affiliate of the Company, since December 27, 2012. Prior to joining Aliante Gaming, Mr. Schaffhauser served as the Executive Vice President-Finance and Principal Financial Officer for Colony Resorts LVH Acquisitions, LLC (d/b/a the Las Vegas Hilton) where for a period of eight years, he was responsible for business planning and administrative functions (including finance, legal, human resources, information technology and purchasing). Mr. Schaffhauser, for a period of over eight years, also served as a senior financial officer for various affiliates of Trump Hotels & Casinos. Mr. Schaffhauser holds a bachelor degree in Accounting from Rutgers University.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s executive officers, members of the Board of Managers and Members who own more than 10% of the Company’s Common Units to file reports of ownership and reports of changes in ownership on Forms 3, 4 and 5 with the SEC. Executive officers, members of the Board of Managers and 10% stockholders are required by the SEC to furnish the Company with all Forms 3, 4 and 5 they file. To our knowledge, based solely on review of the copies of such reports furnished to us and written representations that no other reports were required during the past fiscal year, all Section 16(a) filing requirements applicable to our officers and managers were met.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics (“Code of Ethics”) that applies to all of our members of the Board of Managers, executive officers (including our principal executive officer and principal financial officer) and employees. The Code of Ethics and any waivers or amendments to the Code of Ethics are available to any person without charge, upon request directed to the Company’s Secretary at 7300 Aliante Parkway, North Las Vegas, NV 89084.
Nominating Committee
Given our status as a privately-held company, we do not currently hold shareholder meetings nor do we have a policy or procedures with respect to stockholder recommendations for nominees to the Board of Managers. In addition, we do not currently have a policy with respect to considering and identifying Board of Manager nominees. There have been no material changes to the Company’s Operating Agreement which outlines the procedures by which the Members nominate individuals for the Board of Managers. All of the holders of our Common Units are parties to the Company’s Operating Agreement.
Audit Committee
Our Board of Managers does not have a separately designated standing audit committee (“Audit Committee”). Our entire Board of Managers is serving as our Audit Committee which is currently comprised of Soohyung Kim, Ellis Landau, Eugene I. Davis and Charles Atwood. In light of the absence of a public trading market for our Common Units, our Board of Managers has not designated any member of the Audit Committee as an “audit committee financial expert”; however, each member would be considered an “audit committee financial expert” under applicable SEC rules and regulations and Mr. Davis and Mr. Atwood would be considered independent as independence is defined in Section 303A.02 of the listing standards of the New York Stock Exchange (the “NYSE”). Although we are not subject to the rules promulgated by the NYSE, we have used the independence requirements of the listing standards of the NYSE as a benchmark to determine whether our members of the Board of Managers would be independent. Mr. Kim and Mr. Landau would not be considered independent under the NYSE listing standards due to their positions as executive officers of the Company.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview
The Board of Managers has the authority to appoint executive officers and fix their compensation in accordance with the terms of the Operating Agreement. The compensation of executive officers is designed to provide compensation that is competitive in the marketplace and to incentivize executive officers to increase our revenues and maximize value to our members. The Board of Managers 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 of Managers relies on its prior experience and upon the recommendations of its Chief Executive Officer. As of December 31, 2013, the executive officers of the Company, whom we refer to as our “Named Executive Officers” are:
· Soohyung Kim, Chief Executive Officer and Secretary;
· Ellis Landau, President and Treasurer; and
· Robert Schaffhauser, Chief Financial Officer.
Compensation Philosophy and Objectives
Our executive compensation philosophy is designed to attract and retain talented key executives, while supporting our key business objectives and maximizing value for our members. In setting the compensation of our Named Executive Officers, we evaluate the scope of their responsibilities and apply our general knowledge of compensation practices in the Las Vegas hotel and casino market. The amount and form of compensation paid to our Named Executive Officers is also determined by the position and anticipated roles and responsibilities of the officer within the organization. The primary components of our executive compensation are base salary and
an annual cash bonus. Base salary and the annual cash bonus are determined based on job function and each executive’s contribution to our performance and achievement of our overall business objectives. However, in 2013, no bonuses were paid to our Named Executive Officers.
Elements of Executive Compensation
Base Salary
We view executive officer base salaries as a tool that provides executives with a reasonable base level of income relative to their responsibilities and salaries for comparable positions in the marketplace. The base salary for Mr. Schaffhauser was determined as a result of the negotiation of an employment agreement. The base salary paid to Mr. Schaffhauser in 2013 was $250,000. Mr. Schaffhauser received no compensation in 2012. As of December 31, 2013, we have not entered into any agreements with Messrs. Kim and Landau and they currently receive no compensation for serving in their respective capacities as executive officers.
Bonus
As of December 31, 2013, we have not established criteria for an annual bonus plan for our executive officers. Accordingly, no bonuses were paid to our executive officers in 2013.
Executive Benefits and Perquisites
Mr. Schaffhauser, like our other employees, qualifies to participate in the Aliante Gaming 401(k) Retirement Plan, as well as group medical, dental, life and disability insurance programs that are offered to employees of Aliante Gaming. Messrs. Kim and Landau do not participate in the aforementioned plans because they are not engaged as employees of the Company or of Aliante Gaming.
Summary Compensation Table
(1) Mr. Kim was appointed as Chief Executive Officer and Secretary of the Company on November 1, 2011. Kim is an employee of Standard General. Mr. Kim’s customary duties include, among other things, serving in management positions with respect to portfolio companies and carrying out customary responsibilities in connection with those roles. Mr. Kim receives compensation as an employee of Standard General and is not separately compensated in connection with services to the Company.
(2) Mr. Landau was appointed as President and Treasurer of the Company on February 6, 2012. Mr. Landau is not employed by the Company and has not received any compensation for serving in the capacity as an executive officer.
(3) Mr. Schaffhauser was hired by Aliante Gaming as Chief Financial Officer on December 27, 2012, and was appointed by the Board of Managers as Chief Financial Officer of the Company and of Aliante Gaming on March 7, 2013.
Grants of Plan-Based Awards Table
We had no non-equity incentive plan as of December 31, 2013 and did not grant any stock or option awards to our Named Executive Officers in 2013 in their capacity as an executive officer.
Outstanding Equity Awards at Fiscal Year-End Table
We had no outstanding equity awards for our Named Executive Officers at December 31, 2013 in their capacity as an executive officer.
Option Exercises and Stock Vested Table
We had no option exercises or stock vest for our Named Executive Officers during the year ended December 31, 2013 in their capacity as an executive officer.
Pension Benefits
We had no defined benefit plan or supplemental executive retirement plan at December 31, 2013.
Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans
We had no nonqualified defined contribution or other nonqualified deferred compensation plans offered to our Named Executive Officers at December 31, 2013.
Employment Agreement
Our wholly-owned subsidiary, Aliante Gaming, entered into an employment agreement with Mr. Schaffhauser, effective December 27, 2012. The initial term of the employment agreement was for one year, which automatically renews on an annual basis unless either party provides the other with notice of non-renewal at least 90 days prior to the expiration of the applicable term. The employment agreement provides for a base salary of $250,000 per year, and a discretionary bonus of up to thirty-five percent (35%) of Mr. Schaffhauser’s base salary. In the event of termination of Mr. Schaffhauser’s employment without cause, or upon the sale of the Company or of Aliante Gaming, or upon the sale of substantially all the assets of Aliante Gaming, Mr. Schaffhauser is entitled to a termination payment equal to the greater of (i) the portion of his base salary for the remainder of the applicable employment term or (ii) three months of the base salary in the event Mr. Schaffhauser is terminated within the last two months of the applicable employment term. The salary termination payment, including the performance bonus, if applicable, would be prorated based upon the number of days of his employment during the year of termination.
We have no agreements or arrangements, written or unwritten, that provide for any payment to Messrs. Kim or Landau at or in connection with any resignation of their positions as executive officers, or a change-in-control with respect to the Company as of December 31, 2013.
Compensation of Directors
The following table discloses the compensation for each member of our Board of Managers for the year ended December 31, 2013.
DIRECTOR COMPENSATION
(a)Soohyung Kim has waived all compensation otherwise due and is not separately compensated in connection with serving on the Board of Managers.
Narrative to Director Compensation Table
In accordance with terms of the Operating Agreement, except with respect to any member of the Board of Managers who is employed by the Company, no member of the Board of Managers is entitled to receive remuneration for services rendered or goods provided to the Company for their services other than customary manager fees established by the Board of Managers. However, the Company shall reimburse the Board of Managers for all reasonable travel and accommodation expenses incurred in connection with meeting of the Board of Managers.
Narrative Disclosure of the Registrant’s Compensation Policies and Practices as They Relate to the Registrants Risk Management
The employees of our wholly-owned subsidiary, Aliante Gaming, are compensated through the compensation programs or policies of Aliante Gaming. We have discussed the compensation program and policies of Aliante Gaming with management and have determined that any risks associated with compensation programs or policies applicable to the employees of Aliante Gaming are not reasonably likely to have a material adverse effect on our Company.
Compensation Committee Interlocks and Insider Participation
We currently do not have a standing compensation committee. The Board of Managers is responsible for considering and determining the compensation related to our executive officers and Board of Managers. The current members of our Board of Managers are Soohyung Kim, Ellis Landau, Eugene I. Davis and Charles Atwood. In addition, Mr. Kim and Mr. Landau are current executive officers of the Company. During 2013, none of our executive officers served as a member of the compensation committee (or other committee serving an equivalent function) of another entity, one of whose executive officers served as a member of our Board of Managers.
Compensation Committee Report
We, as the Board of Managers, have reviewed and discussed with management the Compensation Discussion and Analysis set forth above. Based on this review and discussion with management, the Board of Managers have recommended that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for the year ended December 31, 2013.
Respectfully Submitted,
Soohyung Kim
Ellis Landau
Eugene I. Davis
Charles Atwood
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The following table shows each person who beneficially owned more than 5% of our Common Units as of February 28, 2014.
* Represents holding percentage of less than 1%
(1) The address of North LV Holdco LLC is 767 Fifth Avenue, New York, NY 10153. North LV Holdco LLC is an affiliate of Standard General LP.
(2) The address of North LV Holdco II, LLC is Ellis Landau, c/o ALST Casino Holdco, LLC, 7300 Aliante Parkway, North Las Vegas, NV, 89084. North LV Holdco II, LLC is an affiliate of Apollo Management, L.P.
(3) The address of North LV Holdco III, LLC is Ellis Landau, c/o ALST Casino Holdco, LLC, 7300 Aliante Parkway, North Las Vegas, NV 89084. North LV Holdco III, LLC is an affiliate of TPG Capital L.P.
(4) The address of Halcyon ALST, LLC is 477 Madison Avenue, 8th Floor, New York, NY 10022.
(5) The address of NYBEQ LLC is c/o Natixis, 9 West 57th Street, 15th Floor, New York, NY 10019. NYBEQ LLC is an affiliate of Natixis.
(6) The address of Credit Agricole Leasing (USA) Corporation is 1301 Avenue of the Americas, New York, NY 10019-6022.
(7) The address of Merrill, Lynch, Pierce, Fenner & Smith Inc. is 214 N. Tryon St., NC1-027-15-01, Charlotte, NC 28255, Attn: Information Manager.
(8) The address of such persons is c/o ALST Casino Holdco, LLC, 7300 Aliante Parkway, North Las Vegas, NV, 89084.
(9) Reflects 85,086 of Common Units held by North LV Holdco II, LLC and 85,086 Common Units held by North LV Holdco III, LLC in which Mr. Landau is the sole member and may be deemed to beneficially own, and 120 Common Units held by Mr. Landau directly. The address of Mr. Landau is c/o ALST Casino Holdco, LLC, 7300 Aliante Parkway, North Las Vegas, NV, 89084.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 6, 2011, the Board of Managers approved the 2011 Equity Plan as authorized by the Operating Agreement which provides for a maximum of 43,200 non-voting Incentive Units. On December 6, 2011 the Company issued 500 Incentive Units to Ellis Landau and 250 Incentive Units to Eugene I. Davis. As of December 31, 2013, there were 42,450 Incentive Units available for issuance under the Equity Plan. No Incentive Units, or Common Units, were issued by the Company during 2013 with respect to any compensation plans.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Parties
On November 1, 2011, the Company and Aliante Gaming entered into the Senior Secured Credit Facility with, Wilmington Trust FSB, as administrative agent, and the lenders named therein, which are holders of our Common Units. As discussed in “Item 1. Business - Background” the Senior Secured Credit Facility consists of $45.0 million of Senior Secured Loans. In addition, the Lenders own 100% of our Common Units. Pursuant to the Operating Agreement the Lenders have the right to designate up to four individuals to serve on the Company’s Board of Managers. The members of our Board of Managers that are designated by the Lenders could be deemed to have a material direct or indirect interest in the Senior Secured Credit Agreement by virtue of their relationship with the Lenders. For a further discussion of the Senior Secured Credit Facility see “Item 1A. Risk Factors - We have significant indebtedness”, “Item 1A. Risk Factors - Our indebtedness imposes restrictive covenants on us that will limit our flexibility in operating our business and may adversely affect our ability to compete or engage in favorable business or financing activities.” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources”.
Review, Approval or Ratification of Transactions with Related Parties
Our Code of Ethics requires that the Company obtain the approval of the Board of Managers before entering into any contract or other arrangement on behalf of the Company that constitutes a “related-party” transaction (as defined in Item 404 of Regulation S-K promulgated by the SEC). Such transactions are brought to the attention of the Board of Managers by management or the affected related person. In its review and determination, the Board of Managers considers all relevant facts and circumstances, such as the business interest of the Company in such transaction, the benefits to the Company of the transaction, whether the terms of the transaction are no less favorable than those available with unrelated third parties and the nature of the related party’s interest in such transaction. In addition, the Company’s Operating Agreement requires approval of the Members that hold at least two-thirds of the
outstanding Units at the time, for transactions between the Company, or a subsidiary of the Company, on one hand and any Member or any Affiliate (as defined in the Operating Agreement) of such Member, on the other hand, subject to certain limited exceptions.
Manager Independence
Our Board of Managers is composed of Soohyung Kim, Ellis Landau, Eugene I. Davis and Charles Atwood. Though not formally considered by our Board of Managers because our Common Units are not traded on any national securities exchange, based upon the listing standards of the NYSE, we believe that Mr. Davis and Mr. Atwood would be considered independent as independence is defined in Section 303A.02 of the listing standards of the NYSE. Although we are not subject to the rules promulgated by the NYSE, we have used the independence requirements of the listing standards of the NYSE as a benchmark to determine whether our members of the Board of Managers would be independent. Mr. Kim and Mr. Landau would not be considered independent under the NYSE listing standards due to their positions as executive officers of the Company.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table summarizes the aggregate fees the Company paid or accrued to Ernst & Young LLP (“E&Y”), our independent auditor, during 2013 and 2012:
Audit fees include the aggregate fees paid or accrued for professional services rendered for our annual audit and the quarterly reviews of our financial statements. Audit-related fees include the aggregate fees paid or accrued for assurance and related services that are reasonably related to the performance of the audit or review of financial statements provided in connection with other regulatory or statutory filings including services related to SEC periodic filings. Tax fees include the aggregate fees paid or accrued for professional services rendered for tax compliance, tax advice and tax planning.
The Board of Managers has adopted a policy that requires advance approval of all audit, audit-related, tax and other services performed by the independent auditors. The policy provides for pre-approval by the Board of Managers of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that year, the Board of Managers must approve the permitted service before the independent auditor is engaged to perform it. All of the fees described in the table above were pre-approved by the Board of Managers.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1). Financial Statements.
Financial statements and notes thereto that are included in Part II of this report are listed below:
Page
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2013 and 2012 (Successor)
Statements of Operations for the years ended December 31, 2013 and 2012 (Successor), and the period November 1, 2011 through December 31, 2011(Successor), and the period January 1, 2011 through October 31, 2011 (Predecessor)
Statements of Changes in Members’ Equity (Deficit) for the years ended December 31, 2013 and 2012 (Successor), and the period November 1, 2011 through December 31, 2011 (Successor), the period January 1, 2011 through October 31, 2011(Predecessor)
Statements of Cash Flows for the years ended December 31, 2013 and 2012 (Successor), the period November 1, 2011 through December 31, 2011 (Successor), and the period January 1, 2011 through October 31, 2011 (Predecessor)
Notes to Financial Statements
(a)(2). Financial Statement Schedules.
We have omitted financial statement schedules because they are not required or are not applicable, or the required information is shown in the financial statements or notes to the financial statements.
(a)(3). Exhibits.
Exhibit
Number
Description
2.1
First Amended Prepackaged Joint Chapter 11 Plan of Reorganization for Subsidiary Debtors, Aliante Debtors and Green Valley Ranch Gaming, LLC dated May 20, 2011 with Respect to Subsidiary Debtors and Aliante Debtors. (Incorporated herein by reference to the Company’s Form 10 dated October 24, 2011)
3.1
Articles of Organization of the Company. (Incorporated herein by reference to the Company’s Form 10 dated October 24, 2011)
3.2
Amended and Restated Operating Agreement of ALST Casino Holdco, LLC. (Incorporated herein by reference to the Company’s Form 8-K dated November 4, 2011)
10.1
License Agreement between North Valley Enterprises, LLC and Aliante Gaming, LLC dated January 6, 2006. (Incorporated herein by reference to the Company’s Amendment No. 1 to Form 10 dated October 28, 2011)
10.2
Credit Agreement, dated as of November 1, 2011, by and among Aliante Gaming, LLC, ALST Casino Holdco, LLC, Wilmington Trust, National Association, as administrative agent, and the lenders party thereto. (Incorporated herein by reference to the Company’s Form 8-K dated November 4, 2011)
10.3
Management Agreement, dated as of November 1, 2011, by and between Aliante Gaming, LLC and Station Casinos, LLC. (Incorporated herein by reference to the Company’s Form 8-K dated November 4, 2011)
10.4
License Agreement, dated as of November 1, 2011, by and between ALST Casino Holdco, LLC and Station Casinos, LLC. (Incorporated herein by reference to the Company’s Form 8-K dated November 4, 2011)
10.5
ALST Casino Holdco, LLC 2011 Equity Plan. (Incorporated herein by reference to the Company’s Form 10-K dated March 30, 2012)
10.6
Employment Agreement between Aliante Gaming, LLC and Robert Schaffhauser, dated as of December 27, 2012. (Incorporated herein by reference to the Company’s Form 8-K dated March 13, 2013)
21.1
Subsidiaries of the Registrant.
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase.
101.LAB*
XBRL Taxonomy Extension Label Linkbase.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase.
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Soohyung Kim
Manager, Chief Executive Officer and Secretary
March 25, 2014
Soohyung Kim
(Principal Executive Officer)
/s/ Robert Schaffhauser
Chief Financial Officer (Principal Financial Officer)
March 25, 2014
Robert Schaffhauser
/s/ Ellis Landau
Manager
March 25, 2014
Ellis Landau
/s/ Eugene I. Davis
Manager
March 25, 2014
Eugene I. Davis
/s/ Charles Atwood
Manager
March 25, 2014
Charles Atwood
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members of ALST Casino Holdco, LLC:
We have audited the accompanying consolidated balance sheets of ALST Casino Holdco, LLC and subsidiary (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, changes in member’s equity (deficit), and cash flows for the years ended December 31, 2013 and 2012, the two month period ended December 31, 2011 (Successor), and the ten month period ended October 31, 2011 (Predecessor). 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ALST Casino Holdco, LLC and subsidiary at December 31, 2013 and 2012, and the results of their operations and their cash flows for the years ended December 31, 2013 and 2012, the two month period ended December 31, 2011 (Successor), and the ten month period ended October 31, 2011 (Predecessor), in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the United States Bankruptcy Court for the District of Nevada entered an order confirming the plan of reorganization, which became effective on November 1, 2011. Accordingly, the accompanying financial statements have been prepared in conformity with Accounting Standards Codification 852-10, Reorganizations, for the Successor Company as a new entity with assets, liabilities and a capital structure having carrying amounts not comparable with prior periods.
/s/ Ernst & Young LLP
Las Vegas, Nevada
March 27, 2014
ALST CASINO HOLDCO, LLC
BALANCE SHEETS
(in thousands)
The accompanying notes are an integral part of these condensed financial statements.
ALST CASINO HOLDCO, LLC
STATEMENTS OF OPERATIONS
(in thousands)
The accompanying notes are an integral part of these financial statements.
ALST CASINO HOLDCO, LLC
STATEMENTS OF CHANGES IN MEMBERS’ EQUITY (DEFICIT)
(in thousands)
The accompanying notes are an integral part of these financial statements.
ALST CASINO HOLDCO, LLC
STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these financial statements.
ALST CASINO HOLDCO, LLC
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization
ALST Casino Holdco, LLC (the “Company,” “Successor,” “we,” “us” or “our”), a Delaware limited liability company, was formed on May 11, 2011. We were formed to acquire substantially all of the equity interests of Aliante Gaming, LLC (“Aliante Gaming” or “Predecessor”) pursuant to its joint plan of reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code (the “Bankruptcy Code”). The reorganization was completed on November 1, 2011 (the “Effective Date”), resulting in Aliante Gaming, the owner and operator of the Aliante Casino + Hotel, previously known as Aliante Station Casino + Hotel, located in North Las Vegas, Nevada (the “Casino”), becoming our wholly owned subsidiary.
Prior to the Effective Date, Aliante Gaming was a wholly owned subsidiary of Aliante Holding, LLC (“Aliante Holding”), which was a 50/50 joint venture partnership between Aliante Station, LLC (“Aliante Station”), a wholly owned subsidiary of Station Casinos, Inc. (“Old Station”) and G.C. Aliante, LLC, an affiliate of the Greenspun Corporation.
Background
Aliante Gaming experienced lower than expected operating results as a result of macroeconomic conditions, including the economic downturn in the Las Vegas area and low consumer confidence levels. As a result, Aliante Gaming failed to (i) remain in compliance with certain financial maintenance covenants set forth in its $430.0 million credit facility (the “Previous Facility”) and (ii) make scheduled principal or interest payments under the Previous Facility beginning April 2009.
On April 12, 2011 (the “Petition Date”), Aliante Gaming, together with Aliante Holding and Aliante Station, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code (the “Chapter 11 Case”), in the United States Bankruptcy Court for the District of Nevada, Northern Division (the “Bankruptcy Court”) to preserve their assets and the value of their estates. The Chapter 11 Case was jointly administered with certain subsidiaries of Old Station and Green Valley Ranch Gaming, LLC under the lead case In re Station Casinos, Inc., et. al. originally filed on July 28, 2009 (Jointly Administered Case No. 09-52477). Old Station emerged from Chapter 11 on June 17, 2011 as Station Casinos LLC (“New Station,” and collectively with Old Station, “Station”).
On May 20, 2011, Aliante Gaming, along with Aliante Holding, Aliante Station and certain other affiliates of Old Station, filed with the Bankruptcy Court, an amended joint plan of reorganization (the “Plan”) resulting from negotiations with lenders (the “Lenders”) under the Previous Facility and its International Swaps and Derivatives Association master agreement (the “Swap Agreement”). Under the Plan, Aliante Gaming and the Lenders agreed to enter into a series of restructuring transactions pursuant to which the Lenders received new equity of, and issued new debt to, Aliante Gaming, as reorganized, as of the Effective Date.
On the Effective Date, (i) 100% of the equity interest in Aliante Gaming previously held by Aliante Holding were canceled and ceased to be outstanding, (ii) each Lender received, on account and in full satisfaction of its claims against Aliante Gaming under the Previous Facility and the Swap Agreement, its pro rata share of (a) 100% of the equity interests in Aliante Gaming (the “New Aliante Equity”), which were contributed to the Company in exchange for 432,003 units of our issued and outstanding membership interests (“Common Units”) resulting in the Lenders becoming our “Members” and (b) 100% of $45.0 million in aggregate principal amount of senior secured term loans of Aliante Gaming (the “Senior Secured Loans”) under a new senior secured credit facility (the “Senior Secured Credit Facility”), (iii) the Previous Facility and the Swap Agreement were canceled (clauses (i), (ii) and (iii) referred to herein as the “Restructuring Transactions”) and (iv) each creditor holding an unsecured claim was paid in full. Prior to the Effective Date, we conducted no operations and had no material assets or liabilities.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
References in this Annual Report on Form 10-K to “Successor” refer to the Company on or after November 1, 2011, after giving effect to the Restructuring Transactions and the application of fresh-start reporting. References to “Predecessor” refer to Aliante Gaming prior to November 1, 2011.
On November 1, 2011, the Company adopted fresh-start reporting in accordance with Accounting Standards Codification (“ASC”) Topic 852 Reorganizations (“ASC Topic 852”), which resulted in a new reporting entity for accounting purposes. Fresh-start reporting generally requires resetting the historical net book value of assets and liabilities to their estimated fair values by allocating the entity’s enterprise value to its asset and liabilities as of the Effective Date. Certain fair values differed materially from the historical carrying values recorded on the Predecessor’s balance sheet. As a result of the adoption of fresh-start reporting, the Company’s post-emergence financial statements are prepared on a different basis of accounting than the financial statements of the Predecessor prior to emergence from bankruptcy, including the historical financial statements included herein, and therefore are not comparable in many respects with the Predecessor’s historical financial statements.
Due to the adoption of fresh-start reporting, the financial statements for the Company are required to be presented separately from those of the Predecessor. As a result, the accompanying statements of operations, members’ equity (deficit) and cash flows for the year ended December 31, 2011 are presented for two periods: November 1, 2011 through December 31, 2011 (the “Successor Period”) and January 1, 2011 through October 31, 2011 (the “Predecessor Period”).
Prior to the Effective Date the accompanying financial statements for the Predecessor were prepared in accordance with ASC Topic 852 which provides accounting guidance for financial reporting by entities in reorganization under the Bankruptcy Code. ASC Topic 852 requires that the financial statements for periods subsequent to the Petition Date distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. As a result, revenues, expenses, realized gains and losses, and provisions for losses that were directly associated with the reorganization and restructuring of the Predecessor, including fresh-start adjustments, debt discharge and other effects of the Plan, were reported separately as reorganization items in the statements of operations of the Predecessor. See Note 10 for additional information about reorganization items.
Principles of Consolidation
The accompanying financial statements of the Successor include the Company and its wholly owned subsidiary, Aliante Gaming. All material intercompany transactions are eliminated in consolidation. The accompanying financial statements of the Predecessor represent Aliante Gaming prior to the Effective Date.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Significant estimates include the fair value determination of assets and liabilities in conjunction with fresh-start reporting, the reorganization valuation, the estimated useful lives for depreciable and amortizable assets, the estimated allowance for doubtful accounts receivable and the estimated cash flows in assessing the recoverability of long-lived assets as well as the estimated fair values of certain assets related to write-downs and impairments, contingencies and litigation, and claims and assessments. Actual results may differ from those estimates.
Reclassifications
The consolidated financial statements reflect certain reclassifications to prior year amounts to conform to the classification in the current period. For the year ended December 31, 2012, we reclassified $0.8 million, and for the two month period ended December 31, 2011 and the ten month period ended October 31, 2011, we reclassified $149,000 and $0.7 million, respectively, in expenses included in “Selling, General & Administrative” to expense included in “Other Expenses” as we believe these expenses are more closely associated with the other activities. These reclassifications have no effect on previously reported operating income and net loss.
Fresh-Start Reporting
On November 1, 2011, we adopted fresh-start reporting in accordance with ASC Topic 852. The adoption of fresh-start reporting results in a new reporting entity. Under fresh-start reporting, generally all assets and liabilities are recorded at their fair values and the Predecessor’s accumulated deficit is eliminated. In addition, upon adoption of fresh-start reporting, the Company was required to determine its reorganization value, which represents the fair value of the entity before considering its interest-bearing debt.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, as well as investments purchased with an original maturity of 90 days or less. The Company maintains cash and cash equivalents at financial institutions that are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to $250,000. At times the balances in the accounts exceed the FDIC insured amount. The Company has not experienced any losses in such amounts and believes it is not exposed to any significant credit risk.
Restricted Cash
Restricted cash at December 31, 2012 consisted of collateral for an insurance policy.
Receivables, net and Credit Risk
Receivables, net consist primarily of casino, hotel and other receivables, which are typically non-interest bearing. Receivables are initially recorded at cost, and an allowance for doubtful accounts is maintained to reduce receivables to their carrying amount, which approximates fair value. The allowance is estimated based on a specific review of customer accounts, historical collection experience, the age of the receivable and other relevant factors. Accounts are written off when management deems the account to be
uncollectible, and recoveries of accounts previously written off are recorded when received. Management does not believe that any significant concentrations of credit risk existed as of December 31, 2013.
Inventories
Inventories, which consist primarily of food and beverage items, certain supplies and retail items, are stated at the lower of cost or market, with cost being determined on a weighted-average basis.
Fair Value Measurement
The carrying value of the Company’s cash and cash equivalents, receivables and accounts payable approximates fair value primarily because of the short maturities of these instruments.
Fair value is defined in the authoritative guidance as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value framework requires the categorization of assets and liabilities into three levels based upon assumptions (inputs) used to price the assets and liabilities. Level 1 provides the most reliable measure of fair value, whereas, Level 3 generally requires significant management judgment. The three levels are defined as follows: Level 1: quoted market prices in active markets for identical assets or liabilities; Level 2: observable market-based inputs or unobservable inputs that are corroborated by market data and Level 3: unobservable inputs that are not corroborated by market data. As of December 31, 2013, the Company had no assets or liabilities measured at fair value on a recurring basis.
Property and Equipment
Property and equipment are initially recorded at cost, other than fresh-start reporting adjustments which are recorded at fair value. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or the terms of the capitalized lease, whichever is less, beginning the month after the respective assets are placed in service. Costs of major improvements are capitalized, while costs of normal repairs and maintenance are charged to expense as incurred.
We make estimates and assumptions when accounting for capital expenditures. Whether an expenditure is considered a maintenance expense or a capital asset’s is a matter of judgment. Our depreciation expense is highly dependent on the assumptions made about our assets estimated useful lives. We determine the estimated useful lives based on experience with similar assets, engineering studies and our estimate of the usage of the asset. Whenever events or circumstances occur which change the estimated useful life of an asset, we account for the change prospectively.
Intangible Assets
We account for intangible assets in accordance with ASC Topic 350, Intangibles-Goodwill and Other (“ASC Topic 350”). Our finite-lived intangible assets include trademark, customer relationship and reservation backlog intangibles. Finite-lived intangible assets are amortized over their estimated useful lives which is the period over which the asset is expected to contribute directly or indirectly to future cash flows. Management periodically evaluates the remaining useful lives of these intangible assets to determine whether events and circumstances warrant a revision to the remaining period of amortization. Management reviews our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
Impairment of Long-Lived Assets
We evaluate our long-lived assets including property and equipment, finite-lived intangible assets and other long-lived assets for impairment in accordance with the accounting guidance in the Impairment or Disposal of Long-Lived Assets Subsections of ASC Topic 360-10 Property, Plant and Equipment. Assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We measure recoverability of these assets by comparing the estimated future cash flows of the asset, on an undiscounted basis, to its carrying value. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, impairment is measured based on fair value compared to carrying value, with fair value typically based on a discounted cash flow model or market comparables, when available. For assets to be disposed of, we recognize the asset to be sold at the lower of carrying value or fair value less costs of disposal. Fair value of assets to be disposed of is generally estimated based on comparable asset sales, solicited offers or a discounted cash flow model.
Inherent in the calculation of fair values are various estimates. 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 impairment charges in future accounting periods. Our estimates of cash flows are based on the current regulatory, political and
economic climates, recent operating information and budgets of the Casino. 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 the Casino.
Debt Issuance Costs
Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense over the expected terms of the related debt agreements using the effective-interest method. Debt issuance costs are included in prepaid expenses and other current assets on the accompanying balance sheet. Amortization of debt issuance costs was approximately $75,000 and $75,000 for the years ended December 31, 2013 and 2012, respectively. Amortization of debt issuance costs was approximately $12,000 for the two month period ended December 31, 2011 and $0 for the ten month period ended October 31, 2011.
Base Stock
The initial purchase of china, glassware, silverware, uniforms and certain other operating supplies is capitalized and recorded in base stock and is included in other assets, net on our balance sheets. With the exception of uniforms, which are amortized over a 36-month period, the purchase price of all other base stock items remains in base stock until those items are replaced. Recurring replacement purchases of base stock supplies are expensed as incurred. Major replacements of base stock are capitalized and recorded in base stock and the initial purchase price is expensed.
Related Party Transactions
On the Effective Date, the Company and Aliante Gaming entered into the Senior Secured Credit Facility with the Lenders which own 100% of the Company’s Common Units. In addition, pursuant to the Company’s amended and restated operating agreement (the “Operating Agreement”), the Lenders have the right to designate up to four individuals to serve on the Company’s Board of Managers. The members of the Board of Managers that are designated by the Lenders could be deemed to have a material direct or indirect interest in the Senior Secured Credit Agreement by virtue of their relationship with the Lenders.
Revenues and Promotional Allowances
We recognize, as casino revenues, the net win from gaming activities which is the difference between gaming wins and losses. All other revenues are recognized as the service is provided. Effective November 1, 2012, the Casino implemented its own player loyalty program, the Aliante Players Club, which allows participants to redeem points earned from their gaming activity at the Casino for food, beverages, hotel rooms, movie passes, entertainment tickets or merchandise from the gift shop. Under the player loyalty program, participants may accumulate points over time that can be redeemed at their discretion under the terms of the Aliante Players Club. At the time points are redeemed for complimentaries, the retail value is recorded as revenue with a corresponding offsetting amount included in promotional allowances. Prior to November 1, 2012, the Casino participated in Station’s Boarding Pass player rewards program with similar offerings. Casino revenues are recognized net of discounts and certain incentives provided to customers under the Company’s loyalty programs. The estimated departmental costs of providing such promotional allowances are included in casino costs and expenses on the accompanying statements of operations and consist of the following (in thousands):
We record a liability for the estimated cost of the outstanding points under the player loyalty program that we believe will ultimately be redeemed. The estimated cost of the outstanding points under the player loyalty program is calculated based on the total number of points earned but not yet achieving necessary redemption levels, converted to a redemption value times the average cost. The redemption value is estimated based on the average number of points needed to redeem for rewards. The average cost is the incremental direct departmental cost for which the points are anticipated to be redeemed. When calculating the average cost we use historical point redemption patterns to determine the redemption distribution between gaming, food, beverage, rooms, entertainment and merchandise, as well as estimated breakage. At December 31, 2013 and 2012, $431,398 and $112,128, respectively, was accrued for the cost of anticipated player loyalty program redemptions.
Advertising Costs
We expense advertising costs the first time the advertising takes place. For the years ended December 2013, 2012 and 2011 advertising costs totaled approximately $1.9 million, $1.3 million and $1.5 million, respectively, which are included in selling, general and administrative expenses on the accompanying statements of operations.
Restructuring and Other Charges
Restructuring and other charges represent expenses related to the evaluation of financial and strategic alternatives and primarily include legal, consulting and other professional services associated with the Predecessor’s reorganization efforts prior to the filing of the Chapter 11 Case on the Petition Date, including preparation for the bankruptcy filing.
Reorganization Items
Reorganization items represent amounts incurred after the Petition Date that were directly related to the Restructuring Transactions including the discharge of liabilities subject to compromise and the revaluation of assets and liabilities to fair value in addition to legal and advisory fees incurred. See Note 10 for a discussion of the Predecessor’s reorganization items.
Income Taxes
We are a limited liability company disregarded as an entity separate from its owners for income tax purposes and as such, are a pass-through entity and not liable for income tax in the jurisdiction in which we operate or federal income taxes. As a result, no provision for income taxes has been made in the accompanying financial statements. Each member of the Company includes its respective share of the Company’s taxable income in its income tax return. Due to the Company’s status as a pass-through entity, it has recorded no liability associated with uncertain tax positions.
Recently Issued Accounting Standards
In February 2013, the FASB issued Accounting Standards Update 2013-04, Liabilities (Topic 405)-Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. This amendment provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing accounting guidance. Examples of obligations within this guidance are debt arrangements, other contractual obligations, and settled litigation and judicial rulings. Upon adoption, the guidance is required to be applied retrospectively to all prior periods presented for any obligations that exist at the beginning of an entity’s fiscal year of adoption which are within its scope. This guidance will be effective for the Company for the first quarter of 2014, and early adoption is permitted. The Company will adopt this guidance during the first quarter of 2014, and does not expect the adoption to have a material impact on its financial position and results of operations.
In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-02 amends the impairment test for indefinite-lived intangible assets by allowing companies to first assess the qualitative factors to determine if it is more likely than not that an indefinite-lived intangible asset might be impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The changes are effective prospectively for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, that the implementation of such proposed standards would have on our financial statements.
Note 3. Receivables
Receivables, net consisted of the following (in thousands):
Note 4. Property and Equipment
Property and equipment, net consisted of the following (amounts in thousands):
Note 5. Intangible Assets
Intangible assets, net consisted of the following (amounts in thousands):
Upon the adoption of fresh-start reporting, we recognized $2.6 million in finite-lived intangible assets of which $1.2 million was related to a license to use “ALIANTE” in connection with the Casino, $1.4 million related to the value associated with our rated casino guests and $30,000 related to reservation backlog. Intangible assets are being amortized on a straight-line basis over the respective estimated useful life. The aggregate amortization expense for those assets that are amortized under the provisions of ASC Topic 350 was approximately $174,000 and $198,000 for the years ended December 31, 2013 and December 31, 2012 and the Successor Period, respectively. Estimated annual amortization expense for intangible assets for the years ended December 31, 2014, through 2018 is anticipated to be approximately $0.2 million in each of the respective years.
Note 6. Other Assets, net
Other assets, net consist of the following (in thousands):
Note 7. Long-term Debt
Long-term debt consisted of the following (in thousands):
Senior Secured Credit Facility (Related Party)
On November 1, 2011, the Company and Aliante Gaming entered into the Senior Secured Credit Facility, which provided for $45.0 million in principal amount of Senior Secured Loans, which were deemed made on the same date without any funding being provided. The Senior Secured Credit Facility represented an already outstanding obligation of Aliante Gaming as of November 1, 2011. Through November 1, 2014, the Senior Secured Loans bear interest at a rate to be elected by Aliante Gaming, such rate being either (i) 10% per annum, payable in kind, which interest will be added to the principal amount of the Senior Secured Loans quarterly in arrears and subsequently treated as principal of the Senior Secured Loans, or (ii) 6% per annum, which interest will be payable in cash quarterly in arrears. Following November 1, 2014, the Senior Secured Loans will bear interest at a rate of 6% per annum, which interest will be payable in cash quarterly in arrears. The outstanding principal amount of the Senior Secured Loans and all accrued and unpaid interest thereon will be payable on the maturity date, which shall be the earlier of November 1, 2018 or the acceleration of the Senior Secured Loans in accordance with the terms of the Senior Secured Credit Facility. The Senior Secured Loans may be prepaid in certain minimum amounts without the payment of any prepayment premium or fee. Aliante Gaming has not elected the cash interest payment option and accrued interest has been payable in kind, resulting in $55.7 million and $50.5 million in principal outstanding under the Senior Secured Credit Facility as of December 31, 2013 and December 31, 2012, respectively. There is currently no availability for borrowings under the Senior Secured Credit Facility.
The Senior Secured Credit Facility is guaranteed by the Company and by each domestic wholly owned subsidiary of Aliante Gaming and is secured by a first-priority (a) pledge of 100% of the Company’s equity interest in Aliante Gaming, (b) pledge of 100% of the equity interests in Aliante Gaming’s domestic subsidiaries (if any) and 65% of the equity interests of Aliante Gaming’s “first-tier” foreign subsidiaries (if any) and (c) security interest in substantially all of Aliante Gaming’s tangible and intangible assets, as well as those of each subsidiary guarantor (if any), in each case, other than any assets that may not be pledged pursuant to applicable gaming laws and subject to customary exceptions. The Senior Secured Credit Facility includes various covenants and mandatory prepayments which are customary for similar types of financings and does not contain any financial maintenance covenants.
In establishing the amortization of the debt discount on its Senior Secured Loans in November 2011, the Company expected that it would elect the cash interest payment option beginning in the first quarter of 2013. During the first quarter of 2013, this was subsequently revised to assume cash interest payments would begin during the second quarter of 2013. During the second quarter, the Company further evaluated the date it would commence the cash interest payment option, determining the Company would instead elect to defer the cash interest option until contractually required to do so beginning in November 2014. As a result of this change in the expected method of payment, the Company recorded an adjustment to its accrual during the second quarter of 2013 to increase interest expense by $518,326 using the retrospective approach. Under the retrospective approach, a new effective interest rate is computed to reflect the modified estimated cash flows as if such modified cash flows were known at inception. The carrying amount is adjusted to reflect the amount that would have been presented had the adjusted effective rate have been applied since inception.
Equipment Financing
During 2008, Aliante Gaming entered into an equipment financing arrangement which terminates in November 2014 and is accounted for as a capital lease. The agreement calls for monthly payments of approximately $80,000 with a residual payment of $1.1 million to be paid in November 2014.
Future Debt Maturities
Scheduled maturities of long-term debt are as follows (in thousands):
Fair Value of Debt
It was not practicable to determine the fair market value of our senior secured facility due to the lack of comparable credit facilities and the involvement of our majority shareholder in negotiating the terms and conditions directly with the lender. It is unlikely the Company could obtain similar financing on the same terms with another lender without the involvement and resources of our majority shareholder given our financial condition and history of operating losses. The fair value of our equipment financing and spread assessment debt approximates to fair value.
Note 8. Share-Based Compensation
Common Units
In May 2012, 75 Common Units were issued to Ellis Landau and 56.25 Common Units were issued to Eugene I. Davis representing one-third of their compensation as members of the Board of Managers for the period from November 1, 2011 through March 31, 2012. In July 2012, 45 Common Units were issued to Ellis Landau and 33.75 Common Units were issued to Eugene I. Davis representing one-third of their compensation as members of the Board of Managers for the period from April 1, 2012 through June 30, 2012. The Common Units were fully vested on the date of issuance.
Incentive Units
On December 6, 2011, the Board of Managers approved the 2011 Equity Plan (the “Equity Plan”) as authorized by the Operating Agreement which provides for a maximum of 43,200 non-voting Incentive Units (the “Incentive Units”). The Equity Plan is designed to give select officers, employees, consultants and service providers of the Company, including the members of the Board of Managers, the right to acquire an ownership interest in the Company and an incentive to help grow the business.
In December 2011, 750 Incentive Units were granted to certain members of the Board of Managers with a weighted average grant date fair value of $18.66 which vested in full on December 6, 2012. The Company determined the fair value associated with the Incentive Units taking into account the estimated enterprise value of the Company, an expected term of the Incentive Units of
5.3 years, an expected volatility based on expected volatility of equity instruments of comparable companies of 63% and a risk free rate of 1.03%. Share-based compensation expense for the year ended December 31, 2012 was approximately $25,000. As of December 31, 2012, we had no remaining unearned share-based compensation expense to be recognized.
Note 9. Management Fees
Successor
On November 1, 2011, the Company entered into a management agreement (the “Management Agreement”) with New Station pursuant to which New Station agreed to manage the Casino and provide certain transition services should the Management Agreement be terminated. Under the terms of the Management Agreement, the Company was obligated to pay New Station (i) a monthly base management fee equal to 1% of gross revenues from the Casino, (ii) an annual incentive management fee payable quarterly equal to 7.5% of positive earnings before interest, taxes, depreciation and amortization (“EBITDA”) up to and including $7.5 million and 10% of EBITDA in excess of $7.5 million, and (iii) subject to certain limitations, reimbursement of certain expenses including shared services. Effective November 14, 2011, the Company and New Station agreed to terminate the Management Agreement. Pursuant to the transition services sections of the Management Agreement, New Station continued to operate and manage the Casino through October 31, 2012. Effective November 1, 2012, the Company is no longer obligated to pay management fees to New Station. Management fees incurred by Aliante Gaming totaled approximately $1.5 million and $0.4 million for the year ended December 31, 2012 and the Successor Period, respectively.
Effective November 1, 2012, Aliante Gaming assumed management and established its own internal management team to oversee the operations of the Casino. As a result of the transition away from management by New Station to management by its newly established internal management team, the Company incurred approximately $4.8 million in capital expenditures during the year ended December 31, 2012.
Predecessor (related party)
In connection with Old Station’s emergence from bankruptcy, New Station and the Company entered into a Transition Service Agreement on June 17, 2011, whereby New Station provided the management services previously provided by Aliante Station until the Effective Date. Prior to June 17, 2011, Aliante Station was the managing member of Aliante Gaming and, subject to certain limitations set forth in the credit documentation governing the Previous Facility, generally entitled to receive a management fee for its services of 2% of the Predecessor’s gross revenues (as defined in the Aliante Gaming, LLC Amended and Restated operating agreement) and approximately 5% of EBITDA. As a result of the occurrence of certain events of default under the Previous Facility and certain other developments, the credit documentation governing the Previous Facility did not permit the Predecessor to pay any management fees to Aliante Station; however, the Predecessor continued to accrue the management fee expense. As a result, upon the Effective Date, $3.8 million of accrued but unpaid management fees of the Predecessor were discharged pursuant to the Plan. Management fees incurred by the Predecessor totaled approximately $1.5 million for the Predecessor Period.
In addition, Station provided various other shared services to the Predecessor such as purchasing, human resources, advertising and information technology and allocated the costs of the shared services to the Predecessor. The Predecessor also occasionally bought or sold slot machines and other equipment at net book value from Station. Expenses related to shared services totaled approximately $3.8 million for the Predecessor Period.
Note 10. Reorganization Items (Predecessor)
Reorganization items, net represent amounts incurred after the Petition Date that were directly related to the Restructuring Transactions and were comprised of the following (in thousands):
Professional Fees
Professional fees include legal and advisory fees, among other items, in connection with the Restructuring Transactions and the Chapter 11 Case.
Note 11. Commitments and Contingencies
Sales and Use Tax on Complimentary Meals
In March 2008, in the matter captioned Sparks Nugget, Inc. vs. State ex rel. Department of Taxation, the Nevada Supreme Court ruled that food purchased for use in complimentary meals provided to patrons and employees is not subject to Nevada use tax. The Casino had been claiming this exemption on its sales and use tax returns since operations commenced in November 2008 given the Nevada Supreme Court decision. On June 25, 2013, the Nevada Tax Commission adopted regulations proposed by the Nevada Department of Taxation that as of February 15, 2012, 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 Nevada Department of Taxation had issued guidance delaying the payment of this sales tax until the earlier of (1) approval of the regulation by the Legislative Commission, (2) affirmation by the Nevada Supreme Court, (3) the effective date of relevant legislation or (4) June 30, 2013. The sales tax would have applied to all complimentary food and employee meals on or after February 15, 2012, and accordingly, the Company had accrued a liability in the amount of $400,552 for the estimated amount of sales tax for the period February 15, 2012 through May 31, 2013.
In May 2013, the Nevada Department of Taxation agreed to a global settlement resolving the ongoing litigation surrounding complementary patron and employee meals. Nevada taxpayers that agree to join the settlement will withdraw their refund requests in exchange for (a) the Nevada Department of Taxation agreement that it will make no claim against the taxpayers for sales or use tax due on employee meals and/or complimentary meals provided to patrons for any prior periods and (b) the passage of prospective legislation that clarifies that employee meals and complementary meals are not subject to sales or use tax. The prospective legislation was passed by the Nevada Legislature and signed into law by the Governor on June 13, 2013. The Company joined the aforementioned settlement agreement, and accordingly the Company reversed the accrued liability for sales taxes on complimentary patron and employee meals in 2013.
Legal Matters
The Company is currently a party to litigation arising in the ordinary course of business. As with all litigation, no assurance can be provided as to the outcome, and litigation inherently involves significant costs.
Note 12. 401(k) Plan
Prior to June 3, 2011, all Aliante Gaming employees who met certain age and length of service requirements were eligible to participate in Old Station’s 401(k) plan (the “Old 401K”). Effective June 3, 2011, all assets and liabilities attributable to Aliante Gaming employees were transferred into the newly established Aliante Gaming 401(k) plan (the “New 401K”, collectively with the Old 401K, the “401K Plan”). The 401K Plan provides for discretionary employer contributions up to 50% of the first 4% of each participating employees compensation. During 2011 no employer contributions were made. Effective January 1, 2012, employer contributions of 50% of the first 4% have been reinstated. The Company’s matching contribution was $146,662 and $107,436, respectively for the years ended December 31, 2013 and 2012.
Note 13. Subsequent Events
We have evaluated all activity through the issuance date of the consolidated financial statements, and concluded that no material subsequent events have occurred that require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.
Note 14. Selected Quarterly Financial Data (Unaudited)
Note 15. Member’s Interest and Limitation of Liability
Other than the Incentive Units and the Common Units, the Company has not issued or authorized any other class of Membership Units. Pursuant to the Company’s Operating Agreement and unless otherwise required by any non-waivable provisions of applicable law, the Members of the Company are not personally liable for liabilities of the Company.