ITEM 1. BUSINESS
General
American Casino & Entertainment Properties LLC, or ACEP, was formed in Delaware on December 29, 2003. ACEP owns and operates the Stratosphere Casino Hotel & Tower, or the Stratosphere, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder in Las Vegas, Nevada, and the Aquarius Casino Resort, or the Aquarius, in Laughlin, Nevada.
On January 24, 2008, the Nevada Gaming Commission issued an order of registration of ACEP. The order (1) prohibits W2007/ACEP Managers Voteco, LLC, or Voteco, or its affiliates from selling, assigning, transferring, pledging or otherwise disposing of our membership interests or any other security convertible into or exchangeable for our Class A membership interests, or Class A Interests, or Class B membership interests, or Class B Interests, without the prior approval of the Nevada Gaming Commission, (2) prohibits the direct or indirect members of Voteco from selling, assigning, transferring, pledging or otherwise disposing of any direct or indirect membership interest in Voteco without the prior administrative approval of the Chairman of the Nevada State Gaming Control Board or his designee, and (3) prohibits ACEP from declaring cash dividends or distributions on any class of membership interest of ACEP beneficially owned in whole or in part by W2007/ACEP Holdings, LLC, or Holdings, an affiliate of Whitehall Street Real Estate Funds, or Whitehall, a series of real estate investment funds affiliated with Goldman, Sachs & Co., or Voteco, or their respective affiliates, without the prior approval of the Nevada Gaming Commission.
On February 20, 2008, ACEP, Voteco and Holdings entered into an Amended and Restated Limited Liability Company Agreement of ACEP, or the Amended Operating Agreement.
On February 20, 2008, each member of Voteco, Holdings and Voteco entered into a Transfer Restriction Agreement. The Transfer Restriction Agreement provides, among other things, that:
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Holdings has the right to acquire our Class A Interests from Voteco on each occasion that Class B Interests held by Holdings would be transferred to a proposed purchaser who, in connection with such proposed sale, has obtained all licenses, permits, registrations, authorizations, consents, waivers, orders, findings of suitability or other approvals required to be obtained from, and has made all findings, notices or declarations required to be made with, all gaming authorities under all applicable gaming laws,
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A specific purchase price, as determined in accordance with the Transfer Restriction Agreement, will be paid to acquire the Class A Interests from Voteco, and
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Voteco will not transfer ownership of Class A Interests owned by it except pursuant to such option of Holdings.
Pursuant to the Amended Operating Agreement, holders of Class A Interests are entitled to one vote per interest in all matters to be voted on by our voting members. Except as otherwise expressly required by law, holders of Class B Interests have no right to vote on any matters to be voted on by our members. Holders of Class A Interests and Class B Interests have no preemptive rights, no other rights to subscribe for additional interests, no conversion rights and no redemption rights, do not benefit from any sinking fund, and do not have any preferential rights upon a liquidation.
On July 7, 2015, ACEP, or the Company, and certain of its subsidiaries, or the Guarantors, entered into the 2015 Credit Agreement. Pursuant to the terms of the 2015 Credit Agreement, the Lenders provided the Company with senior secured loan facilities in an aggregate principal amount of $310 million, consisting of $295 million of senior secured term loans, or the 2015 Term Loans, and a $15 million revolving credit facility, or the New Revolving Facility. The proceeds from the 2015 Term Loans were used to redeem the First Lien Term Loans and Second Lien Term Loans.
The 2015 Term Loans bear interest either at a base rate plus 2.75% per annum or at the reserve-adjusted eurodollar rate plus 3.75% per annum. In the case of eurodollar rate loans, interest is computed on the basis of a 360-day year and the actual number of days between interest periods, with interest payable on the last day of each interest period of one month, two months, or three months, or, in the case of interest periods longer than three months, every three months. The 2015 Term Loans are subject to scheduled principal payments on the last day of each calendar quarter in an amount equal to 0.25% of the original principal balance.
On July 3, 2013, ACEP and certain of its subsidiaries, or Guarantors, entered into a First Lien Credit and Guaranty Agreement, or First Lien Credit Agreement. Pursuant to the terms of the First Lien Credit Agreement, the First Lien Lenders provided the
Company with senior secured loan facilities in an aggregate principal amount of $230 million, consisting of $215 million of senior secured term loans, or First Lien Term Loans, and a $15 million senior secured revolving credit facility, or the Revolving Facility (the Revolving Facility together with the First Lien Term Loans, the “First Lien Facilities”).
On July 3, 2013, ACEP and the Guarantors entered into a Second Lien Credit and Guaranty Agreement, or Second Lien Credit Agreement. Pursuant to the terms of the Second Lien Credit Agreement, the Second Lien Lenders provided the Company with secured second lien term loans in the aggregate principal amount of $120 million, or the Second Lien Term Loans. The proceeds from the First Lien Term Loans and Second Lien Term Loans were used to purchase the outstanding 11% Senior Secured Notes due 2014 that were tendered in connection with ACEP's previously announced tender offer and to redeem the remaining outstanding 11% Senior Secured Notes.
On February 24, 2014, we entered into an amendment of the First Lien Credit Agreement. Among other changes, the Amendment reduced the interest rates on the Term Loans by 125 basis points per annum. Interest accrued at our election, (i) at the adjusted eurodollar rate plus 3.50% per annum or (ii) at the Base Rate plus 2.50% per annum. Additionally, the minimum adjusted eurodollar rate was reduced by 25 basis points from 1.25% per annum to 1.00% per annum.
Our executive offices are located at 2000 Las Vegas Boulevard South, Las Vegas, Nevada 89104 and our telephone number is (702) 380-7777.
Cautionary Statement Pursuant to the U.S. Private Securities Litigation Reform Act of 1995
We have included or incorporated by reference in this Annual Report on Form 10-K, and from time to time our management may make, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, among other things, as well as statements about the objectives and effectiveness of our risk management policies, statements about trends in or growth opportunities for our businesses, and statements about our future status, activities or regulation by the Nevada Gaming Commission and the Nevada State Gaming Control Board. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed below and under “Risk Factors” in Part I, Item 1A
Item 1A. RISK FACTORS
The future is uncertain and our history may not be an indicator of our future performance. In the future, we may be unable to generate sufficient cash flows to meet our debt obligations and finance all operating expenses, working capital needs and capital expenditures.
Although we generated operating income of $47.5 million and $33.4 million for the years ended December 31, 2015 and December 31, 2014, respectively, we may experience reduced operating income or incur operating losses in the future. We may be unable to generate sufficient revenues and cash flows to service our debt obligations as they come due, finance capital expenditures and meet our operational needs. Any one of these failures may preclude us from, among other things:
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maintaining or enhancing our properties;
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taking advantage of future opportunities;
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growing our business; or
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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. 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, and servicing the payments on such debt which could adversely affect our results of operations and financial condition. Limited liquidity and working capital may also restrict our ability to maintain and update our casino properties, which could put us at a competitive disadvantage to casinos offering more modern and better maintained facilities.
Our business is particularly sensitive to reductions in discretionary consumer spending as a result of downturns in the economy.
Consumer demand for entertainment and other amenities at casino hotel properties, such as ours, is particularly sensitive to reductions in discretionary spending on leisure activities, including as a result of downturns in the economy. Changes in discretionary consumer spending or consumer preferences brought about by factors such as perceived or actual general economic conditions, effects of a decline in consumer confidence in the economy, unemployment, disruptions in the credit markets, the impact of high energy and food costs, the increased cost of travel, decreased disposable consumer income and wealth, or fears of war or acts of terrorism can reduce customer demand for the amenities that we offer, thus imposing practical limits on pricing and negatively impacting our results of operations and financial condition.
The economic recession that occurred in the United States from 2008 - 2009 significantly affected our business and continues to affect our business and the markets in which we operate. We reduced room rates and engaged in promotional activities to try to attract customers. The combination of fewer customers, less spending by customers, and need for promotional incentives reduced revenue and operating margins. At the same time, we found it difficult to reduce operating costs in line with reductions in visitor numbers or customer spending, further reducing operating margins. Although operating margins have since stabilized, there can be no assurance that these circumstances will not reoccur. As a result of the recession, tourism and the residential and commercial real estate markets in and around Las Vegas experienced a significant decline and construction spending in the Las Vegas area (which has historically been an important driver for the local economy) significantly decreased. The amount of spending by visitors to casinos in Las Vegas has not fully recovered from the 2008-2009 recession. For example, gaming revenue in Clark County, Nevada, where all of our properties are located, was approximately $9.6 billion in 2015, which is 12.1% below the peak of approximately $10.9 billion in 2007. Since our business model relies on consumer expenditures on entertainment, luxury and other discretionary items, continuation or deepening of the economic downturn will further adversely affect our results of operations and financial condition.
Our properties draw a substantial number of customers from the Las Vegas Valley, as well as certain geographic areas, including southern California and Arizona. Adverse economic conditions in any of these regions could result in a decrease in the number of customers traveling from those areas to our properties.
Because all four of our gaming properties are concentrated in a relatively small area in Nevada, we are especially subject to certain risks, including economic and competitive risks, associated with the conditions in that area and in the areas from which we draw customers.
Three of our gaming properties are located in Las Vegas, Nevada, and one of them in Laughlin, Nevada, approximately 90 miles from Las Vegas. Because our operations are concentrated in a relatively small area, we are subject to greater risks from local conditions than a gaming company with operating properties in several different markets. A decrease in revenues from or increase in costs for one of these locations is likely to have a proportionally higher impact on our business and operations than it would for a gaming company with more geographically diverse operating properties. Risks from local conditions include the following:
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local economic conditions, including the economic downturn in the Las Vegas metropolitan area discussed in “ Our business is particularly sensitive to reductions in discretionary consumer spending, including as a result of downturns in the economy;”
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local competitive conditions;
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reduced land and air travel due to increasing fuel costs, reduced flights into Las Vegas, or transportation disruptions;
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inaccessibility of the area due to inclement weather, road construction or closure of primary access routes; and
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a decline in the number of visitors to Las Vegas and Laughlin, Nevada.
Local Competitive Risks. We face significant risks due to local competition in the markets in which we operate and the markets from which we draw our customers. We do not believe that our competition is limited to a particular geographic area, and gaming operations in other states or countries could attract our customers. To the extent that new casinos or hotel room capacity is expanded by others in major destination locations, competition will increase. As a result of the increase in product available to our potential customers and the continuing effects of the recession that occurred in 2008 - 2009, we are competing for a smaller number of potential customers with fewer dollars to spend with a larger number of competitors. Arizona Charlie’s Decatur, Arizona Charlie’s Boulder and the Aquarius largely cater to the local markets and depend on the local markets for customers. Competition for local customers has historically been intense, and is particularly intense in the eastern Las Vegas locals market, where Arizona Charlie’s Boulder is located. Local competitive risks and our failure to attract a sufficient number of guests, gaming customers and other visitors in these locations could adversely affect our business.
Transportation-Related Risks. The majority of our customers at the Stratosphere travel by air or car to Las Vegas. Increasing transportation costs, for example, caused by increased fuel costs, may deter people from traveling to our properties from long distances or decrease the amount of money they have available to spend once there. Further, leisure and business travel, especially travel by air, remain particularly susceptible to global geopolitical events. We cannot control the number or frequency of flights into or out of Las Vegas, but we rely on air traffic for a significant portion of our visitors. Reductions in flights by major airlines can impact the number of visitors to our properties.
Additionally, there is one principal interstate highway between Las Vegas and southern California, where a large number of our customers reside. Capacity constraints of that highway or any other traffic disruptions may also affect the number of customers who visit our properties.
Weather and Public Health Risks. Due to our concentration of properties in Nevada, any man-made or natural disasters in or around Nevada, or the areas from which we draw customers to our properties, could have a significant adverse effect on our business, financial condition and results of operations. The outbreak of public health threats at any of our properties, or in the areas in which they are located, or the perception that such threats exist could also have a significant, adverse effect on our business, financial condition and results of operations.
Our success depends in part on our ability to acquire, enhance, and/or introduce successful gaming concepts and game content.
Our casinos are heavily dependent on revenue generated by the games, particularly slot machines, we offer to our customers. We source games and game content through third-party suppliers. We believe that creative and appealing game content, innovative game concepts, and licensed brands produces more revenue for our casinos and provides them with a competitive advantage, which in turn enhances our revenue and our ability to attract new business and to retain existing business. There can be no assurance that we will be able to sustain the acceptance of our existing game content or effectively obtain from third parties game content or licensed brands that will be widely accepted by our customers. There can be no assurance that our third party suppliers will be able to produce new creative and appealing game content, innovative game concepts, and licensed brands in the future that will be widely accepted by our customers.
Our hotels and casinos may need to increase capital expenditures to compete effectively but we may not execute those plans in a timely manner or have sufficient funds to do so.
Capital expenditures, such as room refurbishments, amenity upgrades and new gaming equipment, may be necessary from time to time to preserve the competitiveness of our hotels and casinos. The gaming industry market is very competitive and is expected to continue to be competitive in the future. If cash from operations is insufficient to provide for needed levels of capital expenditures and we are unable to raise funds for such purposes elsewhere, we may be unable to make necessary improvements and our facilities may be less attractive to our visitors than that of our competitors, causing us to lose our competitive position.
We rely on information technology systems and any failures in our systems could disrupt our business and adversely impact our results.
We rely on information technology systems that are important to the operation of our business, some of which are managed by third parties. These systems are used to process, transmit and store electronic information, to manage and support our business operations and to maintain internal controls over our financial reporting. We could encounter difficulties in developing new systems, maintaining and upgrading current systems and preventing security breaches. Among other things, our systems are susceptible to outages due to fire, floods, power loss, break-ins, cyber-attacks, network penetration, denial of service attacks, and similar events. While we have and will continue to implement network security measures and data protection safeguards, our servers and other computer systems are vulnerable to viruses, malicious software, hacking, break-ins or theft, data privacy or security breaches, third-party security breaches, employee error or malfeasance, and similar events. Failures in our systems or services or unauthorized access to or tampering with our systems and databases, could have a material adverse effect on our business, reputation, financial condition, liquidity or results of operations. Any failures in our computer systems or telecommunications services could affect our ability to operate our linked games or otherwise conduct business.
Portions of our information technology infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could be more expensive, time consuming, disruptive and resource-intensive than existing systems or cause business disruptions. Such disruptions could materially and adversely impact our ability to provide services to customers and interrupt other processes. If our information systems do not allow us to transmit accurate information, even for a short period of time, to key decision makers, the ability to manage our business could be disrupted and the results of operations and financial condition could be materially and adversely affected. Failure to properly or adequately address these issues could impact our ability to perform necessary business operations, which could materially and adversely affect our reputation, competitive position, business, results of operations and financial condition.
Conditions in the financial system and the capital and credit markets may negatively affect our ability to raise capital to fund capital expenditures, pursue proposed management, expansion or acquisition opportunities or refinance our significant indebtedness.
Our businesses are capital intensive. For our casino properties to remain attractive and competitive we must periodically invest significant capital to keep the properties well-maintained, modernized and refurbished. Similarly, future construction projects and acquisitions of other gaming operations could require significant additional capital. We rely on earnings and cash flow from operations to finance our business, capital expenditures, development, expansion and acquisitions and, to the extent that we cannot fund such expenditures from cash generated by operations, funds must be borrowed or otherwise obtained.
The financial markets in the United States and internationally have been marked by volatility, which has at times reduced the availability and, in particular, increased the cost of financing for issuers like us with a rating below investment grade. Although we have refinanced our debt, lowered our interest rate, and extended the maturity, we cannot predict the availability of financing with any certainty or how we will be impacted in the future. There can be no assurance that we will be able to secure financing in the future at all or at a cost comparable to or lower than what is available in the current credit markets or on favorable terms.
Our ability to effectively operate and grow our business may be constrained if we are unable to borrow additional capital or refinance existing borrowings on reasonable terms. If we do not have access to credit or capital markets at desirable times or at rates that we would consider acceptable, and the lack of such funding could have a material adverse effect on our business, results of operations and financial condition and our ability to service our indebtedness.
Our operations may be adversely impacted by expanded Native American, internet, mobile, and other gaming operations if they attract customers that otherwise would visit our properties.
The expansion of Native American and other casinos outside of the markets in which our casinos are located, particularly Native American casinos located in California, continues to have an impact on casino revenues in Nevada. For instance, in California, some Native American casino compacts do not limit the number of slot machines at those casinos (which were limited under prior compacts). Additionally, the federal government and various states are currently considering legislation authorizing internet gaming. While the effect of increased casino gaming in California and other states and the potential widespread availability of legal internet gaming is difficult to predict, our revenues could decline if such competing gaming operations attract customers who would otherwise travel to Las Vegas or Laughlin or otherwise use our facilities, and such impact may be significant.
We have significant working capital needs, and if we are unable to satisfy those needs from cash generated from our operations or indebtedness, we may not be able to meet our obligations, including payroll and statutory tax payment requirements.
We require significant amounts of working capital to operate our business. Our primary source of cash is from the operation of our properties. If we experience a significant and sustained drop in operating profits, or if there are unanticipated reductions in cash inflows or increases in cash outlays, we may be subject to cash shortfalls. If such a shortfall were to occur for even a brief period of time, it may have a significant adverse effect on our business and our ability to meet our obligation to make payments on the 2015 Term Loans.
Acts of terrorism and war and natural disasters may negatively impact our business.
Terrorist attacks and other acts of war or hostility have created many economic and political uncertainties. We cannot predict the extent to which terrorism, security alerts or war or hostilities throughout the world will continue to directly or indirectly impact our business and operating results. For example, the terrorist attacks that occurred on September 11, 2001 had a negative impact on travel and leisure expenditures at our properties and on the industry as a whole. As a consequence of the threat of terrorist attacks and other acts of war or hostility in the future, premiums for a variety of insurance products have increased, and some types of insurance are no longer available. Given current conditions in the global insurance markets, we are substantially uninsured for losses and interruptions caused by terrorist acts and acts of war. If any such event were to affect our properties, we would likely be adversely impacted.
Extreme weather conditions or earthquakes may interrupt our operations, damage our properties, and reduce the number of customers who visit our facilities in such areas. Although we maintain both property and business interruption insurance coverage for certain extreme weather conditions or earthquakes, such coverage is subject to deductibles and limits on maximum benefits, including limitation on the coverage period for business interruption, and we cannot assure you that we will be able to fully insure such losses or fully collect, if at all, on claims resulting from such extreme weather conditions or earthquakes. Furthermore, such extreme weather conditions may interrupt or impede access to our affected properties and may cause visits to our affected properties to decrease for an indefinite period.
Changes in tax laws could increase our cost of doing business and negatively affect our business.
The gaming industry represents a significant source of tax revenue, particularly to the State of Nevada and its counties and municipalities. Nevada Gaming companies are currently subject to significant state and local taxes and fees in addition to normal federal and state corporate income taxes, and such taxes and fees are subject to increase at any time. From time to time, various state and federal legislators and officials have proposed changes in tax law, or in the administration of such law, affecting the gaming industry. The Regular Session of the Nevada Legislature (‘‘Nevada Legislature’’) convenes every two years. From time to time, there have been gaming revenue tax increase proposals in Nevada. The Nevada Legislature also approved an increase from 1.17% to 1.475% in the Modified Business Tax that is charged against employee wages, which has increased our labor costs. During the 2013 Nevada Legislature session, legislators considered a 2% Gross Margins Tax on businesses operating in Nevada. The initiative was included on the 2014 general election ballot and was defeated. The 2015 Nevada Legislature passed a budget plan that includes new and extended taxes. This budget includes increasing the business license fee on certain companies based on their revenues. Gaming companies will be required to pay the business license fee based on non-gaming revenues. The Nevada Constitution prohibits both personal and corporate state income taxes. We cannot assure you that our taxes or fees will not be increased. These taxes could have an adverse impact upon our business, financial condition and results of operations because of increased costs to us or our customers.
The federal government has also previously considered a federal tax on gaming revenues and may consider such a tax in the future. Decreases in tax revenues resulting from the economic downturn may increase pressure on federal, state or local authorities to increase taxes. If there is any material increase in federal, state or local taxes and fees, our business, financial condition and results of operations could be adversely affected because of increased costs to us or our customers.
Our business is subject to extensive governmental gaming regulation, which is costly to comply with, and failure to do so could cause us to incur penalties or force us to cease operations.
We are subject to a variety of regulations in the jurisdictions in which we operate, including the extensive gaming laws and regulations of the State of Nevada. Compliance with these regulations is costly and time-consuming. Regulatory authorities at the federal, state and local levels have broad powers with respect to the regulation and licensing of casino operations and may revoke, suspend, condition or limit our gaming or other licenses, impose substantial fines on us and take other actions, any one of which would have a significant adverse effect on our business, financial condition and results of operations.
If additional gaming regulations are adopted in a jurisdiction in which we operate, such regulations could impose restrictions on us that would prevent us from operating our business as it is currently operated, or the increased costs associated with compliance with such regulations could lower our profitability. From time to time, various proposals are introduced in the legislatures of the jurisdictions in which we have operations that, if enacted, could adversely affect the tax, regulatory, operational or other aspects of the gaming industry and our company. Legislation of this type may be enacted in the future.
Our members, managers, directors, officers and key employees must also be approved by certain state regulatory authorities. If state regulatory authorities were to find a person occupying any such position unsuitable, we would be required to sever our relationship with that person. We may thereby lose key personnel which would have a negative effect on our operations. Certain public and private issuances of securities and certain other transactions by us also require the approval of certain state regulatory authorities. Further, our gaming regulators can require us to disassociate ourselves from suppliers or business partners found unsuitable by the regulators. For a summary of some of the significant gaming regulations that affect our business, see ‘‘Regulation and Licensing.” The regulatory environment in any particular jurisdiction may change in the future and any such change could have a material adverse effect on our results of operations. In addition, we are subject to various gaming taxes, which are subject to increase at any time.
Our business is subject to various federal, state and local laws and regulations in addition to gaming regulations. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, environmental matters, employees, currency transactions, taxation, zoning and building codes, and marketing and advertising. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted. Material changes, new laws or regulations, or material differences in interpretations by courts or governmental authorities could adversely affect our operations.
If we lose one or more licenses used in our business or our operations or are otherwise restrained by law or regulation, we may be unable to continue our operations as they are conducted today, or may be forced to cease operations.
Any violation of applicable Anti-Money Laundering laws or regulations or the Foreign Corrupt Practices Act could adversely affect our business, performance, prospects, value, financial condition, and results of operations.
We handle significant amounts of cash in our operations and are subject to various reporting and anti-money laundering laws and regulations. Recently, U.S. governmental authorities have evidenced an increased focus on compliance with anti-money laundering laws and regulations in the gaming industry. Any violation of anti-money laundering laws or regulations could adversely affect our business, results of operations and financial condition. We have implemented internal control policies, employee training and compliance programs designed to deter prohibited practices and have not been subject to any investigation or notified of any violation.
Internal control policies and procedures and employee training and compliance programs that we have implemented to deter prohibited practices may not be effective in prohibiting our employees, contractors or agents from violating or circumventing our policies and the law. If we or our employees or agents fail to comply with applicable laws or Company policies governing our operations, we may face investigations, prosecutions and other legal proceedings and actions which could result in civil penalties, administrative remedies and criminal sanctions. Any such government investigations, prosecutions or other legal proceedings or actions could adversely affect our business, results of operations and financial condition.
Increasing prices or shortages of energy and water may increase our cost of operations or force us to temporarily or permanently cease operations.
Our properties use significant amounts of water, electricity, natural gas and other forms of energy. Our properties are located in a desert where water is scarce and the hot temperatures require heavy use of air conditioning. While we have not experienced any shortages of energy or water in the past, we cannot guarantee you that we will not in the future. Other states have suffered from electricity shortages. For example, California and Texas have experienced rolling blackouts due to excessive air conditioner use because of unexpectedly high temperatures in the past. We expect that potable water will become an increasingly scarce commodity in the areas in which we operate at an increasing price.
Further, the increasing cost of energy and water will increase our costs of operations, thereby likely lowering our net cash flows. In addition, energy price increases in the regions that provide a significant source of customers for our properties could result in a decline of disposable income of potential customers and a corresponding decrease in visitation and spending at our properties, which could negatively impact revenues.
Work stoppages, labor problems and unexpected shutdowns may limit our operational flexibility and negatively impact our future profits.
Approximately 1,600 of our 4,300 employees are covered by collective bargaining agreements. Any work stoppage at one or more of our casino properties could require us to expend significant funds to hire replacement workers, and qualified replacement labor may not be available at reasonable costs, if at all. Strikes and work stoppages could also result in adverse media attention or otherwise discourage customers from visiting our casino properties. As a result, a strike or other work stoppage at one of our casino properties could have an adverse effect on the business of our casino properties and our financial condition and results of operations.
At the Stratosphere, our collective bargaining agreement with the Professional, Clerical and Miscellaneous Employees, Teamsters Local Union 986 (995 merged with 986 in 2014 ) expires on March 31, 2018. The collective bargaining agreement at the Stratosphere with the Culinary Workers Union, Local 226 and Bartenders Union, Local 165 expires on May 31, 2018. The contract with the International Union of Operating Engineers, Local 501, AFL-CIO was canceled by the union effective December 1, 2015, however negotiations continue.
At the Aquarius, the collective bargaining agreement with the International Union of Operating Engineers, Local 501, AFL-CIO expires on March 31, 2016. The agreement at the Aquarius with the International Alliance of Theatrical Stage Employees, Moving Picture Technicians, Artist and Allied Crafts of the United States, Its Territories and Canada, Local 720, Las Vegas, Nevada expires on November 30, 2017. The collective bargaining agreement at the Aquarius with the United Steelworkers of America expired on April 1, 2013, however, the agreement is considered extended indefinitely unless we are notified in writing. We have not been notified in writing. The agreement with the Security, Police, and Fire Professional of America expires on February 28, 2017
We do not expect any work stoppages or slowdowns. Any unexpected shutdown of one of our casino properties could have an adverse effect on the business of our casino properties and our results of operations. There can be no assurance that we will be adequately prepared for unexpected events, including political or regulatory actions, which may lead to a temporary or permanent shutdown of any of our casino properties.
From time to time, we are a defendant in a variety of litigation and other adversarial proceedings, which are costly to defend, divert management’s attention from our operations and may cause us to pay damages if we are unsuccessful in defending against the actions or unable to cover damages with insurance proceeds.
We are involved, from time to time, in a variety of litigation arising out of our business. We carry insurance to cover most business risks, but there can be no assurance that the insurance coverage we have will cover all claims that may be asserted against us. Should any ultimate judgments or settlements not be covered by insurance or exceed our insurance coverage, such uncovered losses could increase our costs and thereby lower our profitability. There can also be no assurance that we will be able to obtain appropriate and sufficient types or levels of insurance in the future or that those adequate replacement policies will be available on acceptable terms, if at all.
We are subject to a wide variety of environmental laws and potential exposure to environmental liabilities.
We are subject to various federal, state and local laws, ordinances and regulations that govern activities or operations that may have adverse environmental effects, such as discharges to air and water or may impose liability for the costs of cleaning up and certain damages resulting from sites of spills, disposals or other releases of hazardous or toxic substances or wastes. These laws and regulations are complex, and subject to change, and violations can lead to significant fines and penalties. Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating contamination on its property, without regard to whether the owner or operator knew of, or caused, the presence of the contaminants, and regardless of whether the practices that resulted in the contamination were legal at the time that they occurred. We endeavor to maintain compliance with environmental laws, but from time to time, current or historical operations on or adjacent to, our property may have resulted or may result in noncompliance with environmental laws or liability for cleanup pursuant to environmental laws. In that regard, we may incur costs for cleaning up contamination relating to historical uses of certain of our properties.
We may incur property and other losses that are not adequately covered by insurance, which may harm our results of operations.
Although we maintain insurance that our management believes is customary and appropriate for our business, we cannot assure you that insurance will be available or adequate to cover all loss and damage to which our business or our assets might be subjected. The lack of adequate insurance for certain types or levels of risk could expose us to significant losses in the event that a catastrophe occurred for which we are underinsured. Any losses we incur that are not adequately covered by insurance may decrease our future operating income, require us to find replacements or repairs for destroyed property and reduce the funds available for payments of our obligations, including the notes.
Claims that we infringe upon third parties’ intellectual property rights could be costly to defend or settle, and thus could reduce our income or increase our net loss.
We may from time to time encounter disputes over rights and obligations concerning intellectual property. Third parties may bring claims of infringement against us. Such claims may be with or without merit. Any litigation to defend against claims of infringement or invalidity could result in substantial costs and diversion of resources. Furthermore, a party making such a claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from operating our websites. Our business, operating results and financial condition could be harmed should we face challenges to our intellectual property.
Our revenues may be negatively impacted by volatility in our hold percentage.
Casino revenue is recorded as the difference between gaming wins and losses or net win from gaming activities. Net win is impacted by variations in the hold percentage (the ratio of net win to total amount wagered), or actual outcome, on our slot machines, table games, race and sports betting, and all other games we provide to our customers. We use the hold percentage as an indicator of a game’s performance against its expected outcome. Although each game generally performs within a defined statistical range of outcomes, actual outcomes may vary for any given period. The hold percentage and actual outcome on our games can be impacted by the level of a customer’s skill in a given game, errors made by our employees, the number of games played, faults within the computer programs that operate our slot machines and the random nature of slot machine payouts. If our games perform below their expected range of outcomes, our cash flow may suffer.
We face the risk of fraud or cheating.
Gaming customers may attempt or commit fraud or otherwise cheat in order to increase their winnings. Acts of fraud or cheating could involve the use of counterfeit chips or other tactics and could include collusion with our employees. Internal acts of cheating could also be conducted by employees through collusion with dealers, surveillance staff, floor managers or other casino or gaming area staff. Failure to discover such acts or schemes in a timely manner could result in losses in our gaming operations. In addition, negative publicity related to such schemes could have an adverse effect on our reputation, thereby adversely affecting our business, financial condition, plan of operations and cash flows.
The loss of management and other key personnel could significantly harm our business, and the quality of individuals hired for positions in the hotel and gaming operations will be critical to the success of our business.
Our ability to maintain our competitive position depends to a large degree on the efforts and skills of our senior management team. It may also be difficult to attract, retain and train qualified employees due to the competition for employees with other gaming companies and their facilities in Nevada. We may not be successful in retaining our current personnel or in hiring or retaining qualified personnel in the future. If we lose the services of any members of our management team, or fail to attract or retain qualified management and personnel at all levels, our business may be significantly disrupted and impaired.
A smoking ban in the jurisdictions in which we operate could have a negative impact on our business and operations.
From time to time, individual jurisdictions have considered legislation or referendums, such as bans on smoking in casinos and other entertainment and dining facilities. Such bans have been implemented in jurisdictions in which gaming facilities are located (such as in California and Atlantic City) and such bans have had a negative impact on business and operations. If such bans were implemented in the markets in which we operate, such a ban could adversely impact our business and operations.
We will regularly pursue new gaming acquisition and management opportunities and may not be able to recover our investment or successfully expand to additional locations.
We will regularly evaluate and pursue new gaming acquisition and management opportunities in existing and emerging jurisdictions. These opportunities may take the form of joint ventures.
To the extent that we decide to pursue any new gaming acquisition or management opportunities, our ability to benefit from such investments will depend upon a number of factors including:
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our ability to identify and acquire attractive acquisition opportunities and management sites;
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our ability to secure required federal, state and local licenses, permits and approvals, which in some jurisdictions are limited in number;
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certain political factors, such as local support or opposition to development of new gaming facilities or legalizing casino gaming in designated areas;
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the availability of adequate financing on acceptable terms (including waivers of restrictions in existing credit arrangements); and
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our ability to identify and develop satisfactory relationships with joint venture partners.
Most of these factors are beyond our control. Therefore, we cannot be sure that we will be able to recover our investment in any new gaming management opportunities or acquired facilities, or successfully expand to additional locations.
We are controlled by officers of Goldman Sachs and the general partners of Whitehall, and the interests of Goldman Sachs, Whitehall and their affiliates may not be aligned with ours.
All of the Class A voting membership interests of ACEP are held by Voteco, the members of which are comprised of current managing directors of Goldman Sachs. As such, the members of Voteco have the power to control our affairs and policies and to control the election of our board of directors, the appointment of management, the entering into of mergers, sales of substantially all of our assets and other extraordinary transactions.
Goldman Sachs, Whitehall and their affiliates are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us, as well as businesses that represent major customers of our businesses. Goldman Sachs, Whitehall and their affiliates may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. Goldman Sachs has agreed with the Nevada gaming authorities not to take any action to influence the members of Voteco in the exercise of their management or voting rights in respect of our gaming operations, and that the exercise of any such rights shall be made by the members of Voteco independently and without consultation with Goldman Sachs. However, since the members of Voteco are also officers of Goldman Sachs and the general partners of Whitehall, it should be expected that the members of Voteco will act in what they independently perceive to be the best interests of Goldman Sachs, Whitehall and their affiliates and that the interests of Goldman Sachs, Whitehall and their affiliates will dictate or strongly influence their decision making.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved written comments that were received from the Securities and Exchange Commission staff 180 days or more before the end of our last fiscal year relating to our periodic or current reports under the Securities Exchange Act of 1934, or the Exchange Act.
ITEM 2.
ITEM 2. PROPERTIES
Please also see the discussion of our properties contained in this annual report on Form 10-K under the caption “Item 1. Business - Our Gaming and Entertainment Properties.”
Stratosphere
The Stratosphere is located at 2000 Las Vegas Boulevard South, Las Vegas, Nevada on approximately 34 acres owned by us.
Arizona Charlie’s Decatur
Arizona Charlie’s Decatur is located at 740 South Decatur Boulevard, Las Vegas, Nevada on approximately 17 acres owned by us. In addition, Arizona Charlie’s Decatur leases office, storage and laundry space located in an adjacent shopping center.
Arizona Charlie’s Boulder
Arizona Charlie’s Boulder is located at 4575 Boulder Highway, Las Vegas, Nevada on approximately 24 acres owned by us.
Aquarius Casino Resort
Aquarius Casino Resort is located at 1900 South Casino Drive, Laughlin, Nevada on approximately 18 acres owned by us.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are, from time to time, parties to various legal proceedings arising out of our businesses. We believe, however, that there are no proceedings pending or threatened against us, which, if determined adversely, would have a material, adverse effect upon our business, financial condition, results of operations, or liquidity.
ITEM 4.
ITEM 4. RESERVED
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Price of and Dividends on the Registrant’s Common Equity and Related Member Matters
As of December 31, 2015, there was no public market for our common equity.
No established public trading market exists for our equity securities. There are no plans, proposals, arrangements or understandings with any person with regard to the development of a trading market in any of our equity securities.
There are no warrants to purchase, or securities convertible into, our common equity. All of our membership interests are subject to sale pursuant to Rule 144 under the Securities Act, subject to the limitations set forth therein. We have not agreed with any security holder to register any of our common equity for sale by any security holder. None of our common equity is being, or has been publicly proposed to be, publicly offered by us.
We have one holder of record of our Class A Interests and one holder of record of our Class B Interests.
We do not pay, and do not anticipate paying, any dividends or making any distributions on our common equity. The 2015 Credit Agreement restricts us from the payment of dividends and distributions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7 in the “Notes to Consolidated Financial Statements.”
On March 26, 2014 our Board of Directors approved the W2007/ACEP Holdings, LLC 2013 Management Incentive Plan that allows for the issuance of securities to our employees.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth the total shares of our Class B Interests authorized and issued (or to be issued) under our equity compensation plans as of December 31, 2015:
Description of Registrant’s Securities to be Registered
General
Reference is made to information set forth in “Item - 1 Business - General”, which information is incorporated herein by reference.
We executed the Amended Operating Agreement, which created two classes of membership interests, the Class A Interests and the Class B Interests. At the closing of the Acquisition, Class A Interests and Class B Interests were outstanding. We issued Class A Interests to Voteco and Class B Interests to Holdings on a pro rata basis in proportion to the equity contributions made by each entity. The Class A Interests are the only class of our equity securities registered pursuant to a registration statement.
Class A Interests and Class B Interests
Pursuant to the Amended Operating Agreement, holders of Class A Interests are entitled to one vote per interest on all matters to be voted on by the members of our company and are not entitled to cumulative voting for the election of directors. Except as otherwise expressly required by law, holders of Class B Interests have no right to vote on any matters to be voted on by our members. Holders of Class A Interests and Class B Interests have no preemptive rights, no other rights to subscribe for additional interests of our company, no conversion rights and no redemption rights, do not benefit from any sinking fund and do not have any preferential rights upon a liquidation. Holders of Class A Interests and Class B Interests are entitled to share ratably in cash dividends or other distributions when, as and if distributed by us, as provided in our Amended Operating Agreement.
No securities issued by us and no interest, claim or charge therein or thereto may be transferred, except in accordance with the provisions of the Nevada Gaming Control Act and the regulations promulgated thereunder. Any transfer in violation thereof is void until we cease to be subject to the jurisdiction of the Nevada Gaming Commission or the Nevada Gaming Commission approves the transfer.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain of our selected historical consolidated financial data (see Note 1 “Notes To Consolidated Financial Statements”), which you should read in conjunction with the consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this annual report on Form 10-K.
The selected historical consolidated financial data as of December 31, 2015, 2014, 2013, 2012 and 2011, and the years ended December 31, 2015, 2014, 2013, 2012 and 2011; each has been derived from our audited consolidated financial statements at those dates and for those periods.
(1)
ACEP is a disregarded entity for federal and state tax purposes and all the tax on its income is borne by its members. ACEP does not record a provision for taxes on its consolidated statements of operations.
Consolidated Balance Sheet ($ in thousands)
(1)
Total debt, including current portion, consists of the current and long-term portions of capital lease obligations and notes payable less unamortized discount and debt issuance costs.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
With the exception of historical facts, the matters discussed in this annual report on Form 10-K are forward looking statements. Forward-looking statements may relate to, among other things, future actions, future performance generally, business development activities, future capital expenditures, strategies, the outcome of contingencies such as legal proceedings, future financial results, financing sources and availability and the effects of regulation and competition. Also, please see Risk Factors in Item 1A of this annual report on Form 10-K. When we use the words “believe,” “intend,” “expect,” “may,” “will,” “should,” “anticipate,” “could,” “estimate,” “plan,” “predict,” “project,” or their negatives, or other similar expressions, the statements which include those words are usually forward-looking statements. When we describe strategy that involves risks or uncertainties, we are making forward-looking statements.
These forward-looking statements are based on the current plans and expectations of our management and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. These factors include, but are not limited to: the size of our indebtedness, our indebtedness' effect on our business, the adverse effect of government regulation and other matters affecting the gaming industry, increased operating costs of our properties, increased competition in the gaming industry, adverse effects of economic downturns and terrorism, our failure to make necessary capital expenditures, increased costs associated with our growth strategy, the loss of key personnel, risks associated with geographical market concentration, our failure to satisfy our working capital needs from operations or our indebtedness, our inability to raise additional money, our dependence on water, energy and technology services, adverse effects of increasing energy costs, and the availability of and costs associated with potential sources of financing.
You should also read, among other things, the risks and uncertainties described in the section entitled Risk Factors in Item 1A of this annual report on Form 10-K.
We warn you that forward-looking statements are only predictions. Actual events or results may differ as a result of risks that we face. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update them.
The following discussion contains management’s discussion and analysis of financial condition and results of operations. Management’s discussion and analysis should be read in conjunction with, and is qualified in its entirety by reference to, our audited financial statements and related notes.
Overview
We own and operate four gaming and entertainment properties in Clark County, Nevada. The four properties are:
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the Stratosphere Casino Hotel & Tower, which is located on the Las Vegas Strip and caters to visitors to Las Vegas;
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two off-Strip casinos, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder, which cater primarily to residents of Las Vegas and the surrounding communities; and
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the Aquarius Casino Resort in Laughlin, Nevada, which caters to visitors to and residents of Laughlin and Northwest Arizona.
We believe that the Stratosphere is one of the most recognizable landmarks in Las Vegas, our two Arizona Charlie’s properties are well-known casinos in their respective marketplaces and the Aquarius is the largest hotel by number of rooms in Laughlin.
We currently offer gaming, hotel, dining, entertainment, retail and other amenities at our properties. We use certain key measurements to evaluate operating revenues. Casino revenue measurements include “table games drop” and “slot coin in”, which are measures of the total amounts wagered by customers. Win or hold percentage represents the percentage of table games drop or slot coin in that is won by the casino and recorded as casino revenues. Hotel revenue measurements include hotel occupancy rate, which is the average percentage of available hotel rooms occupied during a period, and average daily room rate or ADR, which is total hotel revenue divided by occupied rooms. Food and beverage revenue measurements include number of covers, which is the number of guests served, and the average check amount per guest.
Our operating results greatly depend on the volume of customers at our properties, which in turn affects our gaming revenues and the price we can charge for our non-gaming amenities. A substantial portion of our revenue is generated from our gaming operations; especially slot play (including video poker). Approximately 51.1% of our gross revenue in 2015 was generated from our gaming operations. Hotel and food and beverage sales generated similar percentages of our gross revenue during fiscal year 2015, with hotel sales representing 20.7% and food and beverage sales representing 19.6%. The majority of our revenue is cash-based through customers wagering with cash or paying for non-gaming amenities with cash or credit card.
Our expenses also depend on the volume of customers at our properties. The volume of customers that visit our properties directly affects our labor expenses, which represented approximately 51.4% of our expenses during fiscal year 2015, and the amount we spend on marketing, which represented approximately 3.5% of our expenses during fiscal year 2015. However, we incur a significant amount of costs that do not vary directly with changes in the volume of customers. As a result, it is difficult to reduce costs to match reductions in demand, which can result in reduced operating margins. Because our business is capital intensive, we rely heavily on the ability of our properties to generate operating cash flow to repay debt financing, fund maintenance and capital expenditures and provide excess cash for future development.
The Las Vegas and Laughlin Markets
All of our properties are located in the Las Vegas and Laughlin, Nevada markets. Accordingly, our results of operations are driven by economic conditions in these markets.
Las Vegas is one of the largest entertainment markets in the country. We believe that Las Vegas hotel occupancy rates are among the highest of any major market in the United States. We believe that the Las Vegas gaming market has two distinct sub-segments: the destination market, which tends to be concentrated on the Las Vegas Strip and Downtown Las Vegas, and the local market, which includes the surrounding Las Vegas area.
According to the Las Vegas Convention and Visitors Authority, or LVCVA, the number of visitors traveling to Las Vegas has increased over the last ten years from 38.6 million visitors in 2005 to 42.3 million visitors in 2015. The number of hotel and motel rooms in Las Vegas has increased from 133,186 at the end of 2005 to 149,213 at the end of 2015, giving Las Vegas the most hotel and motel rooms of any metropolitan area in the world. Despite this significant increase in the supply of rooms, the Las Vegas hotel average monthly occupancy rate exceeded 80% for each of the years from 2005 through 2015. Hotel occupancy increased 0.7 percentage points to 89.8% for 2015 compared to 89.1% in 2014, which is below the peak of 94.0% in 2007. Las Vegas tourism increased according to the LVCVA as visitor volume increased 2.9% in 2015 compared to 2014. The hotel ADR increased by 2.7% in 2015 compared to 2014.
Las Vegas Strip gaming revenues have grown as Las Vegas visitations and hotel room counts have grown. Between 2005 and 2015, gaming revenues on the Las Vegas Strip experienced a compound annual growth of 0.5%; however gaming revenues for
2015 totaled approximately $6.3 billion, a 0.4% decrease from 2014. A decline in baccarat play, which is favored by high-end international guests, was a significant contributor to the decline in gaming revenue on Las Vegas Strip in 2015. Our properties do not target the baccarat player.
According to the LVCVA, Las Vegas has been the United States’ top-ranked destination for trade shows for the last ten years. The number of trade show and convention attendees in Las Vegas decreased from approximately 6.2 million in 2005 to 5.9 million in 2015. Convention attendance increased 14.0% during 2015 compared to 2014 and has increased 31.1% compared to 2009.
We believe that the growth in the Las Vegas tourist market has been enhanced by a dedicated program of the LVCVA and major Las Vegas hotels to promote Las Vegas as an exciting vacation destination and convention site, the increased capacity of McCarran International Airport and the introduction of large, themed destination resorts in Las Vegas.
Nevada has enjoyed population growth that includes an increasing number of retirees and other active gaming customers. A majority of Nevada’s growth has occurred in Las Vegas, which is located in Clark County. The population of Clark County has grown from 1.8 million people in 2005 to approximately 2.1 million people in 2015, a compound annual growth rate of 1.7%. In comparison, the United States population increased at a compound annual growth rate of 0.8% during this period. From 2014 to 2015, it is estimated that Las Vegas experienced a 2.4% increase in population.
The Laughlin area economy is primarily dependent on the gaming and tourism industry. Visitor volume and occupancy rates have declined on an annual basis over the past several years while the number of hotel rooms has remained fairly constant. The new Laughlin Events Center has hosted several headline concerts that have created successful events in the market. According to the LVCVA, visitation declined 5.1% in 2015 compared to 2014. From 2007 to 2012, annual decreases in visitors averaged 7.5%. In 2014 and 2013, the decreases averaged 1.4%. Laughlin gaming revenues increased 1.7% in 2015 compared to 2014 versus a 1.0% increase in 2014 compared to 2013.
Outstanding Debt
On July 7, 2015, ACEP, or the Company, and certain of its subsidiaries, or the Guarantors, entered into the 2015 Credit Agreement. Pursuant to the terms of the 2015 Credit Agreement, the Lenders provided the Company with senior secured loan facilities in an aggregate principal amount of $310 million, consisting of $295 million of senior secured term loans, or the 2015 Term Loans, and a $15 million revolving credit facility, or the New Revolving Facility. The proceeds from the 2015 Term Loans were used to redeem the First Lien Term Loans and Second Lien Term Loans.
The 2015 Term Loans bear interest either at a base rate plus 2.75% per annum or at the reserve-adjusted eurodollar rate plus 3.75% per annum. In the case of eurodollar rate loans, interest is computed on the basis of a 360-day year and the actual number of days between interest periods, with interest payable on the last day of each interest period of one month, two months, or three months, or, in the case of interest periods longer than three months, every three months. The 2015 Term Loans are subject to scheduled principal payments on the last day of each calendar quarter in an amount equal to 0.25% of the original principal balance.
Results of Operations
The following table sets forth the results of our operations for the periods indicated.
Regulation G, “Conditions for Use of Non-GAAP Financial Measures,” prescribes the conditions for use of non-GAAP financial information in public disclosures. We believe that our presentation of EBITDA is an important supplemental measure of our operating performance to investors. EBITDA is a commonly used measure of performance in our industry which we believe, when considered with measures calculated in accordance with United States Generally Accepted Accounting Principles (GAAP), gives investors a more complete understanding of operating results before the impact of investing and financing transactions and income taxes and facilitates comparisons between us and our competitors. We believe this measure will be used by investors in their assessment of our operating performance and the valuation of our Company.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Las Vegas has shown positive economic signs. Total gaming revenue in Clark County increased 0.9% in 2015 compared to 2014. After deducting Baccarat, a game preferred by mostly wealthy international visitors, Clark County gaming revenue increased approximately 3.5% in 2015 compared to 2014. Although economic indicators are increasingly favorable in the United States and Clark County, accelerated growth has not occurred. According to the Las Vegas Convention and Visitors Authority, or LVCVA, the number of visitors to Las Vegas increased 2.9% to 42.3 million visitors in 2015 compared to 2014. Employment in Las Vegas is increasing and the unemployment rate is decreasing. Las Vegas housing prices have increased and as a percentage of overall housing sales, short sales and bank owned property sales continue to decline. The number of visitors to Laughlin decreased 5.1% in 2015, a decline of approximately 101,000 visitors. Gaming revenue increased 1.7% in 2015, and occupancy also increased. Operators in all of our markets continue to use aggressive promotions and discounted prices to attract customers and increase occupancies at their properties. Competition for customers is intense. All of these factors have impacted our results.
Our consolidated gross revenues increased 6.1% to $401.1 million for the year ended December 31, 2015 from $378.2 million for the year ended December 31, 2014. Consolidated income from operations and EBITDA increased 42.6% and decreased 1.0% to $47.5 million and $62.0 million for the year ended December 31, 2015 compared to $33.3 million and $62.6 million for the year ended December 31, 2014. The increases in our gross revenues and income from operations are due primarily to increases in hotel, casino and food and beverage revenues.
Certain items had a negative impact on income from operations and EBITDA for the years ended December 31, 2015 and December 31, 2014. For the year ended December 31, 2015 the Company recognized a loss on asset disposal of approximately $2.0 million compared to a gain of approximately $26,000 for the year ended December 31, 2014. The loss on asset disposal for the year ended December 31, 2015 was due a $2.1 million write off of pool improvements, due to demolition for pool renovations, at the Stratosphere. For the year ended December 31, 2015 labor cost included approximately $1.2 million in non-cash share-based compensation expense compared to $4.0 million for the year ended December 31, 2014. EBITDA for the year ended December 31, 2015 was negatively impacted by losses on debt redemption of approximately $14.7 million related to our $30.0 million principal payment on the First Lien Term Loans on March 31, 2015 and the redemption of the First Lien Term Loans and Second Lien Term Loans on July 7, 2015, of which approximately $8.9 million was non-cash.
Casino
Casino revenues consist of revenues from slot machines, table games, poker, race and sports book, bingo and keno. Casino revenues increased 2.9% to $205.0 million for the year ended December 31, 2015, compared to $199.3 million for the year ended December 31, 2014. Slot revenues increased 2.9% and table revenues increased 4.8% for the year ended December 31, 2015, compared to the year ended December 31, 2014. For the year ended December 31, 2015, our slot hold increased 0.1 percentage point and coin-in increased 0.5% while table drop increased 1.9% and hold increased by 0.6 percentage points compared to the year ended December 31, 2014. For the year ended December 31, 2015, slot machine revenues were 85.3% of casino revenues and table game revenues were 11.6% of casino revenues, compared to 85.2% and 11.4% of casino revenues, respectively, for the year ended December 31, 2014. Other casino revenues, consisting of race and sports book, poker, bingo and keno, decreased 4.5% for the year ended December 31, 2015 compared to the year ended December 31, 2014. Race and sports book revenues decreased 3.3% for the year ended December 31, 2015 compared to the year ended December 31, 2014 due to a 0.5 percentage point decrease in hold partially offset by a 0.6% increase in handle. Bingo revenues increased 1.8% for the year ended December 31, 2015 compared to the year ended December 31, 2014 due primarily to a 0.1 percentage point increase in hold. Keno and poker revenues decreased 5.5% and 15.5% respectively for the year ended December 31, 2015 compared to the year ended December 31, 2014. Casino operating expenses increased 0.5% to $64.4 million, or 31.4% of casino revenues, for the year ended December 31, 2015, compared to $64.1 million or 32.2% for the year ended December 31, 2014. The increase in expenses was due to increased revenue taxes. Our casino operating margin was 68.6% for the year ended December 31, 2015, compared to 67.8% for the year ended December 31, 2014.
Hotel
Hotel revenues increased 15.6% to $83.1 million for the year ended December 31, 2015 from $71.9 million for the year ended December 31, 2014. Occupancy was unchanged for the Aquarius and increased for all other properties and average daily room rates increased for all properties. Overall occupancy increased to 72.6% for the year ended December 31, 2015 compared to 68.5% for the year ended December 31, 2014. Our overall ADR increased 9.0% for the year ended December 31, 2015 compared to the year ended December 31, 2014. Our hotel expenses increased 6.9% to $37.2 million for the year ended December 31, 2015, compared to $34.8 million for the Year ended December 31, 2014. The increase in hotel expenses was due primarily to increased labor costs, commissions and broker fees and supplies expenses. Our hotel operating margin increased to 55.2% for the year ended December 31, 2015 as compared to 51.6% for the year ended December 31, 2014.
Food and Beverage
Food and beverage revenues increased 6.9% to $78.6 million for the year ended December 31, 2015 compared to $73.5 million for the year ended December 31, 2014. Revenues increased for all properties. Overall, average revenue per cover for the year ended December 31, 2015 increased 3.5% compared to the year ended December 31, 2014, while food covers and beverage covers increased 3.2% and decreased 1.8%, respectively. Our food and beverage expenses increased 4.7% to $58.1 million for the year ended December 31, 2015 compared to $55.5 million for the year ended December 31, 2014 due primarily to increased food and beverage cost of goods and labor costs. Our food and beverage operating margin increased to 26.1% for the year ended December 31, 2015 as compared to 24.5% for the year ended December 31, 2014.
Tower, Retail, Entertainment and Other
Tower, retail and other revenues increased 2.7% to $34.4 million for the year ended December 31, 2015 from $33.5 million for the year ended December 31, 2014. Tower revenues decreased 3.4% for the year ended December 31, 2015, compared to the year ended December 31, 2014. Tower guests declined 2.0% and SkyJump guests fell 13.3% for year ended December 31, 2015 compared to the year ended December 31, 2014. SkyJump was impacted by increased competition from newly launched attractions in the Las Vegas market. Entertainment revenue increased 16.2% for the year ended December 31, 2015, compared to the year ended December 31, 2014. The increase in entertainment revenue was due primarily to higher average ticket prices for the PIN-UP show at the Stratosphere. Retail revenue increased 13.9% for the year ended December 31, 2015, compared to the year ended December 31, 2014. Other operating income increased 12.0% for the year ended December 31, 2015, compared to the year ended December 31, 2014. The increase was primarily due to higher ATM commissions and project development revenues. Other operating expenses decreased 6.1% to $10.8 million for the year ended December 31, 2015, compared to $11.5 million for the year ended December 31, 2014. This decrease was primarily due to lower entertainer fees and labor costs.
Promotional Allowances
Promotional allowances are comprised of the retail value of goods and services provided to casino customers under various marketing programs. As a percentage of casino revenues, promotional allowances increased to 13.7% for the year ended December 31, 2015 compared to 13.6% for the year ended December 31, 2014. The increase was due primarily to increased food promotions.
Selling, General and Administrative
Selling, general and administrative expenses are primarily comprised of payroll, marketing, advertising, utilities and other administrative expenses. These expenses increased 2.8% to $126.0 million, or 31.4% of gross revenues, for the year ended December 31, 2015, compared to $122.6 million, or 32.4% of gross revenues, for the year ended December 31, 2014. The increase in expenses was due primarily to a $2.0 million loss on asset disposal, a $984,000 increase in advertising and related expenses, a $505,000 increase in guest loss and damage expenses and a $362,000 increase in credit card fees partially offset by a $1.4 million decrease in labor costs. For the year ended December 31, 2015 the Company recognized a loss on asset disposal of approximately $2.0 million compared to a gain of approximately $26,000 for the year ended December 31, 2014. The loss for the year ended December 31, 2015 was due a $2.1 million write off of pool improvements at the Stratosphere. For the year ended December 31, 2015, labor cost included approximately $1.2 million in non-cash share-based compensation expense compared to $4.0 million for the year ended December 31, 2014.
Interest Expense
Interest expense decreased 20.9% to $20.8 million for the year ended December 31, 2015, compared to $26.3 million for the year ended December 31, 2014. The decrease was due primarily to the repricing of the First Lien Facilities effective February 24, 2014, a $30.0 million principal payment on the First Lien Term Loans on March 31, 2015 and the issuance of the 2015 Term Loans to prepay in full the Company's existing debt under the 2013 Credit Agreements on July 7, 2015.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
During 2014, the United States continued its slow recovery from the long economic recession that ended in 2009. According to a preliminary estimate released by the U.S. Bureau of Economic Analysis, or BEA, real GDP grew at an annualized rate of 2.6% in the fourth quarter of 2014. This compares to 5.0% real GDP growth in the third quarter of 2014. As the United States economy continues to recover, Las Vegas has shown positive economic signs. Total gaming revenue in Clark County declined 1.2% in 2014 after increases each year from 2010 through 2013. After deducting Baccarat, a game preferred by mostly wealthy international visitors, Clark County gaming revenue decreased approximately 0.2% in 2014 compared to 2013. Although economic indicators are increasingly favorable in the United States and Clark County, accelerated growth has not occurred. According to the LVCVA, the number of visitors to Las Vegas increased 3.7% to 41.1million visitors in 2014 compared to 2013. Employment in Las Vegas is increasing and the unemployment rate is decreasing. Las Vegas housing prices have increased and as a percentage of overall housing sales, short sales and bank owned property sales continue to decline. The number of visitors to Laughlin decreased 2.7% in 2014, a decline of approximately 56,000 visitors. Gaming revenue increased 1.0% in 2014 however, and the number of room nights and occupancy also increased. Operators in all of our markets continue to use aggressive promotions and discounted prices to attract customers and increase occupancies at their properties. Competition for customers is intense. All of these factors have impacted our results.
Our consolidated gross revenues increased 4.0% to $378.2 million for the year ended December 31, 2014 from $363.6 million for the year ended December 31, 2013. Consolidated income from operations and EBITDA increased 11.0% and 16.1% to $33.3 million and $62.6 million for the year ended December 31, 2014 compared to $30.0 million and $53.9 million for the year ended December 31, 2013. The increases in our gross revenues, income from operations, and EBITDA are due primarily to increases in hotel and food and beverage revenues.
Income from operations and EBITDA for the year ended December 31, 2014 were negatively impacted by a 6.5% increase in selling, general and administrative expenses. The increase in selling, general and administrative expenses was due primarily to a $4.0 million non-cash expense for share-based compensation as well as a $717,000 increase in utilities, a $657,000 increase in sales tax expenses, a $452,000 increase in maintenance contract expenses, and a $248,000 increase in supplies expenses partially offset by a $741,000 decrease in repair and maintenance expenses. Income from operations and EBITDA for the year ended December 31, 2013 were positively impacted by a credit to sales tax expense of approximately $1.1 million to reverse previously accrued taxes on complimentary meals provided to customers and employees. The company began accruing for sales taxes on complimentary meals provided to customers and employees in February 2012 based on a decision by the Nevada Tax Commission which was subsequently rescinded in July 2013. EBITDA for the year ended December 31, 2013 was negatively impacted by a $7.9 million charge for the early redemption of debt related to the redemption of debt remaining aggregate principal amount of our 11% Senior Secured Notes, of which approximately $6.3 million was non-cash. Finally, ACEP Interactive, our licensed internet gaming subsidiary, spent approximately $507,000 during the year ended December 31, 2014 to operate acePLAYPoker.com, which became operational in February 2013, compared to approximately $835,000 in the year ended December 31, 2013. As a result, our consolidated net operating margin increased to 9.5% for the year ended December 31, 2014 compared to 8.9% for the year ended December 31, 2013.
Casino
Casino revenues consist of revenues from slot machines, table games, poker, race and sports book, bingo and keno. Casino revenues increased 0.2% to $199.3 million for the year ended December 31, 2014, compared to $199.0 million for the year ended December 31, 2013. Slot revenues increased 0.1% while table revenues were unchanged for the year ended December 31, 2014 compared to the year ended December 31, 2013. For the year ended December 31, 2014, our slot hold increased 0.1 percentage point and coin-in decreased 1.7% while table drop declined 1.2% and hold increased by 0.3 percentage points compared to the year ended December 31, 2013. For the year ended December 31, 2014, slot machine revenues were 85.2% of casino revenues and table game revenues were 11.4% of casino revenues, compared to 85.3% and 11.4% of casino revenues, respectively, for the year ended December 31, 2013. Other casino revenues, consisting of race and sports book, poker, bingo and keno, increased 3.1% for the year ended December 31, 2014 compared to the year ended December 31, 2013. Race and sports book revenues increased 12.2% for the year ended December 31, 2014 compared to the year ended December 31, 2013 due to a 1.4 percentage point increase in hold partially offset by a 0.4% decline in handle. Bingo revenues decreased 3.1% for
the year ended December 31, 2014 compared to the year ended December 31, 2013 due primarily to a 0.2 percentage point increase in hold and 2.3% decrease in patrons. Keno and poker revenues increased 7.6% and decreased 10.3% respectively for the year ended December 31, 2014 compared to the year ended December 31, 2013. Casino operating expenses of $64.1 million, or 32.2% of casino revenues, for the year ended December 31, 2014, were unchanged from the year ended December 31, 2013. Our casino operating margin was 67.8% for both the years ended December 31, 2014 and December 31, 2013.
Hotel
Hotel revenues increased 12.3% to $71.9 million for the year ended December 31, 2014 from $64.0 million for the year ended December 31, 2013. Occupancy and average daily room rates increased for all properties. In addition, a 53.1% increase in resort fee revenue at the Stratosphere contributed to the increase in revenue. The resort fee at the Stratosphere was increased in April 2013 and again in May 2014. Overall occupancy increased to 68.5% for the year ended December 31, 2014 compared to 64.9% for the year ended December 31, 2013. Occupancy for the year ended December 31, 2013 was negatively impacted by the loss of a tour operator contract at the Stratosphere. Our overall ADR increased 6.4% for the year ended December 31, 2014 compared to the year ended December 31, 2013. Our hotel expenses increased 7.1% to $34.8 million for the year ended December 31, 2014, compared to $32.5 million for the Year ended December 31, 2013. The increase in hotel expenses was due primarily to increased labor costs, cable and internet expenses, supplies expenses and commissions and broker fees. Our hotel operating margin increased to 51.6% for the year ended December 31, 2014 as compared to 49.2% for the year ended December 31, 2013.
Food and Beverage
Food and beverage revenues increased 7.6% to $73.5 million for the year ended December 31, 2014 compared to $68.3 million for the year ended December 31, 2013. Revenues increased for all properties. Overall, average revenue per cover for the year ended December 31, 2014 increased 1.7% compared to the year ended December 31, 2013, while food covers and beverage covers increased 5.9% and decreased 1.5%, respectively. Our food and beverage expenses increased 5.5% to $55.5 million for the year ended December 31, 2014 compared to $52.6 million for the year ended December 31, 2013 due primarily to increased labor and food and beverage cost of goods. Our food and beverage operating margin increased to 24.5% for the year ended December 31, 2014 as compared to 23.0% for the year ended December 31, 2013.
Tower, Retail, Entertainment and Other
Tower, retail and other revenues increased 3.7% to $33.5 million for the year ended December 31, 2014 from $32.3 million for the year ended December 31, 2013. Tower revenues increased 6.2% for the year ended December 31, 2014, compared to the year ended December 31, 2013. The primary reason for the increase in tower revenues for year ended December 31, 2014 compared to the year ended December 31, 2013 was a 5.0% increase in guest admissions. Entertainment revenue declined 17.9% for the year ended December 31, 2014, compared to the year ended December 31, 2013. The decrease in entertainment revenue was due primarily to fewer performances at the Aquarius and a 24.9% decrease in patrons at the Stratosphere. Retail revenue increased 6.4% for the year ended December 31, 2014, compared to the year ended December 31, 2013.
Other operating income decreased 3.5% for the year ended December 31, 2014, compared to the year ended December 31, 2013. The decrease was primarily due to lower project development revenues. Other operating expenses increased 1.8% to $11.5 million for the year ended December 31, 2014, compared to $11.3 million for the year ended December 31, 2013. This increase was primarily due to higher labor costs, cost of goods and entertainer fees.
Promotional Allowances
Promotional allowances are comprised of the retail value of goods and services provided to casino customers under various marketing programs. As a percentage of casino revenues, promotional allowances increased to 13.6% for the year ended December 31, 2014 compared to 13.2% for the year ended December 31, 2013. The increase was due primarily to increased food and beverage promotions.
Pre-opening Expense
We incurred no pre-opening costs for the year ended December 31, 2014 compared to $119,000 for the year ended December 31, 2013. Pre-opening costs for the year ended December 31, 2013 were primarily comprised of equipment, labor costs and supplies for PIN UP, a burlesque show at the Stratosphere and equipment and supplies for the Duet Coffee and Wine venue at the Aquarius. PIN UP opened to the public on March 2, 2013 and Duet Coffee and Wine opened on August 16, 2013. Pre-opening expenses associated with PIN UP and Duet Coffee and Wine were approximately $114,000 and $5,000 respectively.
Selling, General and Administrative
Selling, general and administrative expenses are primarily comprised of payroll, marketing, advertising, utilities and other administrative expenses. These expenses increased 6.5% to $122.6 million, or 32.4% of gross revenues, for the year ended December 31, 2014, compared to $115.1 million, or 31.7% of gross revenues, for the year ended December 31, 2013. The increase in expenses was due primarily to increased labor costs, a $717,000 increase in utilities, a $657,000 increase in sales tax expenses, a $452,000 increase in maintenance contract expense, and a $248,000 increase in supplies expenses partially offset by a $741,000 decrease in repair and maintenance expenses. For the year ended December 31, 2014 labor cost included approximately $4.0 million in non-cash share-based compensation expense compared to none for the year ended December 31, 2013. For the year ended December 31, 2013 repair and maintenance expenses included approximately $1.0 million for projects at the Aquarius and sales tax expenses include a credit of approximately $1.1 million for the reversal of prior accruals for taxes on complimentary and employee meals. The company began accruing for sales taxes on complimentary meals provided to customers and employees in February 2012 based on a decision by the Nevada Tax Commission which was subsequently rescinded in July 2013. In addition, we expensed approximately $507,000 related to our interactive gaming initiative during the year ended December 31, 2014 compared to approximately $835,000 during the year ended December 31, 2013.
Interest Expense
Interest expense decreased 29.5% to $26.3 million for the year ended December 31, 2014, compared to $37.3 million for the year ended December 31, 2013. The decrease was due primarily to the redemption of the 11% Senior Secured Notes, issuance of the First Lien Facilities and Second Lien Credit Agreement in July 2013 and repricing of the First Lien Facilities effective February 24, 2014.
Financial Condition
Liquidity and Capital Resources
The following liquidity and capital resources discussion contains certain forward-looking statements with respect to our business, financial condition, results of operations, dispositions, acquisitions, renovation projects and our subsidiaries, which involve risks and uncertainties that cannot be predicted or quantified, and consequently, actual results may differ materially from those expressed or implied herein. Such risks and uncertainties include, but are not limited to, financial market risks, the ability to maintain existing management, competition within the gaming industry, the cyclical nature of the hotel business and gaming business, economic conditions, regulatory matters and litigation and other risks described in our filings with the Securities and Exchange Commission. In addition, renovation projects entail significant risks, including shortages of materials or skilled labor, unforeseen regulatory problems, work stoppages, weather interference, floods, unanticipated cost increases, and disruption to business. The anticipated costs and construction periods are based on budgets, conceptual design documents and construction schedule estimates. There can be no assurance that the budgeted costs or construction period will be met. All forward-looking statements are based on our current expectations and projections about future events.
During the year ended December 31, 2015, our Net Cash Provided by Operating Activities was approximately $63.9 million, compared to $40.7 million for the year ended December 31, 2014. Cash flows used in investing activities were $19.4 million for the year ended December 31, 2015, and consisted primarily of $20.9 million of capital expenditures (including approximately $1.3 million in non-cash items), of which approximately $3.8 million was spent on slot machine replacements and conversions, $10.0 million for renovations to our hotel rooms, public areas and food and beverage venues, $1.9 million on information technology and $5.2 million on our facilities and operations. During the year ended December 31, 2014, cash flows used in investing activities were $13.3 million and consisted primarily of $14.5 million of capital expenditures (including approximately $1.1 million in non-cash items), of which approximately $3.6 million was spent on slot machine replacements and conversions, $4.5 million for renovations to our hotel rooms, public areas and food and beverage venues, $1.7 million on information technology and $4.7 million on our facilities and operations. Cash flows used in financing activities were $49.7 million for the year ended December 31, 2015 compared to $5.7 million for the year ended December 31, 2014. On March 31, 2015, in respect of the First Lien Term Loans, we made an "excess cash flow" principal payment for the 2014 fiscal year of approximately $9.4 million and a voluntary principal payment of $20.6 million. On July 7, 2015, the proceeds from the issuance of the 2015 Term Loans of $293.5 million were used together with cash on hand to repay in full the Company's existing debt under the 2013 Credit Agreements.
Our primary cash requirements for 2016 are expected to include (i) expenses associated with ongoing day-to-day operations, (ii) interest and principal payments on indebtedness, (iii) payments for design and development costs of future projects, and (iv) regular maintenance and other capital expenditures which will be evaluated throughout the year.
Our 2016 capital expenditure budget of approximately $31.8 million includes approximately $5.3 million for slot machine replacements and conversions and approximately $6.6 million on pool renovations at Stratosphere and the Aquarius. In addition, we are evaluating additional improvements to our properties that we believe will enhance the overall guest experience.
The 2015 Term Loans bear interest either at a base rate plus 2.75% per annum or at the reserve-adjusted eurodollar rate plus 3.75% per annum. In the case of eurodollar loans, interest is computed on the basis of a 360-day year and the actual number of days between interest periods with interest payable on the last day of each interest period of one month, two months, or three months, or, in the case of interest periods longer than three months, every three months. The 2015 Term Loans are subject to scheduled principal payments on the last day of each calendar quarter ending on and after December 31, 2015 in an amount equal to 0.25% of the original principal balance. The 2015 Term Loans are also subject to annual principal payments based on excess cash flow. For the fiscal year ending December 31, 2015, the Company will be required to make a principal payment equal to 50% of excess cash flow for the period of August 1, 2015 through December 31, 2015, and for all fiscal years ending on and after December 31, 2016 through the maturity date of the 2015 Term Loans, the percentage of excess cash flow required to be prepaid will vary based on the ratio of total indebtedness (net of unrestricted cash) to trailing four quarter adjusted EBITDA. In addition, we are entitled to at any time make voluntary principal prepayments to the 2015 Term Loans in amounts of $1 million or greater.
During April, 2016, we will not be required to make an "excess cash flow" principal payment as defined in the Credit and Guaranty agreement for the 2015 Term Loans.
At December 31, 2015, we had unrestricted cash and cash equivalents of $71.8 million. We believe our cash flow from operations and our cash balances will be sufficient to fund our operations, interest payments and capital expenditures for the
next 12 months. However, our ability to fund our operations, make payments on our debt and fund planned capital expenditures will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control as well as the factors described in the section entitled Risk Factors in Item 1A. As a result, we expect our primary source of cash to come from the operation of our properties.
We believe that our cash flows from operations, restricted cash, and existing cash balances will be adequate to satisfy our anticipated uses of capital during the next twelve months. However, our forecasts of operations and estimates of our reasonably anticipated liquidity needs may change and further deterioration in the Las Vegas, Laughlin and U.S. economies, or other unforeseen events could occur, resulting in the need to raise additional funds from outside sources. Additional financing, if needed, may not be available to us, or if available, the financing may not be on terms favorable to us.
The table below sets forth our contractual obligations as of December 31, 2015.
(1)
Does not reflect unamortized discount and deferred issuance costs of $9.2 million.
(2)
Contractual obligations for capital leases include amounts due under a 99-year lease for storage space located at the Arizona Charlie’s Decatur property. We are currently making monthly payments for the storage space of approximately $8,000 per month.
(3)
Consists of contracts for pool renovation projects and executive compensation.
Off-Balance Sheet Liabilities
We do not have any off-balance sheet arrangements as defined in Item 303(a) (4) (ii) of SEC Regulation S-K.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. As such, we are required to make estimates and assumptions about the effects of matters that are inherently uncertain. Those estimates and assumptions are derived and continually evaluated based on historical experiences, current facts and circumstances, and changes in the business environment. However, actual results may sometimes differ materially from estimates under different conditions. We have summarized our significant accounting policies in Note 1 to our consolidated financial statements. Of the accounting policies, we believe the following may involve a higher degree of judgment and complexity.
Revenue Recognition
Casino revenue is recorded as the net win from gaming activities (the difference between gaming wins and losses). Casino revenues are net of accruals for anticipated payouts of progressive and certain other slot machine jackpots. Contingent rental income is recognized when the right to receive such rental income is established according to the lease agreements. All other revenues are recognized as the services are provided. Gross revenues include the retail value of rooms, food and beverage and other items that are provided to customers on a complimentary basis. Such amounts are then deducted as promotional allowances. Promotional allowances also include incentives for goods and services earned in our slot club and other gaming programs.
The Company collects taxes from customers at the point of sale on transactions subject to sales and other taxes. Revenues are recorded net of any taxes collected.
We also reward customers, through the use of loyalty programs, with Free Play and points based on amounts wagered, that can be redeemed for a specified period of time for cash or non-cash awards. We deduct the cash incentive amounts from casino revenue.
Slot Club Liability
We offer a program, named ace|PLAY, whereby participants can accumulate points for casino wagering that can currently be redeemed for cash, free play, lodging, food and beverages, and merchandise. Participant points expire after thirteen months of no activity. A liability is recorded for the estimate of unredeemed points based upon redemption history at our casinos. Changes in the program, increases in membership and changes in the redemption patterns of the participants can impact this liability. Slot club liability is included in accrued expenses on the consolidated balance sheet.
Self-Insurance
We retain the obligation for certain losses related to customers’ claims of personal injuries incurred while on our properties, for the first $100,000 per claim. Effective February 20, 2014, we retain the obligation for losses related to Worker’s Compensation claims for the first $350,000 per incident. We accrue for outstanding reported claims, claims that have been incurred but not reported and projected claims based upon management’s estimates of the aggregate liability for uninsured claims using historical experience, and adjusting company’s estimates and the estimated trends in claim values. Although management believes it has the ability to adequately project and record estimated claim payments, it is possible that actual results could differ significantly from the recorded liabilities.
Intangible Assets and Long-Lived Assets
Our finite-lived intangible assets consist of a non-compete agreement and player loyalty plan, and our indefinite-lived intangible assets consist of trade names. Acquired assets are recorded at fair value on the date of acquisition. Finite-lived intangible assets are amortized over the estimated period to be benefited. Indefinite-lived intangible assets are not amortized, but are reviewed annually for impairment, during the fourth quarter or when a triggering event occurs.
We account for indefinite-lived intangible assets in accordance with applicable guidance. For indefinite-lived intangible assets, we perform an annual impairment test of these assets in the fourth quarter of each year and between annual dates in certain circumstances. For assets to be disposed of we recognize the asset at the lower of carrying value or fair market value, less costs of disposal, as estimated based on comparable asset sales, solicited offers, or a discounted cash flow model. For long-lived assets to be held and used, we review for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We then compare the estimated undiscounted future cash flows of the asset to the carrying value of the asset. The asset is not impaired if the undiscounted future cash flows exceed its carrying value. If the carrying value exceeds the undiscounted future cash flows, then an impairment charge is recorded, typically measured using a discounted cash flow model, which is based on the estimated future results of the relevant reporting property discounted using our weighted-average cost of capital and market indicators of terminal year free cash flow multiples. If an asset is under development, future cash flows include remaining construction costs. All recognized impairment charges are recorded as operating expenses.
Management must make various assumptions and estimates in performing its impairment testing. For instance, management must first determine the usage of the asset. To the extent management decides that an asset will be sold or abandoned, it is more likely that impairment may be recognized. Assets must be tested at the lowest level for which identifiable cash flows exist, which means that some assets must be grouped, and management has some discretion in the grouping of assets. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates. If our ongoing estimates of future cash flows are not met, we may have to record additional impairment charges in future accounting periods. Our estimates of cash flows are based on the current regulatory, social and economic climates, recent operating information and budgets of the various properties where we conduct operations. These estimates could be negatively impacted by changes in federal, state or local regulations, economic downturns, or other events affecting various forms of travel and access to our properties.
Stock-Based Compensation
Share-based compensation expense is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense, net of estimated forfeitures, over the employee's requisite service period. Compensation costs related to stock option awards are calculated based on the fair value of each major option grant on the date of the grant using the Black-Scholes-Merton option pricing model, which requires the following assumptions: expected stock price volatility, risk-free interest rates, expected option lives and dividend yields. We formed our assumptions using historical experience and observable market conditions.
Commitments and Contingencies
On an ongoing basis, we assess the potential liabilities related to any lawsuits or claims brought against us. While it is typically very difficult to determine the timing and ultimate outcome of such actions, the Company uses its best judgment to determine if it is probable that it will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. We accrue a liability when we believe a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation, it is possible that certain matters may be resolved for amounts materially different from any provisions or disclosures that we previously made.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2014-09, Revenue from Contracts with Customers, which is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2017. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue arising from contracts with customers is recognized. Additionally, the new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The Company is currently assessing the impact that adoption of this new accounting guidance will have on its consolidated financial statements and footnote disclosures.
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This update amends current guidance to require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and that existing guidance for performance conditions should be used to account for such awards. The amendments in this update will be effective for annual periods beginning after December 15, 2015, with early adoption permitted. This standard is not expected to have an impact on our consolidated financial statements.
In January 2015, FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items. This update eliminates the concept of extraordinary items from current guidance but will require an entity to present material transactions or events that are either unusual or infrequently occurring (or both) to be reported as a separate component of income from continuing operations, or alternatively disclosed in notes to financial statements. The amendments in the update will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This standard is not expected to have an impact on our consolidated financial statements.
In April 2015, FASB issued ASU No. 2015-03, Interest-Imputation of Interest. This update amends current guidance by requiring debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The amendments in this update will be effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption will be permitted for financial statements that have not been previously issued. The Company adopted this new accounting guidance during the third quarter of 2015.
In July 2015, FASB issued ASU No. 2015-11, Inventory. This amendment requires that inventory be measured at the lower of cost or net realizable value. This amendment applies to inventory measured using first-in, first-out or average cost methods but does not apply to inventory measured using last-in, first-out or the retail inventory method. The amendments in the update will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the impact the adoption of this new accounting guidance will have on its consolidated 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. Our primary risk exposure relates to interest rate risk. The fair value of our debt is estimated based on the quoted market prices for the same or similar issues. The estimated fair value of the 2015 Term Loans was approximately $292.1 million as of December 31, 2015. For the year ended December 31, 2015, we incurred approximately $20.8 million in interest expense. Interest on the 2015 Term Loans is variable LIBOR plus a margin, with a floor LIBOR rate of 1.00%. If LIBOR increased by 1.00% above the floor rate, our annual interest costs would increase by approximately $3.0 million.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Members
American Casino & Entertainment Properties LLC
We have audited the accompanying consolidated balance sheets of American Casino & Entertainment Properties LLC and subsidiaries (collectively, the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, members’ equity, and cash flows for each of the three years in the period ended December 31, 2015. 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Casino & Entertainment Properties LLC and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Reno, Nevada
March 23, 2016
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY
(in thousands)
See notes to consolidated financial statements.
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
Note 1.
Description of Business and Summary of Significant Accounting Policies
The Company
American Casino & Entertainment Properties LLC, or ACEP, was formed in Delaware on December 29, 2003. ACEP owns and operates the Stratosphere Casino Hotel & Tower, or the Stratosphere, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder in Las Vegas, Nevada, and the Aquarius Casino Resort, or the Aquarius, in Laughlin, Nevada.
On January 24, 2008, the Nevada Gaming Commission issued an order of registration of ACEP. The order (1) prohibits W2007/ACEP Managers Voteco, LLC, or Voteco, or its affiliates from selling, assigning, transferring, pledging or otherwise disposing of our membership interests or any other security convertible into or exchangeable for our Class A membership interests, or Class A Interests, or Class B membership interests, or Class B Interests, without the prior approval of the Nevada Gaming Commission, (2) prohibits the direct or indirect members of Voteco from selling, assigning, transferring, pledging or otherwise disposing of any direct or indirect membership interest in Voteco without the prior administrative approval of the Chairman of the Nevada State Gaming Control Board or his designee, and (3) prohibits ACEP from declaring cash dividends or distributions on any class of membership interest of ACEP beneficially owned in whole or in part by W2007/ACEP Holdings, LLC, or Holdings, an affiliate of Whitehall Street Real Estate Funds, or Whitehall, a series of real estate investment funds affiliated with Goldman, Sachs & Co., or Voteco, or their respective affiliates, without the prior approval of the Nevada Gaming Commission.
On February 20, 2008, ACEP, Voteco and Holdings entered into an Amended and Restated Limited Liability Company Agreement of ACEP, or the Amended Operating Agreement.
On February 20, 2008, each member of Voteco, Holdings and Voteco entered into a Transfer Restriction Agreement. The Transfer Restriction Agreements provides, among other things, that:
•
Holdings has the right to acquire our Class A Interests from Voteco on each occasion that Class B Interests held by Holdings would be transferred to a proposed purchaser who, in connection with such proposed sale, has obtained all licenses, permits, registrations, authorizations, consents, waivers, orders, findings of suitability or other approvals required to be obtained from, and has made all findings, notices or declarations required to be made with, all gaming authorities under all applicable gaming laws,
•
A specific purchase price, as determined in accordance with the Transfer Restriction Agreement, will be paid to acquire the Class A Interests from Voteco, and
•
Voteco will not transfer ownership of Class A Interests owned by it except pursuant to such option of Holdings.
Pursuant to the Amended Operating Agreement, holders of Class A Interests are entitled to one vote per interest in all matters to be voted on by our voting members. Except as otherwise expressly required by law, holders of Class B Interests have no right to vote on any matters to be voted on by our members. Holders of Class A Interests and Class B Interests have no preemptive rights, no other rights to subscribe for additional interests, no conversion rights and no redemption rights, do not benefit from any sinking fund, and do not have any preferential rights upon a liquidation.
On July 7, 2015, ACEP, or the Company, and certain of its subsidiaries, or the Guarantors, entered into a Credit and Guaranty Agreement, or the Credit Agreement. Pursuant to the terms of the Credit Agreement, the Lenders provided the Company with senior secured loan facilities in an aggregate principal amount of $310 million, consisting of $295 million of senior secured term loans, or the 2015 Term Loans, and a $15 million revolving credit facility, or the New Revolving Facility. The proceeds from the 2015 Term Loans were used to redeem the First Lien Term Loans and Second Lien Term Loans. (See note 7)
On July 3, 2013, ACEP and certain of its subsidiaries, or Guarantors, entered into a First Lien Credit and Guaranty Agreement, or First Lien Credit Agreement. Pursuant to the terms of the First Lien Credit Agreement, the First Lien Lenders provided the Company with senior secured loan facilities in an aggregate principal amount of $230 million, consisting of $215 million of
senior secured term loans, or First Lien Term Loans, and $15 million of senior secured revolving credit facility, or Revolving Facility (the Revolving Facility together with the First Lien Term Loans, the “First Lien Facilities”).
On July 3, 2013, ACEP and the Guarantors entered into a Second Lien Credit and Guaranty Agreement, or Second Lien Credit Agreement. Pursuant to the terms of the Second Lien Credit Agreement, the Second Lien Lenders provided the Company with secured second lien term loans in the aggregate principal amount of $120 million, or the Second Lien Term Loans. The proceeds from the First Lien Term Loans and Second Lien Term Loans were used to purchase the outstanding 11% Senior Secured Notes that were tendered in connection with the Issuer’s previously announced tender offer and to redeem the remaining outstanding 11% Senior Secured Notes.
Principles of Consolidation
The consolidated financial statements include the accounts of ACEP and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. All statements are presented on a consolidated basis.
Revenue Recognition and Promotional Allowances
Casino revenue is recorded as the net win from gaming activities (the difference between gaming wins and losses). Casino revenues are net of accruals for anticipated payouts of progressive and certain other slot machine jackpots. Contingent rental income is recognized when the right to receive such rental income is established according to the lease agreements. All other revenues are recognized as the goods or services are provided. Gross revenues include the retail value of rooms, food and beverage and other items that are provided to customers on a complimentary basis. Such amounts are then deducted as promotional allowances. Promotional allowances also include incentives for goods and services earned in our slot club and other gaming programs.
The Company collects taxes from customers at the point of sale on transactions subject to sales and other taxes. Revenues are recorded net of any taxes collected.
We also reward customers, through the use of loyalty programs, with Free Play and points based on amounts wagered, that can be redeemed for a specified period of time for cash. We deduct the Free Play and cash incentive amounts from casino revenue.
In accordance with industry practice, the retail value of rooms, food and beverage, and other services furnished to the Company's guests without charge is included in gross revenue and then deducted as promotional allowances. The estimated retail value of such promotional allowances is included in operating revenues as follows:
The estimated costs of providing complimentaries, included as casino expenses, are as follows:
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks, interest-bearing deposits, money market funds and debt instruments purchased with an original maturity of 90 days or less.
Inventories
Inventories, which consist primarily of food, beverage and operating supplies, are stated at the lower of cost or market value. Costs are determined using the first-in, first-out and the weighted average methods.
Accounts Receivable
Receivables consist primarily of gaming, hotel and other receivables, net of allowance for doubtful accounts. Receivables are non-interest bearing and are initially recorded at cost. Accounts are written off when management deems the account to be uncollectible. An estimated allowance is maintained to reduce the Company’s receivables to their expected net realizable value. The allowance is estimated based on specific reviews of customer accounts as well as historical collection experience and current economic and business conditions. Recoveries of accounts previously written off are recorded when received.
Investments Restricted
Investments-restricted consist primarily of funds pledged for Nevada sales and use tax and workers’ compensation benefits. These investments are certificates of deposit and approximate their fair value.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents. Cash equivalents consist of interest-bearing deposits, money market funds and debt instruments in financial institutions. Cash and cash equivalents are in excess of Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses in such accounts.
Property and Equipment
Property and equipment purchased are stated at cost. Assets held under capital leases are stated at the lower of the present value of the future minimum lease payments or fair value at the inception of the lease. Expenditures for additions, renewals and improvements are capitalized and depreciated over their useful lives. Costs of repairs and maintenance are expensed when incurred. Leasehold acquisition costs are amortized over the shorter of their estimated useful lives or the term of the respective leases once the assets are placed in service.
Depreciation and amortization of property and equipment are computed using the straight-line method over the following useful lives:
The Company capitalizes interest incurred on debt during the course of qualifying construction projects. Such costs are added to the asset base and amortized over the related assets’ estimated useful lives. For the years ended December 31, 2015, 2014 and 2013, we capitalized interest of $45,000, $61,000 and $176,000, respectively.
Unamortized Debt Issue Costs
Debt issuance and debt discount costs incurred in connection with the issuance of debt are capitalized and amortized to interest expense using the effective interest method. For the years ended December 31, 2015, 2014 and 2013, amortization of debt issue costs and debt discount totaled $1.9 million, $2.4 million and $4.2 million, respectively, and are included in interest expense on the accompanying consolidated statements of operations.
Slot Club Liability
We offer a program, named ace|PLAY, whereby participants can accumulate points for casino wagering that can currently be redeemed for cash, free play, lodging, food and beverages, and merchandise. Participant points expire after thirteen months of no activity. A liability is recorded for the estimate of unredeemed points based upon redemption history at our casinos. Changes in the program, increases in membership and changes in the redemption patterns of the participants can impact this liability. Slot club liability is included in accrued expenses on the consolidated balance sheets.
Sales, Advertising and Promotion
Sales, advertising and promotion costs are expensed as incurred and were approximately $11.3 million, $10.3 million and $9.6 million for the years ended December 31, 2015, 2014 and 2013, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
Income Taxes
Our taxable income or loss is included in Holdings’ partnership tax return (Holdings is a limited liability company and treated as a partnership for tax purposes). As a limited liability company, Holdings’ taxable income or loss is allocated to members in accordance with their respective percentage ownership. Therefore, we are not a taxable entity for federal or state income tax purposes and the tax on our income is borne by our members. Hence, no provision or liability for income taxes has been included in the financial statements. Earnings and losses are included in the income tax returns of the members of Holdings and taxed depending on their tax strategies. The Company had no uncertain tax positions at December 31, 2015 and 2014.
Holdings’ members are responsible for income taxes on their allocated share of taxable income which may differ from income for financial statement purposes due to differences in the tax basis and financial reporting basis of assets and liabilities. The net tax basis of Holdings’ assets and liabilities exceeded the reported amounts by $58.5 million, $52.3 million and $47.5 million at December 31, 2015, 2014 and 2013, respectively. Holdings files tax returns in the United States and is subject to income tax examinations for the years beginning with 2012.
Intangible Assets and Long-Lived Assets
Our finite-lived intangible assets consist of a non-compete agreement and a player loyalty plan, and both were fully amortized in 2013. Our indefinite-lived intangible assets consist of trade names. Acquired assets are recorded at fair value on the date of acquisition. Finite-lived intangible assets are amortized over the estimated period to be benefited. Indefinite-lived intangible assets are not amortized, but are reviewed annually for impairment, during the fourth quarter.
We account for indefinite-lived intangible assets in accordance with applicable guidance. For indefinite-lived intangible assets, we perform an annual impairment test of these assets in the fourth quarter of each year and between annual dates in certain circumstances. For assets to be disposed of we recognize the asset at the lower of carrying value or fair market value, less costs of disposal, as estimated based on comparable asset sales, solicited offers, or a discounted cash flow model. For long-lived assets to be held and used, we review for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We then compare the estimated undiscounted future cash flows of the asset to the carrying value of the asset. The asset is not impaired if the undiscounted future cash flows exceed its carrying value. If the carrying value exceeds the undiscounted future cash flows, then an impairment charge is recorded, typically measured using a discounted cash flow model, which is based on the estimated future results of the relevant reporting property discounted using our weighted-average cost of capital and market indicators of terminal year free cash flow multiples. If an asset is under development, future cash flows include remaining construction costs. All recognized impairment charges are recorded as operating expenses.
Management must make various assumptions and estimates in performing its impairment testing. For instance, management must first determine the usage of the asset. To the extent management decides that an asset will be sold or abandoned, it is more likely that impairment may be recognized. Assets must be tested at the lowest level for which identifiable cash flows exist,
which means that some assets must be grouped, and management has some discretion in the grouping of assets. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates. If our ongoing estimates of future revenue and cash flows are not met, we may have to record additional impairment charges in future accounting periods. Our estimates of revenue and cash flows are based on the current regulatory, social and economic climates, recent operating information and budgets of the various properties where we conduct operations. These estimates could be negatively impacted by changes in federal, state or local regulations, economic downturns, or other events affecting various forms of travel and access to our properties.
Self-Insurance
We retain the obligation for certain losses related to customers’ claims of personal injuries incurred while on our properties, for the first $100,000 per claim. Effective February 20, 2014, we retain the obligation for losses related to Worker’s Compensation claims for the first $350,000 per incident. We accrue for outstanding reported claims, claims that have been incurred but not reported and projected claims based upon management’s estimates of the aggregate liability for uninsured claims using historical experience, and adjusting company’s estimates and the estimated trends in claim values. Although management believes it has the ability to adequately project and record estimated claim payments, it is possible that actual results could differ significantly from the recorded liabilities.
Fair Value of Financial Instruments
The Company determines fair value based on 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. Accounting Standards Topic 820, Fair Value Measurement, provides three levels within the fair value hierarchy that may be used to report fair value: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities: Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly: and Level 3: Unobservable inputs that are developed using the best available information about the assumptions that market participants would use. The carrying value of our cash and cash equivalents, receivables and accounts payable approximates fair value primarily because of the short maturities of these instruments. We use Level 2 inputs for the disclosures of valuation of our long-term debt.
Segment Information
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company’s chief operating decision-maker is its chief executive officer (“CEO”), who is supported by the Company’s executive management team and board of directors. The Company’s CEO has the primary decision-making responsibilities over all of the Company’s operating and strategic decisions. The Company owns and operates four casino properties in one market. The Company views each property as an operating segment and all such operating segments have been aggregated into one reporting segment.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes its estimates and assumptions are reasonable under the circumstances; however, actual results may differ from these estimates.
Reclassifications
Certain reclassifications have been made to the consolidated balance sheet as of December 31, 2014 to conform with the current fiscal period presentation. The Company reclassified debt issuance costs from Debt issuance costs, net to Long-term debt, net of unamortized discount and debt issuance costs. This reclassification had no effect on net income.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2014-09, Revenue from Contracts with Customers, which is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2017. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue arising from contracts with customers is recognized. Additionally, the new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The Company is currently assessing the impact that adoption of this new accounting guidance will have on its consolidated financial statements and footnote disclosures.
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This update amends current guidance to require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and that existing guidance for performance conditions should be used to account for such awards. The amendments in this update will be effective for annual periods beginning after December 15, 2015. This standard is not expected to have an impact on our consolidated financial statements.
In January 2015, FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items. This update eliminates the concept of extraordinary items from current guidance but will require an entity to present material transactions or events that are either unusual or infrequently occurring (or both) to be reported as a separate component of income from continuing operations, or alternatively disclosed in notes to financial statements. The amendments in the update will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015, with early adoption permitted. This standard is not expected to have an impact on our consolidated financial statements.
In April 2015, FASB issued ASU No. 2015-03, Interest-Imputation of Interest. This update amends current guidance by requiring debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The amendments in this update will be effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption will be permitted for financial statements that have not been previously issued. The Company adopted this new accounting guidance during the third quarter of 2015.
In July 2015, FASB issued ASU No. 2015-11, Inventory. This amendment requires that inventory be measured at the lower of cost or net realizable value. This amendment applies to inventory measured using first-in, first-out or average cost methods but does not apply to inventory measured using last-in, first-out or the retail inventory method. The amendments in the update will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the impact the adoption of this new accounting guidance will have on its consolidated financial statements.
Note 2.
Accounts Receivable
Accounts receivable consists of the following:
The Company recorded bad debt expense and allowance for doubtful accounts for the years ended December 31, 2015, 2014 and 2013 as follows:
Note 3.
Other Current Assets
Other current assets consist of the following:
Note 4.
Property and Equipment, Net
Property and equipment consist of the following:
Assets recorded under capital leases were approximately $3.0 million at both December 31, 2015 and 2014. Such assets include buildings of approximately $600,000 and equipment of approximately $2.4 million at both December 31, 2015 and December 31, 2014. Accumulated depreciation and amortization at December 31, 2015 and 2014 includes amounts recorded for capital leases of $2.6 million.
Note 5.
Accrued Expenses
Accrued expenses consist of the following:
Note 6.
Leases
For the years ended December 31, 2015, 2014 and 2013, we recorded rental revenue of $5.9 million, $5.3 million and $4.9 million, respectively.
The future minimum lease payments to be received under non-cancelable operating leases for years subsequent to December 31, 2015 are as follows:
The above minimum rental income does not include contingent rental income or common area maintenance costs contained within certain retail operating leases.
The Company, as a lessee, had operating lease expenses for the years ended December 31, 2015, 2014 and 2013 of $41,000, $47,000 and $46,000, respectively.
Future minimum rental payments with respect to non-cancelable operating leases with terms in excess of one year consist of the following at December 31, 2015:
Future minimum lease payments under capital leases with initial or remaining terms of one year or more consist of the following at December 31, 2015:
Note 7.
Debt
Long-term debt and capital lease obligations consist of the following:
2015 Term Loans and Revolving Facility
On July 7, 2015, the Company and certain of its subsidiaries, or the Guarantors, entered into the 2015 Credit Agreement, with the Lenders party thereto from time to time, DBNY, as administrative agent and collateral agent, Goldman Sachs LP, and DBSI, as joint lead arrangers, joint bookrunners and co-syndication agents, and DBSI as documentation agent. The Guarantors pledged as collateral all of the real, personal and mixed property, including equity interests, in which liens are purported to be granted pursuant to the collateral documents for the First Lien Facilities. Pursuant to the terms of the 2015 Credit Agreement, the Lenders provided the Company with senior secured loan facilities in an aggregate principal amount of $310 million, consisting of the $295 million of 2015 Term Loans, and the $15 million 2015 Revolving Facility. The maturity date of the 2015 Term Loans is the earlier to occur of (i) July 7, 2022 and (ii) the acceleration of the Term Loans, and the maturity date of the 2015 Revolving Facility is the earlier to occur of (i) July 7, 2020 and (ii) the acceleration of the 2015 Revolving Facility. The proceeds of the 2015 Term Loans were used, together with cash on hand, to repay in full the Company’s existing debt under the 2013 Credit Agreements. The Company also recognized a $14.7 million loss on debt redemption which consisted of an $11.1 million write off of unamortized debt issuance costs and discounts, and a $3.6 million prepayment penalty.
The 2015 Term Loans bear interest either at a base rate plus 2.75% per annum or at the reserve-adjusted eurodollar rate plus 3.75% per annum. In the case of eurodollar rate loans, interest is computed on the basis of a 360-day year and the actual number of days between interest periods, with interest payable on the last day of each interest period of one month, two months, or three months, or, in the case of interest periods longer than three months, every three months. As of December 31, 2015, all outstanding 2015 Term Loans are eurodollar loans. The 2015 Term Loans are subject to scheduled principal payments on the last day of each calendar quarter ending on and after December 31, 2015 in an amount equal to 0.25% of the original principal balance. The 2015 Term Loans are also subject to annual principal payments based on excess cash flow. For the fiscal year ending December 31, 2015, the Company may be required to make a principal payment equal to 50% of excess cash flow for the period of August 1, 2015 through December 31, 2015, and for all fiscal years ending on and after December 31, 2016 through the maturity date of the 2015 Term Loans, the percentage of excess cash flow required to be prepaid will vary based on the ratio of total indebtedness (net of unrestricted cash) to trailing four quarter adjusted EBITDA. In addition, we are entitled to, at any time, make voluntary principal prepayments to the 2015 Term Loans in amounts of $1 million or greater.
The 2015 Revolving Facilities bear interest at a base rate plus an applicable margin that is1.25%, 1.75% or 2.25% per annum (depending on the Company’s First Lien Leverage Ratio) or the reserve-adjusted Eurodollar rate plus an applicable margin that is 2.25%, 2.75% or 3.25% per annum (depending on the Company’s First Lien Net Leverage Ratio). In the case of eurodollar rate revolving facilities, interest is computed on the basis of a 360-day year and the actual number of days between interest
periods, with interest payable on the last day of each interest period of one month, two months, or three months, or, in the case of interest periods longer than three months, every three months. We will also pay a commitment fee equal to the applicable revolving commitment fee percentage times the average daily difference between the revolving commitments and the aggregate principal amount of any outstanding revolving loans. The applicable revolving commitment fee percentage is either 0.250% or 0.375% per annum (depending on the Company’s First Lien Net Leverage Ratio). We may at the expiration of any interest period convert all or a portion of the Revolving Facility to base rate loans or Eurodollar loans. We may at any time request voluntary commitment reductions to the Revolving Facility in amounts of $1 million or greater.
As of December 31, 2015 there were no borrowings outstanding under the 2015 Revolving Facility.
The Credit Agreement includes a number of covenants that place restrictions on how we may operate our business, including, among others (i) restrictions on incurring other indebtedness and liens; (ii) a springing financial maintenance covenant; and (iii) restrictions on distributions, investments, acquisitions, significant asset disposals or making fundamental changes to our business. As of December 31, 2015 we were in compliance with the covenants of the Credit Agreement.
First Lien Facilities
On July 3, 2013, the Company and certain of its subsidiaries, or the Guarantors, entered into the First Lien Credit Agreement, with the lenders party thereto from time to time, DBNY, as administrative agent, collateral agent and documentation agent, and Goldman Sachs, and DBSI, as joint lead arrangers, joint bookrunners and co-syndication agents. The Guarantors pledged as collateral all of the real, personal and mixed property, including equity interests, in which liens are purported to be granted pursuant to the collateral documents for the First Lien Facilities. Pursuant to the terms of the First Lien Credit Agreement, the lenders party thereto provided the Company with senior secured loan facilities in an aggregate principal amount of $230 million, consisting of $215 million of First Lien Term Loans, and a $15 million Revolving Facility.
The maturity date of the First Lien Term Loans was the earliest to occur of (i) July 3, 2019 and (ii) the acceleration of the First Lien Term Loans. The First Lien Term Loans bore interest either at a base rate plus 3.75% per annum or at the reserve-adjusted Eurodollar rate plus 4.75% per annum. Interest was computed on the basis of a 360-day year and the actual number of days between interest periods with interest payable in one month, two month or three month periods or any other period acceptable to the administrative agent. We were entitled to at the expiration of any interest period convert all or a portion of the First Lien Term Loans to base rate loans. The First Lien Term Loans were subject to scheduled principal payments on the last day of each calendar quarter on and after September 30, 2013 in an amount equal to 0.25% of the original principal balance. The First Lien Term Loans were also subject to annual principal payments equal to a percentage of excess cash flow earned during a calendar year. For the fiscal year ended December 31, 2013, the company was required to make a principal payment equal to 75% of excess cash flow for the period of August 1, 2013 through December 31, 2013, and for all fiscal years ending on and after December 31, 2014 through the maturity date of the First Lien Term Loans, the percentage of excess cash flow varied based on the ratio of total indebtedness to trailing four quarter adjusted EBITDA. For the fiscal year ended December 31, 2014 we were required to make a principal payment equal to 50% of excess cash flow. The amount due related to excess cash flow was approximately $9.4 million and was paid on March 31, 2015. In addition, we were entitled to at any time make voluntary principal prepayments to the First Lien Term Loans in amounts of $1 million or greater.
On February 24, 2014, we entered into an amendment of the First Lien Credit Agreement. Among other changes, the Amendment reduced the interest rates on the Term Loans by 125 basis points per annum. Interest accrued, at our election, (i) at the adjusted eurodollar rate plus 3.50% per annum or (ii) at the Base Rate plus 2.50% per annum. Additionally, the minimum adjusted eurodollar rate was reduced by 25 basis points from 1.25% per annum to 1.00% per annum.
The maturity date of the Revolving Facility was the earliest to occur of (i) July 3, 2018 and (ii) the acceleration of the Revolving Facilities. The Revolving Facilities bore interest at a base rate plus an applicable margin that is 2.75%, 3.25% or 3.75% per annum (depending on the Company’s First Lien Leverage Ratio) or the reserve-adjusted Eurodollar rate plus an applicable margin that is 3.75%, 4.25% or 4.75% per annum (depending on the Company’s First Lien Leverage Ratio). We also paid a commitment fee equal to the applicable revolving commitment fee percentage times the average daily difference between the revolving commitments and the aggregate principal amount of any outstanding revolving loans. The applicable revolving commitment fee percentage was either 0.375% or 0.500% per annum (depending on the Company’s First Lien Leverage Ratio). Interest and commitment fees were computed on the basis of a 360-day year and the actual number of days between interest periods with interest and commitment fees payable in one month, two month or three month periods or any other period acceptable to the administrative agent. We were entitled to, at the expiration of any interest period convert all or a portion of the Revolving Facility to base rate loans or Eurodollar loans. We were entitled to at any time request voluntary commitment reductions to the Revolving Facility in amounts of $1 million or greater.
Second Lien Term Loans
On July 3, 2013, the Company and the Guarantors entered into the Second Lien Credit and Guaranty Agreement, or Second Lien Credit Agreement, together with the First Lien Credit Agreement, the 2013 Credit Agreements, with the lenders party thereto from time to time, DBNY, as administrative agent, collateral agent and documentation agent, and Goldman Sachs and DBSI, as joint lead arrangers, joint bookrunners and co-syndication agents. The Guarantors provided collateral of all of the real personal and mixed property, including equity interests, in which liens are purported to be granted pursuant to the collateral documents as security for the obligations. Pursuant to the terms of the Second Lien Credit Agreement, the lenders party thereto provided the Company with secured second lien term loans in the aggregate principal amount of $120 million, the Second Lien Term Loans. The maturity date of the Second Lien Term Loans was the earliest to occur of (i) January 3, 2020 and (ii) the acceleration of the Second Lien Term Loans. The Second Lien Term Loans bore interest either at a base rate plus 9.00% per annum or at the reserve-adjusted Eurodollar rate plus 10.00% per annum. Interest was computed on the basis of a 360-day year and the actual number of days between interest periods with interest payable in either one month, two month or three month periods or any other period acceptable to the administrative agent. As of December 31, 2014, all Second Lien Term Loans were Eurodollar rate loans. We were entitled to, at the expiration of any interest period convert all or a portion of the Second Lien Term Loans to base rate loans.
Both of the 2013 Credit Agreements included a number of covenants that place restrictions on how we may operate our business, including, among others (i) restrictions on incurring other indebtedness and liens; (ii) leverage and financial maintenance covenants; and (iii) restrictions on capital expenditures, distributions, investments, acquisitions, significant asset disposals or making fundamental changes to our business.
Maturities for the 2015 Term Loans outstanding as of December 31, 2015 are as follows:
The estimated fair value of the 2015 Term Loan was approximately $292.1 million as of December 31, 2015.
Note 8.
Related Party Transactions
For the year ended December 31, 2015, we paid Goldman Sachs approximately $2.5 million in underwriting and related fees on our debt compared to $674,000 and $3.4 million for the years ended December 31, 2014 and 2013, respectively. We also paid Goldman Sachs approximately $911,000 in interest for the year ended December 31, 2015 compared to $598,000 and $2.6 million for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2015, Goldman Sachs owned approximately $517,000 of the 2015 Term Loans and committed to provide up to $7.5 million of the 2015 Revolving Facility. As of December 31, 2014, Goldman Sachs owned approximately $0 of the First Lien Term Loans, $2.3 million of the Second Lien Term Loans and committed to provide up to $5 million of the Revolving Credit Facility. As of December 31, 2015 and December 31, 2014, there was no accrued interest due to Goldman Sachs.
The Realty Management Division of Goldman Sachs, or Goldman Sachs RMD, provides various services to us such as environmental services and insurance brokerage. We expensed fees of approximately $412,000 for the year ended December 31, 2015 compared to $394,000 and $401,000 for the years ended December 31, 2014 and 2013, respectively. In addition, we provided construction management services to Goldman Sachs RMD for hotels managed by them. We recorded revenues of $0 for the year ended December 31, 2015 compared to $0 and $330,000 for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2015 and December 31, 2014, we owed Goldman Sachs RMD $0. As of December 31, 2015 and December 31, 2014, Goldman Sachs RMD owed us approximately $0.
On February 20, 2008 we entered into a consulting agreement with Highgate Hotels, L.P., or Highgate, pursuant to which Highgate provides asset management consulting services to us. The agreement was amended to reduce fees payable thereunder on June 25, 2009 and Highgate converted amounts due them from ACEP to contributed capital in Holdings. Highgate owns a less than 5% membership interest in Holdings. The consulting agreement expired on June 20, 2013. Highgate was entitled to receive a $1.5 million per year base consulting fee for the periods through February 20, 2011 and a $1.0 million per year base consulting fee for the periods after February 20, 2011, along with additional consulting fees up to $500,000 per year for periods after February 20, 2011 based on EBITDA results at the properties and development fees at 4% of the aggregate costs of any agreed upon development projects. We incurred Highgate fees of $0 for the year ended December 31, 2015 compared to $0 and $500,000 for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2015 and December 31, 2014, there were no amounts due to or from Highgate.
On February 24, 2015, we entered into an agreement with Travel Tripper LLC, or TTL, to utilize their technology for online hotel reservations. TTL is owned by an affiliate of Highgate (23)% and an employee of Highgate (40)%. From December 4, 2012 through February 24, 2015 we did not use Travel Tripper LLC’s services. We expensed fees of approximately $30,000 for the year ended December 31, 2015 compared to $0 and $8,000 for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2015 and December 31, 2014, we owed TTL approximately $1,000 and $0, respectively.
On October 3, 2008, we entered into a participation agreement with Nor1, Inc., or Nor1, to utilize their technology to help sell perishable suite and room inventories. Nor1 gives the guest who books on-line the opportunity to book a non-guaranteed suite or upgraded rooms at a discounted rate if such is available at check-in. If the suite or upgraded room is awarded, Nor1 is paid 25% of the upgrade fee. Goldman Sachs owns less than 5% of Nor1. We expensed fees of approximately $15,000 for the year ended December 31, 2015 compared to $21,000 and $24,000 for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2015 and December 31, 2014, we owed Nor1 approximately $7,000 and $1,000, respectively.
If a proposed transaction appears to or does involve a related person, the transaction is presented to our management for review. If management is unable to determine if a transaction is with a related party it will be presented to our audit committee for review. The audit committee is authorized to retain and pay such independent advisors as it deems necessary to properly evaluate the proposed transaction, including, without limitation, outside legal counsel and financial advisors to determine the fair value of the transaction.
Note 9.
Intangible Assets
Pursuant to authoritative guidance, indefinite-lived intangible assets are subject to an annual assessment for impairment during the fourth quarter, or more frequently if there are indications of possible impairment, by applying a fair-value-based test.
Our indefinite-lived acquired intangible assets include trade names. Our finite-lived acquired intangible assets included our player loyalty plan and a non-compete agreement and were fully amortized as of December 2015 and 2014. Acquired indefinite-lived intangible assets are recorded at fair value on the date of acquisition and finite-lived assets are recorded at cost and amortized over the estimated period to be benefited.
As of December 31, 2015 and 2014, we had the following intangible assets.
We perform an annual impairment test of indefinite-lived intangible assets in the fourth quarter of each year and whenever a triggering event occurs which causes us to perform an impairment test. We completed our 2015, 2014 and 2013 annual impairment test of indefinite-lived intangible assets. None of our indefinite-lived intangible assets were determined to be impaired based on these analyses. The fair value of the trade names was determined using the relief-from-royalty method.
Amortization expense relating to finite-lived intangible assets was $0, $0 and $300,000, respectively, for the years ended December 31, 2015, 2014 and 2013.
Note 10.
Employee Benefit Plans
As of December 31, 2015 approximately 37% of the Company’s employees are members of various unions and covered by union-sponsored, collectively bargained, multi-employer health and welfare and defined benefit pension plans. The Company recorded expenses for such plans of $9.9 million, $9.8 million and $8.8 million for the years ended December 31, 2015, 2014 and 2013, respectively. The Company has no obligation for funding the plans beyond payments made based upon hours worked. The risks of participating in multiemployer pension plans are different from single-employer plans in the following aspects:
a) Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers;
b) If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers;
c) If an entity chooses to stop participating in some of its multiemployer plans, the entity may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company considers the following multiemployer pension plans to be significant:
1)
The Pension Protection Act of 2006 requires plans that are certified as endangered (yellow) or critical (red) to develop and implement a funding improvement plan.
For the years ended December 31, 2015, 2014 and 2013, our contributions to multiemployer pension and benefit plans were as follows:
For the 2014 plan year, the latest period for which plan data is available, contributions by the Company were less than 5% of total contributions for all multiemployer pension and benefit plans to which the Company contributes.
The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code covering its non-union employees. The plan allows employees to defer, within prescribed limits, up to 75% of their income on a pre-tax basis through contributions to the plan.
Note 11.
Share-Based Compensation
The company accounts for share-based compensation under ASC 718, Compensation-Stock Compensation. We recognized share-based compensation expense for the years ended December 31, 2015, 2014 and 2013 of approximately $1.2 million, $4.0 million, and $0, respectively. These amounts are included in selling, general and administrative expenses in our consolidated statements of operations.
There are 16,500,000 stock options and 2,500,000 restricted stock units, or RSUs, available for issuance under the W2007/ACEP Holdings, LLC 2013 Management Incentive Plan, or 2013 Plan, that was approved on March 26, 2014. On March 26, 2014, our Board of Directors approved the grant of 2,500,000 RSUs under the 2013 Plan to executive officers and certain key employees, effective April 1, 2014. RSUs only vest upon a qualifying event (generally an initial public offering, the sale or disposition of Holdings’ membership interests in the Company, or sale or other disposition of Holdings). Additionally on March 26, 2014, our Board of Directors approved the grant of 13,035,000 stock options to be measured and valued over the next three years in accordance with ASC 718, effective April 1, 2014. In 2015, the Company measured and expensed 3,258,750 stock options granted under the 2013 Plan that have already vested. In 2014, the Company measured and expensed 6,517,500 stock options granted under the 2013 Plan that have already vested. The remaining stock options will be measured and expensed ratably over the next year based on the establishment of performance and service conditions and will vest upon the achievement of such performance and service conditions. The stock options expire 10 years from the grant date.
A summary of stock option activity for the years ended December 31, 2015 and 2014 is as follows:
The fair value of each stock option granted under the 2013 Plan is estimated on the date of the grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:
The weighted average fair value of options granted during 2015 and 2014 was $0.37 and $0.62, respectively.
A summary of RSU activity for the years ended December 31, 2015, and 2014 is as follows:
As of December 31, 2015 there was $2.4 million of total unrecognized compensation cost related to all unvested RSUs. As of December 31, 2015 no RSUs vested as the shares only vest upon the occurrence of a qualifying event. Compensation costs will be recognized when a qualifying event becomes probable.
Note 12.
Commitments & Contingencies
Legal Proceedings
We are, from time to time, parties to various legal proceedings arising out of our businesses. We believe, however, that there are no proceedings pending or threatened against us, which, if determined adversely, would have a material adverse effect upon our business financial conditions, results of operations or liquidity.
Sales and use tax on complimentary meals
In March 2008, the Nevada Supreme Court ruled, in a case, Sparks Nugget, Inc. vs. The State of Nevada Ex Rel. Department of Taxation, that food and non-alcoholic beverages purchased for use in providing complimentary meals to customers and to employees were exempt from sales and use tax. The Company paid use tax on these items through February 2008 and has filed for refunds for the periods from February 2005 to February 2008 related to this matter. The Company is claiming the exemption on sales and use tax returns for periods after February 2008 in light of this Nevada Supreme Court decision and as such has not paid any sales or use tax for those periods.
In February 2012, the Nevada Tax Commission ruled that customer complimentary meals and employee meals are subject to sales tax. Based on this decision, the Nevada Department of Taxation declared that these meals were subject to tax and that complimentary meals provided to customers would be subject to sales tax at the retail value of the meal and employee meals would be subject to sales tax at the cost of the meal. These meals would be subject to tax effective February 15, 2012 but not due and payable until July 31, 2012. The payable date for these sales taxes has since been amended to the earlier of: 1) the last day of the next month following approval of the regulation by the Legislative Commission; 2) the last day of the next month following a Nevada Supreme Court Decision relating to or affirming that complimentary and/or employee meals are subject to sales tax; 3) the effective date of any related legislation; or 4) June 30, 2013.
In the third quarter of 2013, we recorded a credit to sales tax expense of approximately $1.1 million to reverse previously accrued taxes on complimentary meals provided to customers and employees based on the reversal of the regulation by the Nevada Legislative Commission.
Note 13.
Selected Quarterly Financial Information (Unaudited)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer, based on their evaluation of our disclosure controls and procedures (as such terms are defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this annual report on Form 10-K, have concluded that our disclosure controls and procedures are effective for ensuring that information required be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management is required to base its assessment of the effectiveness of our internal control over financial reporting on a suitable, recognized control framework, such as the framework developed by the Committee of Sponsoring Organizations (COSO). The COSO framework, published in Internal Control-Integrated Framework, is known as the COSO Report. Our Management has chosen the 2013 COSO framework on which to base its assessment. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2015.
This annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report on Form 10-K.
There were no changes in our internal control over financial reporting that occurred during the last quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Identification of Directors and Officers
The following table sets forth certain information as of March 23, 2016 concerning our directors, executive officers and key employees:
Name
Age
Position
Alan S. Kava
Board Member
Peter A. Weidman
Board Member
Frank V. Riolo
Chief Executive Officer and Board Member
Edward W. Martin III
Chief Operating Officer, Chief Financial Officer, Treasurer and Board Member
Name
Age
Position
Phyllis A. Gilland
Senior Vice President, General Counsel and Secretary
Ronald P. Lurie
Executive Vice President, General Manager - Arizona Charlie’s Decatur
Paul N. Hobson
Vice President, General Manager- Stratosphere Casino Hotel & Tower
Sean L. Hammond
General Manager - Aquarius Casino Resort
Mark A. Majetich
Senior Vice President, General Manager - Arizona Charlie’s Boulder
Alan S. Kava has served as a director since December 31, 2009. Mr. Kava is a member of the audit committee and compensation committee. He is a Managing Director and Partner of Goldman, Sachs & Co. where he is co-head for the Americas of the Real Estate Principal Investment Area. He is a member of the Investment Committees of The Whitehall Street Real Estate Funds, Goldman Sachs Real Estate Mezzanine Partners and the Caribbean Property Fund. Mr. Kava is a member of the Northeast Board of Directors for the Diabetes Research Institute and a director of Hilton Corporation. Prior to joining Goldman, Sachs & Co., Mr. Kava was an associate attorney in the corporate and real estate departments of Simpson Thacher & Bartlett from 1990-1997.
Peter A. Weidman became a director on January 19, 2010. Mr. Weidman has been a managing director of Goldman, Sachs & Co. since 2007, where he works in the Real Estate Principal Investment Area. Prior to joining Goldman, Sachs & Co. in 1999, Peter worked as an analyst in the Real Estate Investment Banking Group at Salomon Brothers and then at Averstar Capital Partners, a real estate development and private equity firm in New York.
Frank V. Riolo has served as our Chief Executive Officer since April 2008 and as a director since September 2008. In October 2011, Mr. Riolo became a member of the Board of Directors for Centaur Holdings LLC, a gaming and horse racing company in Indiana. Additionally, he operates Riolo Group, LLC, consulting Native American Governments on strategic initiatives, economic development, and gaming operational improvement. Prior to joining American Casino & Entertainment Properties LLC, Mr. Riolo served as Chief Executive Officer of Viejas Enterprises, from 2002 to 2007, a Native American gaming company operating in the State of California.
Edward W. Martin III has served as our Chief Financial Officer and Treasurer since October 2008 and as a director since March 2009. He has also served as Chief Operating Officer since August 2015. From September 2003 to May 2008, Mr. Martin was Vice President of Gaming Development for Station Casinos, Inc., a provider of gaming and entertainment in Las Vegas, NV. From September 2000 to August 2003, Mr. Martin was Senior Vice President of Finance and Strategic Planning for Silverton Casino, LLC., a provider of gaming and entertainment in Las Vegas, NV. Mr. Martin was Chief Financial Officer of the Maloof Companies from May 1994 to September 2000. From 1999-2011, he was a member of the Board of Directors of Nevada First Bank and its successor the Bank of Nevada, the Nevada affiliate of Western Alliance Bancorporation. As a member of the board he spent time as Chairman of the Audit Committee and a member of the Regulatory Oversight Committee. In August 2010, Governor Jim Gibbons appointed him to the Board of Trustees of the College Savings Plans of Nevada for a four year term and was reappointed in 2015 by Governor Brian Sandoval In August 2014, Mr. Martin became a member of the Board of Directors for The CENTECH Group, Inc., a provider of systems and solutions for federal government agencies.
Phyllis A. Gilland has served as our Vice President, General Counsel and Secretary since October 2008. Ms. Gilland is the corporate Compliance Officer. Prior to joining ACEP, from 2000 to 2007 Ms. Gilland served as general counsel and chief financial officer for Taylor Construction Group Companies, headquartered in Des Moines, Iowa with affiliates around the country, including Las Vegas, Nevada and with several of their subsidiaries. Prior to Taylor Construction, she served as general counsel for Principal International, Inc. from 1999 through 2000 and associate general counsel for Principal Financial Group from 1994 through 1999. In addition, Ms. Gilland has held positions with the Resolution Trust Corporation and KPMG.
Ronald P. Lurie has served as Executive Vice President and General Manager of Arizona Charlie’s Decatur since January 1999. From November 1990 until January 1999, Mr. Lurie held various positions at Sunset Coin, an affiliate of Arizona Charlie’s, Inc., including as General Manager of Sunset Coin. In addition to his more than 25 years in the gaming industry, Mr. Lurie served as a Las Vegas City Councilman from 1973 to 1987 and as the Mayor of Las Vegas from June 1987 to June 1991.
Paul N. Hobson has served as General Manager of Stratosphere Casino, Hotel & Tower since January 2011. He also served as the General Manager of Aquarius Casino Resort from December 2008 to December 2010. From 1998 to 2008, he was a member of Primm Valley Casino Resorts executive team; most recently as Senior Vice President of Operations in Primm, Nevada. During his tenure there, his areas of responsibility expanded while in the employment of the Primadonna Co., LLC, MGM MIRAGE and Herbst Gaming. Mr. Hobson brings more than 20 years of gaming and hospitality experience, and has also held financial management positions with both Caesars Palace in Las Vegas, Nevada and Caesars Tahoe in South Lake Tahoe, Nevada.
Mark A. Majetich has served as Senior Vice President and General Manager of Arizona Charlie’s Boulder since April 2004, and Vice President and General Manager for Arizona Charlie’s Boulder since May 2001. He served as Director of Operations at Arizona Charlie’s Boulder from February 2001 until May 2001. From June 2000 until January 2001, he was Director of Hotel Operations for the Stratosphere. From November 1992 until August 1999, Mr. Majetich held various positions at the Excalibur Hotel/Casino. He has more than 35 years of experience in the gaming industry.
Sean L. Hammond has served as General Manager of the Aquarius Casino Resort since January 2011. From August 2009 to January 2011, he held the position of Vice President of Marketing and Player Development. Mr. Hammond joined the Aquarius in May of 2006 when he was hired as Vice President of Player Development. Prior to his employment at the Aquarius, he worked at the Tropicana Express (formerly Ramada Express) in Laughlin, Nevada from February 1990 through May of 2006 as Director of Player Development & Casino Events.
Qualifications of Board of Directors
The board of directors has concluded that, based on each director‘s experience, qualifications, attributes or skills on an individual basis and in combination with those of the other directors, each director should serve as a director. Among other attributes common to all directors are their ability to review critically, evaluate, question and discuss information provided to them, to interact effectively with the various service providers to the Company, and to exercise reasonable business judgment in the performance of their duties as directors. In addition, the board of directors has taken into account the actual service and commitment of the directors during their tenure in concluding that each should continue to serve. A director‘s ability to perform his or her duties effectively may have been attained through a director‘s educational background or professional training; business, consulting, public service or academic positions; experience from service as a director of the Company, public companies, or non-profit entities or other organizations; or other experiences. Also, set forth below is a brief discussion of the specific experience qualifications, attributes or skills of each director that led the board of directors to conclude that he or she should serve as a director.
Alan S. Kava was selected to be a director of the Company given his experience as co-head for the Americas of the Real Estate Principal Investment Area and as a member of the Investment Committees of The Whitehall Street Real Estate Funds, Goldman Sachs Real Estate Mezzanine Partners and the Caribbean Property Fund, as well as a director of Hilton Hotels Corporation, his previous experience as an associate attorney in the corporate and real estate departments of Simpson Thacher & Bartlett, and his experience in the real estate, hotel and gaming industries.
Peter A. Weidman was selected to be a director of the Company given his experience as a managing director of Goldman, Sachs & Co. and his work in their Real Estate Principal Investment Area, his experience as an analyst in the Real Estate Investment Banking Group at Salomon Brothers and then at Averstar Capital Partners, and his experience in the real estate, hotel and gaming industries.
Frank V. Riolo was selected to be a director of the Company given his experience operating Riolo Group, LLC and serving as Chief Executive Officer of Viejas Enterprises, as well as his experience serving as our Chief Executive Officer and his experience in the real estate, hotel and gaming industries.
Edward W. Martin, III was selected to be a director of the Company given his experience as Vice President of Gaming Development for Station Casinos, Inc., Senior Vice President of Finance and Strategic Planning for Silverton Casino, LLC, and Chief Financial Officer of the Maloof Companies, as well as his experience serving as our Chief Financial Officer and Treasurer and his experience in the real estate, hotel and gaming industries.
Family Relationships
No family relationships exist between any directors or executive officers of ACEP.
Audit Committee
On December 31, 2009, Mr. Kava became a director and was appointed to the audit committee. On January 19, 2010, Mr. Weidman became a director and was appointed to the audit committee.
Our Board of Directors did not have an “audit committee financial expert”, within the meaning of Item 407(d)(5) of Regulation S-K, serving on the audit committee. The Board believed that each member of the audit committee was financially literate and possessed sufficient experience, both professionally and by virtue of his service as a director and member of the audit committee, to be fully capable of discharging his duties as a member of the audit committee. However, none of the members of the audit committee had a professional background in accounting or “preparing, auditing, analyzing or evaluating financial statements”.
If the audit committee determined that it requires additional financial expertise, it would have either engaged professional advisers or sought to recruit a member who would qualify as an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K.
Audit Committee Report
The audit committee has confirmed that: (1) the audit committee reviewed and discussed our 2015 audited financial statements with management, (2) the audit committee has discussed with our independent auditors the matters required to be discussed by AS 16, The Auditors Communication With Those Charged With Governance, (3) the audit committee has received the written
disclosures and the letter from the independent accountant required by applicable requirements of the PCAOB regarding the independent accountant’s communications with the audit committee concerning independence, and has discussed with the independent accountant the independent accountant’s independence, and (4) based on the review and discussions referred to in clauses (1) (2) and (3) above, the audit committee recommended to the Board of Directors that our 2015 audited financial statements be included in this annual report on Form 10-K.
This report is provided by the following directors, who constitute the audit committee:
Alan S. Kava
Peter A. Weidman
Code of Ethics
We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, and other senior officers, or persons performing similar functions. The Code of Business Conduct and Ethics is incorporated by referenced as Exhibit 14.1 as previously reported in our Annual Report on Form 10-K, filed with the SEC on March 21, 2013 (SEC File No. 000-52975).
Corporate Governance Guidelines
Our Corporate Governance Guidelines may be obtained without charge, by writing to American Casino & Entertainment Properties LLC, 2000 Las Vegas Boulevard South Las Vegas, NV, 89104, attention: Investor Relations.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC reports of ownership of, and transactions in, certain classes of our equity securities. Such directors, executive officers and 10% owners are also required to furnish us with copies of all Section 16(a) reports they file.
On March 26, 2009, our Chief Executive Officer and our Chief Financial Officer each filed Form 3 with the SEC due to their status as executive officers of the Company. These filings, which were due to be filed with the SEC upon their becoming our executive officers, did not report any beneficial ownership of our equity securities. Based solely upon our review of Forms 3 and 4 filed with the SEC for our Company with the SEC, we do not believe there were any other late filings or known failures to file under Section 16(a) during our most recent fiscal year or prior fiscal years.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Committee Report
Our Board of Directors reviewed and discussed the Compensation Discussion and Analysis contained in this annual report on Form 10-K with management. Based on that review and discussion, the Board of Directors recommended that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.
This report is provided by the following directors, who constitute the compensation committee:
Alan S. Kava
Peter A. Weidman
Compensation Committee Interlocks and Insider Participation
During our 2015 fiscal year, none of our officers or former officers (a) participated in deliberations concerning executive compensation of our Board of Directors, or (b) served on the board of directors or compensation committee (or other board committee performing equivalent functions) of another entity, one of whose executive officers served on our Board of Directors.
Compensation Discussion and Analysis
Overview
Our Board has established a standing compensation committee. The entire compensation committee participates in deliberations concerning executive compensation and annually reviews the performance, salary and bonus of our Chief Executive Officer and Chief Financial Officer. Our Chief Executive Officer reviews the performance, salary and bonus of the other executive officers. The conclusions reached and the recommendations based on these reviews, including with respect to salary adjustments and annual bonus awards, if any, are then presented to the Board. We feel it is beneficial to have our entire Board participate in discussions and decision-making concerning executive compensation. The Board does not delegate the authority to establish executive officer compensation to any other person and has not retained any compensation consultants to determine or recommend the amount or form of executive and director compensation. Instead, the Board has relied on recommendations from our human resources personnel, Chief Executive Officer and appropriate, legal, tax and accounting advisors.
Compensation Philosophy and Objectives
Our executive compensation philosophy is designed to support our key business objectives while maximizing value. The objectives of our compensation structure are to attract and retain valuable employees, assure fair and internally equitable pay levels and provide a mix of base salary and variable bonuses that provides motivation and awards performance. At the same time, we seek to optimize performance and manage compensation costs.
The primary components of our executive compensation are base salary and annual bonus, payable in cash. Base salary and bonus are determined based on job function and each executive’s contribution to our performance and achievement of our overall business objectives.
We are a limited liability company with two members, and our securities are not publicly traded. On March 26, 2014 our Board of Directors approved the W2007/ACEP Holdings, LLC 2013 Management Incentive Plan, or 2013 Plan, that allows for the issuance of securities to our employees.
Individual Performance Measurement
Our board of directors sets performance goals for our executive officers, including operational, growth and leadership goals for the organizations they manage. At the end of each year, the board of directors, with input from our Chief Executive Officer, assesses each executive’s performance against his or her pre-established goals. The board of directors uses this assessment to inform its discretion in determining the individual component of the cash bonus. This performance appraisal process is largely subjective, with much discretion exercised by our board of directors and performance review by our Chief Executive Officer. There is no specific weight given to any one individual goal or performance criterion. The assessment is based on our board of directors’ and Chief Executive Officer’s determinations regarding how well the executive performed his or her job, and such assessment is qualitative, not quantitative, in nature. For example, when determining how well each of the executive’s grew his or her organization, they placed more importance on the quality of the new hires than on the number or percentage of people hired. The performance appraisal process is the same for each of our executive officers.
Base Salary
We view executive officer base salaries as a tool that provides executives with a reasonable base level of monthly income relative to the jobs they are doing and market-competitive salaries. The compensation committee participates in deliberations with respect to base salary, and then makes recommendations to the board of directors for the compensation of the Chief Executive Officer, Chief Financial Officer and other executive officers as it may determine. The entire Board of Directors then sets final salaries for the Chief Executive Officer and the Chief Financial Officer. Base salary is paid for ongoing performance throughout the year and is determined based on job function and each executive’s contribution to our performance and achievement of our overall business objectives.
Bonus
Our annual bonuses are intended to reward particular achievement during the year, motivate future performance and attract and retain highly qualified key employees. Although we intend for performance-based incentives and rewards to be substantial when warranted, these incentives are secondary to career growth, work environment and engaging work opportunities. We seek to develop a highly-motivated and collaborative workforce that pursues achievements for the sake of progress and innovation
before individual gain. When ACEP as a whole, as well as individual executive officers, achieve our goals, we ensure that appropriately significant economic rewards follow.
All of our executive officers are eligible to receive discretionary cash bonuses.
Plan-Based and Equity Awards
On March 26, 2014 our Board of Directors approved the 2013 Plan that allows for the issuance of securities to our employees. The 2013 Plan was established to attract, retain and motivate ACEP’s employees, to compensate employees for their contributions to the long-term profits of ACEP and to encourage employees to acquire a proprietary interest in the success of ACEP. On March 26, 2014, our Board of Directors also approved the grant of 13,035,000 stock options and 2,500,000 restricted stock units, or RSUs, under the 2013 Plan to executive officers and certain key employees, effective April 1, 2014. Stock options generally vest ratably over 4 years and include a performance and service condition; the stock options expire 10 years from the grant date. RSUs vest upon certain events (including an initial public offering, the sale or disposition of Holdings’ membership interests in the Company, or a sale or other disposition of Holdings).
Perquisites Benefits
Our executive officers, like our other employees, participate in various employee benefit plans, including medical and dental care plans; flexible spending accounts for healthcare; life, accidental death and dismemberment and disability insurance; employee assistance programs (e.g., confidential counseling); and paid time off. Like our other employees, we also pay life insurance premiums for the benefit of our executive officers. Our offering of benefits is designed to enable us to attract and retain our workforce in a competitive environment.
The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code covering its non-union employees. The plan allows employees to defer, within prescribed limits, up to 75% of their income on a pre-tax basis through contributions to the plan. The Company matched, within prescribed limits, 50% of eligible employees’ contributions up to 6% of any individual’s earnings. The company made no matching contributions for the years ended December 31, 2015, 2014 and 2013.
The total value of all perquisites provided to each of our executive officers is less than $10,000.
Executive Compensation
The following table sets forth the compensation earned during the years ended December 31, 2015, 2014 and 2013, as applicable, by our Chief Executive Officer, or PEO, Chief Financial Officer, or PFO, and our three other most highly compensated executive officers and key employees for services rendered in all capacities for the year.
ANNUAL COMPENSATION (1)
(1)
Pursuant to applicable regulations, certain columns of the Summary Compensation Table and each of the remaining tables required by applicable SEC regulations have been omitted, if there was no compensation awarded to, or earned by or paid to any of the named executive officers by us.
(2)
For the year 2015, represents amounts approved by the Board, upon recommendation of the compensation committee, on January 20, 2016, related to 2015. The amounts were paid in 2016. For the year 2014, represents amounts approved by the Board, upon recommendation of the compensation committee, on January 15, 2015, related to 2014. The amounts were paid in 2015. For the year 2013, represents amounts approved by the Board, upon recommendation of the compensation committee, on January 17, 2014, related to 2013. The amounts were paid in 2014.
(3)
The grant date fair value of 2014 restricted stock units:
(4)
The fair value of each stock option granted under the 2013 Plan is estimated on the date of the grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:
(5)
Includes contributions by ACEP for dollar value of insurance premiums and other compensation related to health insurance payments, auto allowances and other benefits. For 2015, 2014 and 2013 All Other Compensation consisted of the following:
Grants of Plan-Based Awards
On March 26, 2014 our Board of Directors approved the 2013 Plan that allows for the issuance of securities to our employees. On March 26, 2014, our Board of Directors also approved the grant of 13,035,000 stock options and 2,500,000 RSUs under the 2013 Plan to executive officers and certain key employees, effective April 1, 2014.
The following table shows plan-based awards granted to each of our Named Executive Officers during the fiscal year ended December 31, 2015.
(1) Stock Option Award
(2) RSU Award
(3) Stock options granted under the 2013 Plan include a performance and service condition.
(4) The amounts shown in this column reflect the grant date fair value of each equity award approved for grant on March 26, 2014.
Outstanding Equity Awards at Fiscal Year-End
The following table shows outstanding unexercised stock options and unvested Restricted Stock Units for each of our Named Executive Officers as of December 31, 2015.
(1) Stock options have vested on April 1, 2014, December 31, 2014 and December 31, 2015 and will continue to vest ratably on December 31st of 2016 if the performance and service conditions have been met.
Potential Payments Upon Termination or Change in Control
We have arrangements with certain of our Named Executive Officers that may provide them with compensation following termination of employment. These arrangements are discussed below under “Employment Agreements”.
Severance Arrangements
We have agreements with certain of our executive officers that provide for additional or accelerated compensation on the termination of the executive’s employment or a change of control of ACEP, as set forth below.
We have entered into an employment agreement with Frank V. Riolo, our Chief Executive Officer, Edward W. Martin III, our Chief Financial Officer and Chief Operating Officer, , and Phyllis A. Gilland, our Senior Vice President and General Counsel that provides that in the event of termination without cause (as defined in the employment agreements), said party will receive all amounts earned, vested, due, and unpaid as of the termination date, plus a lump sum payment equal to one year of base salary, payable on the 60th day following termination.
Employment Agreements
We have entered into agreements with certain of our current executive officers and key personnel that regulate their employment with us, their compensation and potential severance packages.
On May 15, 2014, we have entered into amended and restated employment agreements with our Chief Executive Officer, Frank V. Riolo, our Chief Financial Officer and Chief Operating Officer, Edward W. Martin, III, and our Senior Vice President and General Counsel, Phyllis A. Gilland.
The term of each employment agreement commenced on April 1, 2014 and will continue until the executive’s separation from service. Each employment agreement provides for, among other things: (1) base salary at an annual rate of $600,000 for Mr. Riolo, $400,000 for Mr. Martin and $220,000 for Ms. Gilland, (2) an annual bonus, as may, from time to time, be determined in the sole discretion of the Company’s board of directors, and (3) participation in the Company’s benefit plans as generally made available from time to time to similarly situated employees.
Upon a termination of employment due to resignation by the executive without “good reason,” termination by the Company for “cause,” or failure to satisfy certain licensing requirements as set forth in the applicable employment agreement, each executive will be entitled to receive (1) due and unpaid base salary, (2) any earned bonus that is due and unpaid, (3) continued participation in the Company’s group medical plan pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1986 at the executive’s cost provided he or she is eligible for and timely elects to receive such coverage, and (4) incurred but unpaid business expense reimbursements (collectively, the “Accrued Benefits”). Upon termination of employment due to death or disability, resignation by the executive with “good reason,” or termination by the Company without “cause” (any such termination, an “Involuntary Termination”), each executive will be entitled to receive (1) the Accrued Benefits, (2) a lump-sum severance payment equal to one year of base salary, payable on the 60th day following termination and (3) vesting and exercisability, as applicable, of any then-unvested equity awards in accordance with the W2007/ACEP Holdings, LLC 2013 Management Incentive Plan (the “Plan”) and applicable award agreements; provided that the severance payment and any equity treatment are subject to the delivery (and non-revocation) of an executed general release of claims.
During and, in the event of an Involuntary Termination, for six months after, employment, each executive will be subject to a covenant not to compete in the hotel or casino business in or within 100 miles of the Stratosphere Hotel and Casino. In addition, during and for one-year after employment, each executive will be subject to a covenant not to solicit the advertisers, suppliers, vendors, clients, customers, independent contractors, brokers or employees of the Company or its subsidiaries or affiliates, and a covenant not to induce or advise any person not to do business with the Company or its subsidiaries or affiliates.
“Good reason,” as used in the employment agreements, is defined in accordance with the Plan and generally means the occurrence of any of the following: (1) a material reduction in the executive’s duties, (2) a material reduction in the executive’s annual base salary rate, or (3) a relocation of the executive’s place of employment, by the Company, to more than 50 miles from the Company’s headquarters in Las Vegas, Nevada; provided, however, that the executive must give written notice to the Company of the applicable event within 90 days of the occurrence thereof, and the Company will have a period of 30 business days after receipt of such notice to cure the event, and in the event of cure (or the commencement of steps reasonably designed to result in a prompt cure), the executive’s assertion of “good reason” will be null and void.
“Cause,” as used in the employment agreements, is defined in accordance with the Plan and generally means the occurrence of any of the following: (1) failure to perform the executive’s assigned duties, (2) chronic impairment due to alcohol or substance abuse, (3) conviction of a crime that could prohibit the executive from obtaining or maintaining any work card, license or finding of compliance suitability necessary for the executive to maintain employment with the Company, (4) being charged with a felony, (5) violation of a federal or state securities law or regulation, (6) attempted commission of, or participation in, a fraud or act of dishonesty against the Company, W2007/ACEP Holdings, LLC, any subsidiary of W2007/ACEP Holdings, LLC or certain clients or prospective clients, (7) intentional, material violation of any material contract or agreement between the executive and the Company, W2007/ACEP Holdings, LLC or any subsidiary of W2007/ACEP Holdings, LLC, (8) negligent conduct, error or omission in carrying out the duties required by the executive’s job description, (9) conduct that is reasonably expected to cause damage to the reputation of the Company or W2007/ACEP Holdings, LLC, (10) disqualification or bar by any governmental or self-regulatory authority from serving in the capacity required by the executive’s job description or loss of any governmental or self-regulatory license that is reasonably necessary for the executive to perform his or her duties or responsibilities to the Company or (11) any act or failure to act by the executive which causes any gaming or other regulatory authority having jurisdiction over the Company or W2007/ACEP Holdings, LLC to seek any redress or remedy against the executive, the Company, W2007/ACEP Holdings, LLC or any subsidiary of W2007/ACEP Holdings, LLC.
Compensation of Directors
Alan S. Kava and Peter A. Weidman did not receive any compensation for their service as members of our Board in 2015, 2014 or 2013.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Voteco owns 100% of our issued and outstanding Class A Interest. Holdings own 100% of our issued and outstanding Class B Interest. The address of Voteco is 200 West Street, New York, NY 10282 and the address of Holdings is 200 West Street, New York, NY 10282.
Messrs. Kava and Weidman own 100% of the membership interests of Voteco. As of October 14, 2010, Messrs. Kava and Weidman are the managers of Voteco.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
For the year ended December 31, 2015, we paid Goldman Sachs approximately $2.5 million in underwriting and related fees on our debt compared to $674,000 and $3.4 million for the years ended December 31, 2014 and 2013, respectively. We also paid Goldman Sachs approximately $911,000 in interest for the year ended December 31, 2015 compared to $598,000 and $2.6 million for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2015, Goldman Sachs owned approximately $517,000 of the 2015 Term Loans and committed to provide up to $7.5 million of the 2015 Revolving Facility. As of December 31, 2014, Goldman Sachs owned approximately $0 of the First Lien Term Loans, $2.3 million of the Second Lien Term Loans and committed to provide up to $5 million of the Revolving Credit Facility. As of December 31, 2015 and December 31, 2014, there was no accrued interest due to Goldman Sachs.
The Realty Management Division of Goldman Sachs, or Goldman Sachs RMD, provides various services to us such as environmental services and insurance brokerage. We expensed fees of approximately $412,000 for the year ended December 31, 2015 compared to $394,000 and $401,000 for the years ended December 31, 2014 and 2013, respectively. In addition, we provided construction management services to Goldman Sachs RMD for hotels managed by them. We recorded revenues of $0 for the year ended December 31, 2015 compared to approximately $0 and $330,000 for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2015 and December 31, 2014, we owed Goldman Sachs RMD $0. As of December 31, 2015 and December 31, 2014, Goldman Sachs RMD owed us approximately $0.
On February 20, 2008 we entered into a consulting agreement with Highgate Hotels, L.P., or Highgate, pursuant to which Highgate provides asset management consulting services to us. The agreement was amended to reduce fees payable thereunder on June 25, 2009 and Highgate converted amounts due them from ACEP to contributed capital in Holdings. Highgate owns a less than 5% membership interest in Holdings. The consulting agreement expired on June 20, 2013. Highgate was entitled to receive a $1.5 million per year base consulting fee for the periods through February 20, 2011 and a $1.0 million per year base consulting fee for the periods after February 20, 2011, along with additional consulting fees up to $500,000 per year for periods after February 20, 2011 based on EBITDA results at the properties and development fees at 4% of the aggregate costs of any agreed upon development projects. We incurred Highgate fees of approximately $0 for the year ended December 31, 2015 compared to $0 and $500,000 for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2015 and December 31, 2014, there were no amounts due to or from Highgate.
On February 24, 2015, we entered into an agreement with Travel Tripper LLC, or TTL, to utilize their technology for online hotel reservations. TTL is owned by an affiliate of Highgate (23)% and an employee of Highgate (40)%. From December 4, 2012 through February 24, 2015 we did not use Travel Tripper LLC’s services. We expensed fees of approximately $30,000 for the year ended December 31, 2015 compared to $0 and $8,000 for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2015 and December 31, 2014, we owed TTL approximately $1,000 and $0, respectively.
On October 3, 2008, we entered into a participation agreement with Nor1, Inc., or Nor1, to utilize their technology to help sell perishable suite and room inventories. Nor1 gives the guest who books on-line the opportunity to book a non-guaranteed suite or upgraded rooms at a discounted rate if such is available at check-in. If the suite or upgraded room is awarded, Nor1 is paid 25% of the upgrade fee. Goldman Sachs owns less than 5% of Nor1. We expensed fees of approximately $15,000 for the year ended December 31, 2015 compared to $21,000 and $24,000 for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2015 and December 31, 2014, we owed Nor1 approximately $7,000 and $1,000, respectively.
Other Relationships and Policies
If a proposed transaction appears to or does involve a related person, the transaction is presented to our management for review. If management is unable to determine if a transaction is with a related party it will be presented to our audit committee for review. The audit committee is authorized to retain and pay such independent advisors as it deems necessary to properly evaluate the proposed transaction, including, without limitation, outside legal counsel and financial advisors to determine the fair value of the transaction.
Director Independence
We believe that Messrs. Kava and Weidman are not “independent” as defined in the currently applicable listing standards of the New York Stock Exchange, or NYSE, because they are the beneficial owners of 100% of the Class A Interests. ACEP has no securities listed on the NYSE and, therefore, are not subject to the NYSE listing standards.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the approximate aggregate fees incurred by our principal accountants for 2015 and 2014 services:
Grant Thornton, LLP, did not provide any services related to financial information systems design and implementation during 2015 or 2014.
(1)
Fees related to the preparation of the consolidated tax return for the years ended December 31, 2014 and 2013.
It is the policy of the Audit Committee to pre-approve all engagements and fees of the independent public accountant and during 2015 and 2014 all such engagements and fees were pre-approved.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements
3. List of Exhibits
EXHIBITS INDEX
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities indicated with respect to the Board of Directors of American Casino & Entertainment Properties LLC, on behalf of the Registrant in the capacities and on the dates indicated:
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
We have not sent any annual reports to security holders covering the year ended December 31, 2015. We have not sent proxies, form of proxy or other proxy soliciting material to our security holders with respect to any annual or other meeting of security holders and will not be doing so subsequent to the filing of this Form 10-K.