ITEM 1. BUSINESS
General
American Casino & Entertainment Properties LLC owns and operates four gaming and entertainment properties in southern Nevada. The four properties are the Stratosphere Casino Hotel & Tower, which is located on the Las Vegas Strip and caters to visitors to Las Vegas, two off-Strip casinos, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder, which cater primarily to residents of Las Vegas and the surrounding communities, and the Aquarius Casino Resort which caters to visitors to Laughlin. The Stratosphere is one of the most recognized landmarks in Las Vegas and our two Arizona Charlie’s branded properties are well-recognized casinos in their respective marketplaces and the Aquarius has the largest hotel in Laughlin. Each of our properties offers customers a value-oriented experience by providing competitive odds in our casinos, quality rooms in our hotels, award-winning dining facilities and, at the Stratosphere, an offering of entertainment attractions that we believe cannot be found anywhere else in Las Vegas. We believe the value we offer our patrons, together with a strong focus on customer service, will enable us to continue to attract customer traffic to our properties.
We are a holding company that was formed for the purpose of acquiring the entities that own and operate the Stratosphere, Arizona Charlie’s Decatur, Arizona Charlie’s Boulder and the Aquarius. We conduct our operations through direct and indirect wholly-owned subsidiaries. These subsidiaries are Stratosphere LLC and its wholly-owned subsidiaries, Stratosphere Gaming LLC, Stratosphere Land LLC, Stratosphere Advertising Agency and Stratosphere Leasing, LLC; and Charlie’s Holding LLC and its wholly-owned subsidiaries, Arizona Charlie’s, LLC, Fresca, LLC, and Aquarius Gaming LLC. Unless the context indicates otherwise, all references to “American Casino & Entertainment Properties LLC,” “ACEP,” the “Company,” “we,” “our,” “ours” and “us” refer to American Casino & Entertainment Properties LLC and include our subsidiaries.
On April 22, 2007, American Entertainment Properties Corp., or AEP, our former direct parent, entered into a Membership Interest Purchase Agreement, or the Agreement, with W2007/ACEP Holdings, LLC, or Holdings, an affiliate of Whitehall Street Real Estate Funds, a series of real estate investment funds affiliated with Goldman, Sachs & Co., to sell all of our issued and outstanding membership interests to Holdings, for $1.3 billion plus or minus certain adjustments such as working capital, more fully described in the Agreement. Pursuant to the Assignment and Assumption Agreement, dated December 4, 2007, between Holdings and W2007/ACEP Managers Voteco, LLC, or Voteco, Holdings assigned all of its rights, obligations and interests under the Agreement to Voteco. The acquisition, or the Acquisition, closed at a purchase price of $1.2 billion on February 20, 2008.
On February 20, 2008, upon the consummation of the closing of the Acquisition contemplated by the Agreement, ACEP, Voteco and Holdings entered into an Amended and Restated Limited Liability Company Agreement of ACEP or the Amended Operating Agreement. On February 20, 2008, in connection with the closing of the Acquisition, each member of Voteco (Stuart Rothenberg, Brahm Cramer and Jonathan Langer), Holdings and Voteco entered into a Transfer Restriction Agreement.
On February 20, 2008, in connection with the closing of the Acquisition, certain of our wholly owned indirect subsidiaries obtained term loans in an aggregate amount of approximately $1.1 billion from Goldman Sachs Mortgage Company, or the Goldman Term Loans, pursuant to certain mortgage and mezzanine loan agreements.
The Goldman Term Loans have an initial term of two years with two one-year extension options and a blended annual interest rate of LIBOR plus 3.00% during the initial term and LIBOR plus 3.25% during any extension term. Approximately $56.5 million of the Goldman Term Loans is held for a capital expenditure reserve, a deferred maintenance and an environmental reserve. In addition, the Goldman Term Loans contain important affirmative and negative financial covenants customary for loans of this nature, which may restrict our ability to conduct our gaming operations or pursue development opportunities if desired. Certain of our assets, including the Stratosphere Casino Hotel & Tower, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder, and the Aquarius Casino Resort, secure the Goldman Term Loans.
On February 20, 2008, upon consummation of the Acquisition, we issued and sold 100% of our Class B membership interests, or Class B Interests, to Holdings for approximately $225.1 million. Except as otherwise expressly required by law, holders of our Class B Interests have no voting rights. The sale of our Class B Interests to Holdings is exempt from registration under the Securities Act pursuant to Section 4(2) thereof.
On January 24, 2008, the Nevada Gaming Commission issued an order of registration of ACEP as constituted after the consummation of the Acquisition. The order (1) prohibits Voteco or Holdings or their respective affiliates from selling, assigning, transferring, pledging or otherwise disposing of our membership interests or any other security convertible into or exchangeable from our class A membership interests, or Class A Interests, or Class B Interests, without the prior approval of the Nevada Gaming Commission, (2) prohibits the direct or indirect members of Voteco from selling, assigning, transferring, pledging or otherwise disposing of any direct or indirect membership
interest in Voteco without the prior administrative approval of the Chairman of the Nevada State Gaming Control Board or his designee, and (3) prohibits ACEP from declaring cash dividends or distributions on any class of membership interest of ACEP beneficially owned in whole or in part by Holdings or Voteco or their respective affiliates, without the prior approval of the Nevada Gaming Commission.
On February 20, 2008, in connection with the closing of the Acquisition, each member of Voteco (Stuart Rothenberg, Brahm Cramer and Jonathan Langer), Holdings and Voteco entered in to a Transfer Restriction Agreement. The Transfer Restriction Agreements provides, among other things, that:
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Holdings has the right to acquire Class A Interests from Voteco on each occasion that Class B Interests held by Holdings would be transferred to a proposed purchaser who, in connection with such proposed sale, has obtained all licenses, permits, registrations, authorizations, consents, waivers, orders, findings of suitability or other approvals required to be obtained from, and has made all findings, notices or declarations required to be made with, all gaming authorities under all applicable gaming laws,
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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.
On February 20, 2008, upon consummation of the Acquisition, Voteco acquired control of ACEP from our previous direct parent, AEP. AEP sold all the issued and outstanding membership interests of ACEP to Voteco pursuant to the Agreement. The membership interests of ACEP acquired by Voteco were redeemed and canceled pursuant to the terms of the Amended Operating Agreement entered into by ACEP, Voteco and Holdings upon the consummation of the Acquisition. Voteco acquired 100% of our voting securities by purchasing 100% of our newly issued Class A Interest in exchange for consideration in the amount of $30. The source of funds used by Voteco to purchase the Class A Interest were contributions of capital made to Voteco by each of its three members. Voteco designated each of its members, Stuart Rothenberg, Brahm Cramer and Jonathan Langer, as a board member of ACEP.
Prior to the consummation of the Acquisition, we were managed by our sole member, AEP, and did not have a board of directors. On February 20, 2008, upon consummation of the Acquisition, Stuart Rothenberg, Brahm Cramer and Jonathan Langer, each a member of Voteco, were appointed as members of our board. Each of the members of Voteco are party to the Transfer Restriction Agreement.
On February 20, 2008, upon the consummation of the Acquisition, ACEP, Voteco and Holdings entered into the Amended Operating Agreement. Pursuant to the Amended Operating Agreement, holders of Class A Interests will be entitled to one vote per interest in all matters to be voted on by our voting members. Except as otherwise expressly required by law, holders of Class B Interests will have no right to vote on any matters to be voted on by our members. Holders of Class A Interests and Class B Interests will have no preemptive rights, no other rights to subscribe for additional interests, no conversion rights and no redemption rights, will not benefit from any sinking fund, and will not have any preferential rights upon a liquidation. The Amended Operating Agreement contains provisions for indemnification of the members of our board and our officers and their respective affiliates.
On February 21, 2008, Icahn Enterprises L.P., or IELP, and ACEP issued a press release announcing the closing of the Acquisition and, in connection with the closing of the Acquisition, that ACEP has accepted for payment and has repaid all of its outstanding 7.85% senior secured notes due 2012, which were tendered pursuant to ACEP’s previously announced tender offer and consent solicitation. In addition, ACEP has repaid in full all amounts outstanding, and terminated all commitments, under its senior secured revolving credit facility with Bear Stearns Corporate Lending Inc., as administrative agent, and the other lenders thereunder.
Before the consummation of the Acquisition, ACEP was an indirect subsidiary of, and its ultimate parent was, IELP, a Delaware master limited partnership the units of which are traded on the New York Stock Exchange. As of December 31, 2007, affiliates of Carl C. Icahn owned 10,304,013 preferred units and 64,288,061 depositary units, which represented approximately 86.5% of the outstanding preferred units and approximately 91.2% of the outstanding depositary units of IELP. Mr. Icahn is the Chairman of the Board of Directors of Icahn Enterprises G.P., or IEGP, IELP’s general partner. IELP is a holding company. Its operations are conducted through its subsidiaries and substantially all of its assets consist of a 99% limited partnership interest in its subsidiary, Icahn Enterprises Holdings L.P., or IEH. IEH is a holding company for IELP’s operating subsidiaries and investments. The general partner of IEH is IEGP.
Our management team has been responsible for the management of all three Las Vegas Properties since 2002. We purchased the Aquarius on May 19, 2006 from Harrah’s Operating Company, Inc.
We were formed in Delaware on December 29, 2003. Our executive offices are located at 2000 Las Vegas Boulevard South, Las Vegas, Nevada 89104 and our telephone number is (702) 380-7777.
Our Business Strategy and Competitive Strengths
We intend to grow the revenues and profitability of our business through the continued execution of a number of key operating strategies:
Value-Oriented Experience
We target primarily middle-market customers who focus on obtaining value in their gaming, lodging, dining and entertainment experiences. We strive to deliver value to our gaming customers at our Arizona Charlie’s locations by offering payout ratios on our slot and video poker machines that we believe are among the highest payout ratios in Las Vegas. Similarly, at the Stratosphere, we offer attractive table games, including Single Zero Roulette and Ten Times Odds Craps, which provide patrons with odds that we believe are better than the standard odds for these games at other Las Vegas Strip casinos.
We also provide our customers with attractive offerings in the areas of lodging and food and beverage service. We believe that our product offerings in each of these categories are reasonably priced and of consistently high quality. In addition, our Ultimate Rewards and A.C.E. Rewards programs enables customers to receive and redeem rewards further encouraging frequent visits by our customers.
Customer Service
We are committed to providing our patrons a high level of customer service. Our employees participate in regular and intensive customer service training programs and are rewarded and incentivized, in part, based upon the quality of service they provide to customers. We routinely conduct comprehensive customer surveys at all of our properties, and we pursue a process of continuous improvement at our properties based on the information gathered from our surveys.
Stratosphere as a Destination Property for Visitors to Las Vegas
We believe the Stratosphere is one of the most recognized landmarks in Las Vegas. The Stratosphere offers the tallest free-standing observation tower in the United States and, at 1,149 feet, is the tallest building west of the Mississippi River. In our opinion, the Stratosphere Tower boasts some of the most unique amenities in Las Vegas, including an award-winning, revolving restaurant with unparalleled views of Las Vegas, known as the Top of the World, the highest indoor/outdoor observation deck in Las Vegas, and the three highest amusement rides in the world: the Big Shot, the X Scream and Insanity. The Stratosphere Tower also has a cocktail lounge, a wedding chapel and event space.
We believe that the distinctive amenities of the Stratosphere, together with our dedication to providing a quality, value-oriented experience, have significantly contributed to approximately 1.4 million visits to the Stratosphere Tower in the twelve months ended December 31, 2007. We believe our attractions, as well as the introduction of additional entertainment-driven amenities will enable us to continue to market the Stratosphere as a must-see destination property in Las Vegas.
Repositioned Properties to Better Target Market
Our management team has repositioned each of our properties to better target their respective markets, expanding and improving our existing facilities, focusing on customer service and implementing a targeted cost reduction program. In addition, we have converted 100% of the slot machines at all of our properties to ticket-in/ticket-out technology. We believe this format yields meaningful operating efficiencies for us and increases the rate of customer play, since patrons are able to enjoy a gaming experience uninterrupted by the machine servicing requirements typically necessary for coin-operated slot machines.
Emphasis on Slot Play
We focus our marketing efforts on attracting customers with an affinity for playing slot and video poker machines. Similarly, we have intentionally avoided competing for the attention of high-stakes table game customers. We believe slot machine players are a more consistently profitable customer type. We have invested in equipping our casinos with the latest in slot and video poker machine technology and game brands. We regularly modify our mix of slot machine product to maximize the profitability of our casinos while also providing our customers with the
most current product offerings. The conversion to ticket-in/ticket-out slot machines has yielded meaningful operating efficiencies for us while also increasing the rate of customer play, as patrons are able to enjoy a gaming experience uninterrupted by the machine servicing requirements typically necessary for coin-operated slot machines.
Experienced Management Team
Our senior management team, which collectively has over 100 years of operating experience in the gaming industry, has successfully managed a significant improvement in the operating performance of our properties. Our executive and property-level management teams have an established record of developing, integrating and operating gaming and entertainment properties. Our management team is focused on controlling costs and executing efficient marketing programs in an effort to increase operating cash flow.
Our Gaming and Entertainment Properties
Stratosphere
The Stratosphere owns approximately 34 acres of land located at the northern end of the Las Vegas Strip, of which approximately 17 acres is undeveloped land, and the remainder is a tourist-oriented gaming and entertainment destination property. The Stratosphere operates the Stratosphere Tower, a hotel, a casino and a retail center. The parking facility accommodates approximately 4,000 cars.
The Stratosphere is centered around the Stratosphere Tower, the tallest free-standing observation tower in the United States. Standing 1,149 feet above the Las Vegas Strip, the Stratosphere Tower is visible from all directions, including from McCarran International Airport.
Casino
The Stratosphere’s casino contains approximately 80,000 square feet of gaming space, with approximately 1,300 slot machines, 49 table games, an eight table poker room, and a race and sports book. The Stratosphere has converted 100.0% of its video poker and slot machines to ticket-in/ticket-out technology.
For the years ended December 31, 2007, 2006 and 2005, approximately 72.2%, 68.2% and 70.7%, respectively, of the Stratosphere’s gaming revenue was generated by slot machine play and 25.9%, 27.3% and 25.9%, respectively, by table games. The Stratosphere derives its other gaming revenue from the poker room and race and sports book, which primarily are intended to attract customers for slot machines and table games.
Hotel, Food and Beverage
The hotel has 2,444 rooms, including 131 suites. The hotel amenities include a 67,000 square-foot resort pool and recreation area located on the eighth floor, which includes a café, cocktail bar, private cabanas and a fitness center, Beach Club 25, located on the 25th floor, provides a secluded adult pool. Approximately 1,700 of our guest rooms have been refurbished in the four years ended December 31, 2007.
The Stratosphere offers six themed restaurants and six lounges, two of which feature live entertainment. The C-Bar, our most recent addition to the Stratosphere’s lounges, opened in November of 2006 and is centrally located within the casino. Our premier restaurant is Top of the World Restaurant, a 336-seat revolving restaurant located on the 106th floor of the tower. Located 833 feet over the Las Vegas Strip, the Top of the World has been Michelin Guide recommended for 2007. In addition, it has been awarded the Certified Angus Beef Restaurant Marketer of the Year for 2007 and has been granted the “Award of Excellence” from Wine Spectator Magazine for over 10 years.
The Tower
The Tower is the tallest freestanding observation tower in the United States and, at 1,149 feet, is the tallest building west of the Mississippi River. From the indoor/outdoor observation decks, lounge and restaurant, Tower visitors have dramatic views of the Las Vegas Strip, downtown Las Vegas and the surrounding Las Vegas Valley.
The Tower Pod features the three highest thrill rides in the world:
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Big Shot, which catapults up to 16 riders, in harnessed seats, from the 921-foot level of the Tower Pod, 160 feet straight up the mast of the Tower and allows for a controlled free-fall back to the landing platform;
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X Scream, is shaped like a giant teeter-totter and launches up to eight riders approximately 30 feet over the edge of the Tower and then dangles them weightlessly above the Las Vegas Strip; and
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Insanity, which opened in March 2005, holds ten passengers in “escape proof” seats in an arm that extends out 64 feet over the edge of the Tower and spins passengers at up to three “G’s.” As the ride spins faster and faster, the riders are propelled up to an angle of 70 degrees, overlooking the City of Las Vegas more than 900 feet below.
The Tower Pod also includes:
Retail and Entertainment
The retail center, located on the second floor of the base building, occupies approximately 110,000 square feet of developed retail space and approximately 80,000 square feet of undeveloped space. The retail center contains 44 shops, five of which are food venues, and space for 16 merchant kiosks. The retail center also includes a full-service salon and spa. Adjacent to the retail center is the 640-seat showroom that currently offers evening and late-night shows, which are designed to appeal to value-oriented visitors who come to Las Vegas. The Stratosphere’s entertainment includes American Superstars, a celebrity tribute, and Bite, a vampire-themed adult review.
Arizona Charlie’s Decatur
Arizona Charlie’s Decatur opened in April 1988 as a full-service casino and hotel geared toward residents of Las Vegas and the surrounding communities. Arizona Charlie’s Decatur is located on approximately 17 acres of land four miles west of the Las Vegas Strip in the heavily populated west Las Vegas area. The property is easily accessible from Route 95, a major highway in Las Vegas. Arizona Charlie’s Decatur offers on-site valet and self-parking lots with combined capacity for over 1,400 vehicles. We believe that ease of access to the casino is an important element in the appeal of Arizona Charlie’s Decatur to local customers.
Casino
Arizona Charlie’s Decatur contains approximately 52,000 square feet of gaming space with approximately 1,350 slot machines, 15 table games, a 24-hour bingo parlor, a keno lounge, a race and sports book and a poker lounge.
Approximately 52.0% of the slot machines at Arizona Charlie’s Decatur are video poker games. Arizona Charlie’s Decatur emphasizes video poker because it is popular with local players and, as a result, generates high volumes of play and casino revenue. Arizona Charlie’s Decatur has converted 100% of its video poker and slot machines to ticket-in/ticket-out technology. Most table games at Arizona Charlie’s Decatur are devoted to double-deck, hand-dealt blackjack play.
For the years ended December 31, 2007, 2006 and 2005, approximately 91.5%, 89.7% and 89.3%, respectively, of the property’s gaming revenue was generated by slot machine play and 4.4%, 5.3% and 4.9%, respectively, by table games. Arizona Charlie’s Decatur derives its other gaming revenue from bingo, keno, poker and the race and sports book, which primarily are intended to attract customers for slot machines and table games.
Hotel, Food and Beverage
Arizona Charlie’s Decatur currently has 258 rooms, including nine suites. Hotel customers include local residents and their out-of-town guests, as well as those business and leisure travelers who, because of location or cost considerations, choose not to stay on the Las Vegas Strip or at other hotels in Las Vegas.
Arizona Charlie’s Decatur has three restaurants, one of which is an independently run franchised, Subway® and Roman’s Pizza®. Arizona Charlie’s Decatur also has one bar in the bingo area and three bars in the casino area, one of which includes a lounge with live entertainment nightly.
Retail and Entertainment
Arizona Charlie’s Decatur provides complimentary entertainment as a component of its overall customer appeal. The Naughty Ladies Saloon features a variety of entertainment, including live bands, musician showcase nights and jam sessions. Arizona Charlie’s Decatur has focused on the appeal of its entertainment programming in order to retain its customers and increase the play at its casino.
A small gift shop located adjacent to the casino provides a limited range of inexpensive gift items, candy, newspapers, magazines and cigarettes. We believe that ease of access to the casino is an important element in the appeal of Arizona Charlie’s Decatur to local customers.
Arizona Charlie’s Boulder
Arizona Charlie’s Boulder opened in May 2000 as a full-service casino, hotel and RV park. Arizona Charlie’s Boulder is situated on approximately 24 acres of land located on Boulder Highway, in an established retail and
residential neighborhood in the eastern metropolitan area of Las Vegas. The property is accessible from I-515, the most heavily traveled east/west highway in Las Vegas. Arizona Charlie’s Boulder offers on-site valet and self-parking lots with combined capacity for over 1,200 vehicles.
Casino
Arizona Charlie’s Boulder contains approximately 47,000 square feet of gaming space, 6,000 of which was added in June 2006, with approximately 1,100 slot machines, 16 table games, a 24-hour bingo parlor and a race and sports book. The additional gaming space features approximately 230 new slot machines, a new A.C.E. Rewards center, and a new hotel front desk.
Approximately 52.2% of the slot machines at Arizona Charlie’s Boulder are video poker games. Arizona Charlie’s Boulder emphasizes video poker because it is popular with local players and, as a result, generates high volumes of play and casino revenue. Arizona Charlie’s Boulder is 100% converted to ticket-in/ticket-out technology. Most table games at Arizona Charlie’s Boulder are devoted to double-deck, hand-dealt blackjack play.
For the years ended December 31, 2007, 2006 and 2005, approximately 89.6%, 89.3% and 88.1%, respectively, of gaming revenue was generated by slot machine play and 6.1%, 6.0% and 7.1%, respectively, by table games. Arizona Charlie’s Boulder derives its other gaming revenue from bingo and the race and sports book, which primarily serve to attract customers for slot machines and table games.
Hotel, Food and Beverage
Arizona Charlie’s Boulder hotel currently has 303 rooms, including 221 suites. Hotel customers include local residents and their out-of-town guests, as well as those business and leisure travelers who, because of location or cost considerations, choose not to stay on the Las Vegas Strip or at other hotels in Las Vegas.
Arizona Charlie’s Boulder has four restaurants and three bars, one of which is the Palace Grand lounge.
Retail and Entertainment
Arizona Charlie’s Boulder complimentary entertainment is a component of its overall customer appeal. Palace Grand features live bands at no charge. Arizona Charlie’s Boulder utilizes the appeal of its entertainment programming in order to retain its customers and increase the play at its casino.
A small gift shop located adjacent to the casino provides a limited range of inexpensive gift items, candy, newspapers, magazines and cigarettes.
Arizona Charlie’s Boulder also has an RV park. The RV park is one of the largest short-term RV parks on the Boulder Strip with 30 to 70-foot pull through stations and over 200 spaces. The RV park offers nightly, weekly and monthly rates and a range of services, including laundry facilities, game and exercise rooms, a swimming pool, a whirlpool and shower facilities.
Aquarius Casino Resort
On May 19, 2006, we acquired the Flamingo Laughlin Hotel and Casino in Laughlin, Nevada from Harrah’s Operating Company, Inc. We paid $114.0 million for the Flamingo, including direct acquisition costs and working capital amounts.
We renamed the property, the Aquarius Casino Resort, or the Aquarius. The Aquarius owns approximately 18 acres of land located next to the Colorado River in Laughlin, Nevada and is a tourist-oriented gaming and entertainment destination property. In 2006, we initiated a large capital improvement program for the Aquarius. We currently estimate the cost of the improvements to be approximately $52.1 million through 2008, of which approximately $30.3 million had been expended, through December 31, 2007. Completed capital improvements to the Aquarius include renovations to the casino and common areas, new slot machines and new signage. Currently planned 2008 capital improvements to the Aquarius include renovations to our suites as well as standard rooms in our Arizona and California towers.
The Laughlin area is situated in an unincorporated portion of Clark County and is located in the southerly portion of the State of Nevada. Laughlin is located along the west side of the Colorado River which forms the boundary between the States of Nevada and Arizona. Las Vegas is located approximately 97 miles to the north via U.S. Highway 95. Los Angeles is approximately 300 miles west with access being provided by Interstate 40 and Interstate 15. Flagstaff, Arizona is approximately 180 miles via Interstate 40 while Phoenix, Arizona is approximately 185 miles southeast of Laughlin.
Casino
The Aquarius contains approximately 57,000 square feet of gaming space with approximately 1,200 slot machines,
42 table games, including a three table poker room, a keno lounge and a race and sports book.
Approximately 33.0% of the slot machines at Aquarius Casino Resort are video poker games. Aquarius Casino Resort emphasizes video poker because it is popular with local players and, as a result, generates high volumes of play and casino revenue. Aquarius Casino Resort has converted 100% of its video poker and slot machines to ticket-in/ticket-out technology. Many table games at the Aquarius Casino Resort are devoted to double-deck, hand-dealt blackjack play.
For the year ended December 31, 2007 and from the date of acquisition through December 31, 2006, approximately 84.0% and 80.5%, respectively, of the property’s gaming revenue was generated by slot machine play and 13.2% and 15.5%, respectively, by table games. Aquarius Casino Resort derives its other gaming revenue from keno, poker and the race and sports book, which primarily are intended to attract customers for slot machines and table games.
Hotel, Food and Beverage
The Aquarius is the largest hotel in Laughlin, Nevada, with 1,907 hotel rooms, including 90 suites, in two 15-story towers. Hotel amenities include: an outdoor pool; lighted tennis courts; three restaurants, including the Aqua Bella, which is designed for fine dining and is utilized in the mornings for player’s club members’ breakfast, the Windows on the River Buffet and Café Aquarius, a diner which is open 24 hours. The Aquarius has four franchised fast food restaurants. Two nationally recognized brand names operate within the Aquarius: the Outback Steakhouse®, and Starbucks®. The Aquarius also has four bars, one of which is an entertainment lounge, and one lounge patio.
Retail and Entertainment
Total meeting space at the Aquarius is nearly 30,000 square feet, with approximately 19,300 devoted to the pavilion which can accommodate 1,300 to 2,000 guests. The ballroom hosts numerous stage shows and musical reviews. The property also has a club that is situated on the first floor adjacent to the casino and can accommodate 300 guests. The outdoor amphitheater can accommodate 3,300 seats and is utilized approximately 16 times a year. In addition to meeting rooms, the facility offers a wedding chapel with a wide variety of ceremony packages. The property also includes a leased gift shop, one retail shop, the Jewels of Laughlin, which is leased to an outside operator and a parking garage with a capacity for 2,420 cars. Tours of the Colorado River are offered aboard the “Celebration” paddle-wheeler style boat and jet ski’s can be rented from the Aquarius’ boat dock; both businesses are operated by lessees.
Marketing Strategy
We market our properties to both the tourist and local resident markets. The primary market for the Stratosphere is the middle-market, value conscious Las Vegas visitor. Both Arizona Charlie’s Decatur and Arizona Charlie’s Boulder cater to the local Las Vegas resident market. The Aquarius targets the middle to high-end visitor to Laughlin, Nevada and local residents.
Our strategy is to provide value to our customers through pricing, competitive gaming odds and attentive customer service. We tailor our selection of slot machines to our targeted customer’s expectation and our casinos feature many diverse video poker machines and unique table games with attractive odds.
A.C.E. Rewards is our cross property player rewards program which we utilize to attract and retain customers. This program allows players to accumulate points which can be exchanged for cash and complimentaries at any of our properties regardless of where the points were earned. We believe our rewards program is very competitive in our respective markets.
We use our database technology to support the marketing of our product offerings through direct mail, e-mail and telemarketing programs. We also use print, billboards, radio and television advertising and promotional messages posted on our marquees to promote our properties and target our customers.
In the Las Vegas tourist market, we primarily target middle-market customers who focus on obtaining value in their gaming, lodging and dining and entertainment experiences. We emphasize the Stratosphere as a destination property for visitors to Las Vegas by offering an attractive experience for the value minded customer. The Stratosphere utilizes the unique amenities of its tower to attract visitors. Gaming products, hotel rooms, entertainment and food and beverage products are priced to appeal to the value-conscious middle-market Las Vegas visitor. The Top of the World our gourmet restaurant located at the top of the tower, however, caters to higher-end customers. Advertising and promotional campaigns are designed to maximize hotel room occupancy, visits to the tower, attendance at our shows, and the attraction and retention of players to the property.
In the Las Vegas local market, we strive to deliver value to our gaming customers at our Arizona Charlie’s locations by offering payout ratios on our slot and video poker machines that we believe are among the highest payout ratios in Las Vegas. Arizona Charlie’s Decatur and Arizona Charlie’s Boulder market their hotels and casinos primarily to local residents of Las Vegas and the surrounding communities. We believe that the properties’ pricing and gaming odds make them two of the best values in the gaming industry and that their gaming products, hotel rooms, restaurants and other amenities attract local customers in search of reasonable prices, boutique casinos and more attentive service.
We believe that our Las Vegas management team has repositioned each of our properties to better target their respective markets, expanding and improving our existing facilities, focusing on customer service and implementing a targeted cost reduction program.
The Laughlin market is a value-oriented destination for travelers seeking an alternative to the fast-paced Las Vegas experience. The Aquarius targets the mid to high end customer in this market seeking great value, a breadth of amenities and friendly service in their gaming, lodging, dining and entertainment experiences. The facility has been upgraded with 1,000 new slot machines, new lobby, new V.I.P. Check-In, V.I.P. Players Lounge, a refurbished Center Bar and the addition of a patio lounge providing views of the Colorado River. Two nationally recognized brand names operate within the Aquarius: the Outback Steakhouse®, and Starbucks®.
Trademarks
We regard our trademarks, service marks, trade names and similar intellectual property as important to our success. We rely on a combination of laws and contractual restrictions with our employees, customers and others to establish and protect our proprietary rights. We have registered a large number of trademarks and service marks in the United States, including the names of our hotels and casinos. We use certain other trademarks, trade names, service marks and similar intellectual property owned by third parties in our business.
Seasonality
Generally, our Las Vegas gaming and entertainment properties are not affected by seasonal trends. However, our Laughlin gaming and entertainment property tends to have increased customer flow from mid-January through April.
Casino Credit
We extend credit on a discretionary basis to qualified patrons. We maintain strong controls over the extension of credit and evaluate each individual patron’s creditworthiness before extending credit. Collection of our customers’ debts is pursued by appropriate means, including legal proceedings when necessary. Our casino credit is less than 2% of all table games wagering.
Competition
The hotel and casino industry in general, and the markets in which we compete in particular, are highly competitive. The Las Vegas market includes many world-class destination resorts, with numerous other tourist attractions. Numerous Las Vegas hotel and casino resorts are themselves tourist attractions. Each of these resorts competes with us in our ability to attract visitors to the Stratosphere. The Stratosphere’s hotel and food and beverage operations compete directly with other properties targeting the budget-minded, middle-market Las Vegas visitor. Some of our competitors on the Las Vegas Strip include, but are not limited to, hotels and casinos such as the Sahara, the Riviera, Circus Circus, the Luxor and the Tropicana. The Stratosphere competes with other hotels and casinos on the Las Vegas Strip based on a mix of casino games, personal service, payout ratios, location, price of hotel rooms, restaurant value and promotions.
Arizona Charlie’s Decatur and Arizona Charlie’s Boulder compete primarily with other Las Vegas hotels and casinos located outside of the Las Vegas Strip. The Arizona Charlie’s properties compete for local customers with other hotels and casinos targeting this group and located near their respective hotel and casino. The Arizona Charlie’s properties compete with other casinos in the Las Vegas metropolitan area based on a mix of casino games, personal service, payout ratios, location, price of hotel rooms, restaurant value and promotions.
The Aquarius competes primarily with other Laughlin hotels and casinos, some of similar size, located along the Colorado River. From a competitive standpoint, we believe that the Aquarius is the largest hotel in Laughlin based on the number of available rooms and we believe that the Aquarius casino has the third largest number of slot machines of its competitors. The Aquarius competes with other hotels and casinos in Laughlin based on a mix of casino games, personal service, payout ratios, price of hotel rooms, restaurant value and promotions.
The Las Vegas Market
Las Vegas is one of the fastest-growing and largest entertainment markets in the country. 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 tourist market, which tends to be concentrated on the Las Vegas
Strip and Downtown Las Vegas, and the local market, which includes the surrounding Las Vegas area.
Tourist Market
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 30.5 million visitors in 1997 to 39.2 million visitors in 2007, a compound annual growth rate of 2.3%. The number of hotel and motel rooms in Las Vegas has increased by over 26%, from 105,347 at the end of 1997 to 132,947 at the end of 2007, giving Las Vegas the most hotel and motel rooms of any metropolitan area in the world. Despite this significant increase in the supply of rooms, the Las Vegas hotel occupancy rate exceeded 88% for each of the years from 1997 through 2007.
Las Vegas Strip gaming revenues have grown as Las Vegas visitations and hotel room count have grown. Between 1997 and 2007, gaming revenues on the Las Vegas Strip experienced a compound annual growth of 5.4%
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 attendees in Las Vegas increased from approximately 3.5 million in 1997 to 6.2 million in 2007, representing a compound annual growth rate of 5.3%. Trade show attendees spent approximately $8.4 billion in 2007.
We believe that the growth in the Las Vegas tourist market has been enhanced by a dedicated program of the LVCVA and major Las Vegas hotels to promote Las Vegas as an exciting vacation and convention site, the increased capacity of McCarran International Airport and the introduction of large, themed destination resorts in Las Vegas.
Local Market
Nevada has enjoyed a strong economy and demographics that include an increasing number of retirees and other active gaming patrons. 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 1,115,940 in 1996 to 1,912,654 in 2006, a compound annual growth rate of 5.0%. In comparison, the United States population increased at a compound annual growth rate of 1.0% during this period. In 2006, median household income in Clark County was $53,536, compared with the national median income of $48,451.
The Laughlin Market
The Laughlin area economy is primarily dependent on the gaming and tourism industry. Visitor volume and occupancy rates have declined on an annual basis over the past several years while the number of hotel rooms has remained fairly constant. The declining trend in these primary indicators began in 1994 after nearly 10 years of economic growth in the area’s primary industry. The Laughlin gaming market consists of approximately 10,700 rooms and its gaming revenue for 2007 was $631 million.
Regulation and Licensing
Introduction
The ownership and operation of casino gaming facilities in the State of Nevada are subject to the Nevada Gaming Control Act and the regulations made under such Act, as well as various local ordinances. The gaming operations of our casinos are subject to the licensing and regulatory control of the Nevada Gaming Commission and the Nevada State Gaming Control Board. Our casinos’ operations are also subject to regulation by the Clark County Liquor and Gaming Licensing Board and the City of Las Vegas. These agencies are referred to herein collectively as the Nevada Gaming Authorities.
Policy Concerns of Gaming Laws
The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy. These public policy concerns include, among other things:
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preventing unsavory or unsuitable persons from being directly or indirectly involved with gaming at any time or in any capacity;
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establishing and maintaining responsible accounting practices and procedures;
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maintaining effective controls over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs, and safeguarding assets and revenue, providing reliable recordkeeping and requiring the filing of periodic reports with the Nevada Gaming Authorities;
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preventing cheating and fraudulent practices; and
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providing a source of state and local revenue through taxation and licensing fees.
Changes in these laws, regulations and procedures could have significant negative effects on our gaming operations
and our financial condition and results of operations.
Owner and Operator Licensing Requirements
Our subsidiaries that operate casinos are licensed by the Nevada Gaming Authorities as limited liability company licensees, which we refer to herein as company licensees. Under their gaming licenses, company licensees are required to pay periodic fees and taxes. The gaming licenses are not transferable.
To date, our company licensees have obtained all gaming licenses necessary for the operation of their existing gaming operations; however, gaming licenses and related approvals are privileges under Nevada law, and we cannot assure you that any new gaming license or related approvals that may be required in the future will be granted, or that any existing gaming licenses or related approvals will not be limited, conditioned, suspended, revoked or renewed.
Registration Requirements
On January 24, 2008, the Nevada Gaming Commission issued an order of registration of ACEP as a publicly traded company, which we refer to herein as a registered company for purposes of the Nevada Gaming Control Act. The order (1) prohibits Voteco or Holdings or their respective affiliates from selling, assigning, transferring, pledging or otherwise disposing of our membership interests or any other security convertible into or exchangeable from our Class A Interests or Class B Interests, without the prior approval of the Nevada Gaming Commission, (2) prohibits the direct or indirect members of Voteco from selling, assigning, transferring, pledging or otherwise disposing of any direct or indirect membership interest in Voteco without the prior administrative approval of the Chairman of the Nevada State Gaming Control Board or his designee, and (3) prohibits ACEP from declaring cash dividends or distributions on any class of membership interest of ACEP beneficially owned in whole or in part by Holdings or Voteco or their respective affiliates, without the prior approval of the Nevada Gaming Commission.
ACEP has been found suitable by the Nevada Gaming Commission to own the equity interests of Stratosphere LLC, Charlie’s Holding and Aquarius Gaming LLC, which is a company licensee. Voteco has been registered as a holding company and found suitable by the Nevada Gaming Commission as the sole owner of our voting securities. Charlie’s Holding has been registered as a holding company found suitable by the Nevada Gaming Commission to own the equity securities of its licensed subsidiaries, Arizona Charlie’s, LLC and Fresca, LLC. Stratosphere LLC has been registered as a holding company and has been found suitable to own the equity securities of Stratosphere Gaming LLC, a company licensee.
Periodically, we are required to submit detailed financial and operating reports to the Nevada Gaming Commission and to provide any other information that the Nevada Gaming Commission may require. Substantially all of our material loans, leases, sales of securities and similar financing transactions must be reported to, or approved by, the Nevada Gaming Commission.
Individual Licensing Requirements
No person may become a stockholder or member of, or receive any percentage of the profits of, a non-publicly traded holding or intermediary company or company licensee without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Nevada Gaming Authorities may investigate any individual who has a material relationship to or material involvement with our gaming operations to determine whether the individual is suitable or should be licensed as a business associate of a gaming licensee. Key employees of a company licensee may also be required to file such applications. The Nevada Gaming Authorities may deny an application for licensing for any cause, which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. An applicant for licensing or an applicant for a finding of suitability must pay or must cause to be paid all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensing, the Nevada Gaming Authorities have the jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would have to sever all relationships with that person. In addition, the Nevada Gaming Commission may require us to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or questions pertaining to licensing are not subject to judicial review in Nevada.
Consequences of Violating Gaming Laws
If the Nevada Gaming Commission decides that we have violated the Nevada Gaming Control Act or any of its regulations, it could limit, condition, suspend or revoke our registrations and gaming licenses. In addition, we, and the persons involved, could be subject to substantial fines for each separate violation of the Nevada Gaming Control
Act, or of the regulations of the Nevada Gaming Commission, at the discretion of the Nevada Gaming Commission. Further, the Nevada Gaming Commission could appoint a supervisor to conduct the operations of our casinos and, under specified circumstances, earnings generated during the supervisor’s appointment, except for the reasonable rental value of the premises, could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any of our gaming licenses and the appointment of a supervisor could, and revocation of any gaming license would, have a significant negative effect on our gaming operations.
Requirements for Equity Security Holders
Regardless of the number of equity interests held, any beneficial holder of a registered company’s voting or non-voting securities may be required to file an application, be investigated and have that person’s suitability as a beneficial holder of voting securities determined if the Nevada Gaming Commission has reason to believe that the ownership would otherwise be inconsistent with the declared policies of the State of Nevada. If the beneficial holder of the voting or non-voting securities who must be found suitable is a corporation, partnership, limited partnership, limited liability company or trust, it must submit detailed business and financial information, including a list of its beneficial owners. The applicant must pay all costs of the investigation incurred by the Nevada Gaming Authorities in conducting any investigation.
The Nevada Gaming Control Act requires any person who acquires more than 5% of the voting securities of a registered company to report the acquisition to the Nevada Gaming Commission. The Nevada Gaming Control Act requires beneficial owners of more than 10% of a registered company’s voting securities to apply to the Nevada Gaming Commission for a finding of suitability within 30 days after the Chairman of the Nevada State Gaming Control Board mails the written notice requiring such filing. Under certain circumstances, an “institutional investor,” as defined in the Nevada Gaming Control Act, which acquires more than 10%, but not more than 15%, of the registered company’s voting securities may apply to the Nevada Gaming Commission for a waiver of a finding of suitability if the institutional investor holds the voting securities for investment purposes only. In certain circumstances, an institutional investor that has obtained a waiver can own up to 19% of a registered company’s voting securities for a limited period of time and maintain the waiver. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the registered company, a change in the corporate charter, bylaws, management, policies or operations of the publicly traded registered company, or any of its gaming affiliates, or any other action which the Nevada Gaming Commission finds to be inconsistent with holding the registered company’s voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include:
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voting on all matters voted on by stockholders or interest holders;
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making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and
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other activities that the Nevada Gaming Commission may determine to be consistent with such investment intent.
A registered company is required to maintain a current stock ledger in Nevada, which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make the disclosure may be grounds for finding the record holder unsuitable. We will be required to render maximum assistance in determining the identity of the beneficial owner of any of our voting securities. The Nevada Gaming Commission has the power to require the stock certificates of any registered company to bear a legend indicating that the securities are subject to the Nevada Gaming Control Act and certain restrictions imposed by applicable gaming laws. To date, this requirement has not been imposed on us.
Consequences of Being Found Unsuitable
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Gaming Commission or by the Chairman of the Nevada State Gaming Control Board, or who refuses or fails to pay the investigative costs incurred by the Nevada Gaming Authorities in connection with the investigation of its application, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any person found unsuitable and who holds, directly or indirectly, any beneficial ownership of any voting security or debt security of a registered company beyond the period of time as may be prescribed by the Nevada Gaming Commission may be guilty of a criminal offense. A registered company will be subject to disciplinary action if, after it receives notice that a person is unsuitable to hold an equity interest or to have any other relationship with, it:
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pays that person any dividend or interest upon any voting securities;
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allows that person to exercise, directly or indirectly, any voting right held by that person;
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pays remuneration in any form to that person for services rendered or otherwise; or
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fails to pursue all lawful efforts to require the unsuitable person to relinquish such person’s voting securities including, if necessary, the immediate purchase of the voting securities for cash at fair market value.
Requirements for Debt Security Holders
The Nevada Gaming Commission may, in its discretion, require the holder of any debt or similar security of a registered company to file an application, be investigated and be found suitable to own the debt or other security of the registered company if the Nevada Gaming Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. If the Nevada Gaming Commission decides that a person is unsuitable to own the security, then under the Nevada Gaming Control Act, the registered company can be sanctioned, including the loss of its approvals if, without the prior approval of the Nevada Gaming Commission, it:
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pays to the unsuitable person any dividend, interest or any distribution whatsoever;
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recognizes any voting right by the unsuitable person in connection with the securities;
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pays the unsuitable person remuneration in any form; or
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makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction.
Approval of Public Offerings
Neither we nor any of our affiliates may make a public offering of our securities without the prior approval of the Nevada Gaming Commission if the proceeds from the offering are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for those purposes or for similar transactions. Any approval that we might receive in the future relating to future offerings will not constitute a finding, recommendation or approval by any of the Nevada Gaming Control Board or the Nevada Gaming Commission as to the accuracy or adequacy of the offering memorandum or the investment merits of the securities. Any representation to the contrary is unlawful.
Approval of Changes in Control
A registered company must obtain prior approval of the Nevada Gaming Commission with respect to a change in control through:
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merger;
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consolidation;
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stock or asset acquisitions;
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management or consulting agreements; or
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any act or conduct by a person by which the person obtains control of us.
Entities seeking to acquire control of a registered company must satisfy the Nevada State Gaming Control Board and Nevada Gaming Commission with respect to a variety of stringent standards before assuming control of the registered company. The Nevada Gaming Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as part of the approval process relating to the transaction.
Approval of Defensive Tactics
The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licenses or affecting registered companies that are affiliated with the operations permitted by Nevada gaming licenses may be harmful to stable and productive corporate gaming. The Nevada Gaming Commission has established a regulatory scheme to reduce the potentially adverse effects of these business practices upon Nevada’s gaming industry and to further Nevada’s policy to:
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assure the financial stability of corporate gaming operators and their affiliates;
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preserve the beneficial aspects of conducting business in the corporate form; and
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promote a neutral environment for the orderly governance of corporate affairs.
Approvals may be required from the Nevada Gaming Commission before we can make exceptional repurchases of voting securities above their current market price and before a corporate acquisition opposed by management can be consummated. The Nevada Gaming Control Act also requires prior approval of a plan of recapitalization proposed by a registered company’s board of directors in response to a tender offer made directly to its stockholders for the purpose of acquiring control.
Fees and Taxes
License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the licensed subsidiaries respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable monthly, quarterly or annually and are based upon:
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a percentage of gross revenues received;
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the number of gaming devices operated; or
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the number of table games operated.
A live entertainment tax is also paid by casino operations where entertainment is furnished in connection with an admission charge and the selling or serving of food, refreshments or merchandise. Our casinos are also subject to a state payroll tax based on the wages paid to their employees.
Foreign Gaming Investigations
Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with those persons, which we refer to as licensees, and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada State Gaming Control Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada State Gaming Control Board of the licensee’s or registrant’s participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Gaming Commission. Licensees and registrants are required to comply with the reporting requirements imposed by the Nevada Gaming Control Act. A licensee or registrant is also subject to disciplinary action by the Nevada Gaming Commission if it:
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knowingly violates any laws of the foreign jurisdiction pertaining to the foreign gaming operation;
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fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations;
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engages in any activity or enters into any association that is unsuitable because it poses an unreasonable threat to the control of gaming in Nevada, reflects or tends to reflect, discredit or disrepute upon the State of Nevada or gaming in Nevada, or is contrary to the gaming policies of Nevada;
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engages in activities or enters into associations that are harmful to the State of Nevada or its ability to collect gaming taxes and fees; or
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employs, contracts with or associates with a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of unsuitability.
License for Conduct of Gaming and Sale of Alcoholic Beverages
The conduct of gaming activities and the service and sale of alcoholic beverages by our casinos are subject to licensing, control and regulation by the Clark County Liquor and Gaming Licensing Board and the City of Las Vegas. In addition to approving our casinos, the Clark County Liquor and Gaming License Board and the City of Las Vegas have the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license. All licenses are revocable and are not transferable. The county and city agencies have full power to limit, condition, suspend or revoke any license. Any disciplinary action could, and revocation would, have a substantial negative impact upon our operations.
Environmental Matters
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 past spills, disposals or other releases of hazardous or toxic substances or wastes. 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 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.
Employees
At December 31, 2007, we had approximately 5,300 employees, of which approximately 2,050 were covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment, and orderly settlement of labor disputes. We historically have had good relationships with the unions representing our employees and believe that our employee relations are good.
Available Information
We file annual and quarterly reports and other information with the Securities and Exchange Commission. You may read and copy any document that we file at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C., 20549. Please call 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Reports and other information regarding issuers, including us, that file electronically with the Securities and Exchange Commission are also available to the public from the Securities and Exchange Commission’s Web site at http://www.sec.gov.
Item 1A.
Item 1A. RISK FACTORS
We have a large amount of debt, which could restrict our operations and impair our financial condition.
On February 20, 2008, in connection with the closing of the Acquisition, certain of our wholly owned indirect subsidiaries obtained term loans in an aggregate amount of approximately $1.1 billion from the Goldman Term Loans pursuant to certain mortgage and mezzanine loan agreements.
Our substantial indebtedness could have adverse consequences, including:
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making it more difficult for us to satisfy our obligations;
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increasing our vulnerability to adverse economic, regulatory and industry conditions;
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limiting our ability to obtain additional financing for future working capital, capital expenditures, mergers and other purposes;
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requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations and other purposes;
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limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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making us more vulnerable to increases in interest rates;
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placing us at a competitive disadvantage compared to our competitors that have less debt; and
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having a material adverse effect on us if we fail to comply with the covenants in the instruments governing our debt and preferred stock.
The Goldman Term Loans contain important affirmative and negative financial covenants customary for loans of this nature, which may restrict our ability to conduct our gaming operations or pursue development opportunities if desired.
These covenants could materially and adversely affect our ability to finance our future operations or capital needs. Furthermore, they may restrict our ability to expand, to pursue our business strategies and otherwise to conduct our business. Our ability to comply with these covenants may be affected by circumstances and events beyond our control, such as prevailing economic conditions and changes in regulations, and we cannot assure you that we will be able to comply. A breach of these covenants could result in a default under the terms of our debt. If there were an event of default under our outstanding indebtedness and the obligations thereunder accelerated, our assets and cash flow might not be sufficient to repay our outstanding debt and we could be forced into bankruptcy.
The gaming industry is highly regulated. We are subject to extensive governmental gaming regulation and taxation policies, which may harm our business.
We are subject to a variety of regulations in the jurisdictions in which we operate. Regulatory authorities at the federal, state and local levels have broad powers with respect to the licensing of casino operations and may revoke, suspend, condition or limit our gaming or other licenses, impose substantial fines 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 or costs that could have a significant adverse effect on us. 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. The federal government has also previously considered a federal tax on casino revenues and may consider such a tax in the future. In addition, 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. If there is any material increase in state and local taxes and fees, our business, financial condition and results of operations could be adversely affected. Our 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. Certain public and private issuances of securities and certain other transactions by us also require the approval of certain state regulatory authorities.
Our businesses are 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 operating units.
Rising operating costs for our gaming properties could have a negative impact on our profitability.
The operating expenses associated with our gaming properties could increase due to, among other reasons, the following factors:
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potential changes in the tax or regulatory environment which impose additional restrictions or increase operating costs;
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our properties use significant amounts of electricity, natural gas and other forms of energy, and energy price increases may reduce our profitability;
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our properties use significant amounts of water and a water shortage may adversely affect our operations;
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an increase in the cost of health care benefits for our employees could have a negative impact on our profitability;
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approximately 39% of our employees are members of various unions and covered by union-sponsored collective bargaining agreements and we may incur higher costs or work slow-downs or stoppages due to union activities;
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our reliance on slot machine revenues and the concentration of manufacturing of slot machines in certain companies could impose additional costs on us; and
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our insurance coverage may not be adequate to cover all possible losses and our insurance costs may increase.
We face substantial competition in the hotel and casino industry.
The hotel and casino industry in general, and the markets in which we compete in particular, are highly competitive:
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we compete with many world class destination resorts with greater name recognition, different attractions, amenities and entertainment options;
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we compete with the continued growth of gaming on Native American tribal lands;
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the existence of legalized gambling in other jurisdictions may reduce the number of visitors to our properties;
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certain states have legalized, and others may legalize, casino gaming in specific venues, including race tracks and/or in specific areas, including metropolitan areas from which we traditionally attract customers; and
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our properties also compete and will in the future compete with all forms of legalized gambling.
Many of our competitors have greater financial, selling and marketing, technical and other resources than we do. We may not be able to compete effectively with our competitors and we may lose market share, which could reduce our revenue and cash flow.
Economic downturns, terrorism and the uncertainty of war, as well as other factors affecting discretionary consumer spending, could reduce the number of our visitors or the amount of money visitors spend at our casinos.
Our business operations are affected by international, national and local economic conditions. The strength and
profitability of our business depends on consumer demand for hotel-casino resorts and gaming in general and for the type of amenities we offer. Changes in consumer preferences or discretionary consumer spending could harm our business.
A recession or downturn in the general economy could result in fewer customers visiting our properties and as a result, our revenues may decrease while some of our costs remain fixed, resulting in decreased earnings, because the gaming and other leisure activities we offer at our properties are discretionary expenditures, and participation in these activities may decline during economic downturns because consumers have less disposable income. Even an uncertain economic outlook may adversely affect consumer spending in our gaming operations and related facilities, as consumers spend less in anticipation of a potential economic downturn. Additionally, rising fuel prices could deter non-local visitors from traveling to our properties.
The terrorist attacks which occurred on September 11, 2001, the potential for future terrorist attacks and the wars in Afghanistan and Iraq had a negative impact on travel and leisure expenditures, including lodging, gaming and tourism. Leisure and business travel, especially travel by air, remain particularly susceptible to global geopolitical events. Many of the customers of our properties travel by air, and the cost and availability of air service can affect our business. Furthermore, insurance coverage against loss or business interruption resulting from war and some forms of terrorism may be unavailable or not available on terms that we consider reasonable. We cannot predict the extent to which war, future security alerts or additional terrorist attacks may interfere with our operations.
Our hotels and casinos may need to increase capital expenditures to compete effectively.
Capital expenditures, such as room refurbishments, amenity upgrades and new gaming equipment, may be necessary from time to time to preserve the competitiveness of our hotels and casinos. The gaming industry market is very competitive and is expected to become more competitive in the future. If cash from operations is insufficient to provide for needed levels of capital expenditures, the competitive position of our hotels and casinos could deteriorate if our hotels and casinos are unable to raise funds for such purposes.
Our hotels and casinos may incur substantial costs as a result of our growth and expansion strategy.
As part of our business strategy, we regularly evaluate opportunities for growth through development of gaming operations in existing or new markets, through acquiring other gaming entertainment facilities or through redeveloping our existing gaming facilities. The expansion of our operations, whether through acquisitions, development or internal growth could divert management’s attention and could also cause us to incur substantial costs, including legal, professional and consulting fees. There can be no assurance that we will be able to identify, acquire, develop or profitably manage additional companies or operations or successfully integrate such companies or operations into our existing operations without substantial costs, delays or other problems. Further, there can be no assurance that we will have the ability to obtain the necessary financing to execute our strategy.
The loss of management and other key personnel could significantly harm our business, and the quality of individuals hired for positions in the hotel and gaming operations will be critical to the success of our business.
Our ability to maintain our competitive position depends to a large degree on the efforts and skills of our senior management team. It may also be difficult to attract, retain and train qualified employees due to the competition for employees with other gaming companies and their facilities in Nevada. We may not be successful in retaining our current personnel or in hiring or retaining qualified personnel in the future. If we lose the services of any members of our management team, or fail to attract or retain qualified management and personnel at all levels, our business may be significantly disrupted and impaired.
We adopted a Key Employee Plan in conjunction with the Acquisition, which allows for certain key employees to be paid one year’s salary upon meeting certain conditions. The employee must be employed in good standing at the closing date and must complete the transition period, defined as up to 60 days after closing, if requested by Voteco. Many key employees may leave shortly after completion of the transition period.
Because we are currently dependent upon four properties for all our cash flow, we will be subject to greater risks than a gaming company with more operating properties or that operates in more markets.
Given that our operations are currently conducted at four properties in the state of Nevada, we are subject to greater degrees of risk than a gaming company with more operating properties in more markets. The risks to which we will have a greater degree of exposure include the following:
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local economic and competitive conditions;
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inaccessibility due to inclement weather, road construction or closure of primary access routes;
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decline in air passenger traffic due to higher ticket costs or fears concerning air travel;
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natural and other disasters;
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reduced land travel due to the increase in gas prices;
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a decline in the number of visitors to Las Vegas and Laughlin, Nevada; and
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a decrease in gaming and non-gaming activities.
Our properties draw a substantial number of patrons from the Las Vegas valley, as well as certain geographic areas, including Southern California, Arizona and Utah. Adverse economic conditions in any of these regions could have a significant adverse effect on our business, financial condition and results of operations. Since all of our properties are located in Nevada, any terrorist activities or disasters in or around southern Nevada could have a significant adverse effect on our business, financial condition and results of operations.
We have significant working capital needs and if we are unable to satisfy those needs from cash generated from our operations or indebtedness, we may not be able to meet payroll or statutory tax payment requirements.
We require significant amounts of working capital to operate our business. 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.
On February 20, 2008, certain of our wholly-owned indirect subsidiaries obtained terms loans in an aggregate amount of approximately $1.1 billion from Goldman Sachs Mortgage Company. The Goldman Term Loans are subject to various financial and other covenants with which we must comply in order to maintain borrowing availability and avoid penalties. Any future failure to comply with the covenants could result in an event of default which, if not cured or waived, could trigger prepayment obligations. There can be no assurance that Goldman Sachs Mortgage Company will waive defaults that may occur in the future. If we were forced to refinance the Goldman Term Loans, there can be no assurance that such refinancing would be available or that such refinancing would not have a material adverse effect on our business and financial condition. Even if such refinancing were available, the terms could be less favorable and our results of operations and financial condition could be adversely affected by increased costs and interest rates.
We typically experience significant seasonal and other fluctuations in our borrowings and borrowing availability, and have, in the past, been required to aggressively manage our cash flow to ensure adequate funds to meet working capital needs. Such management steps included working to improve collections, adjusting the timing of cash expenditures and reducing operating expenses where feasible.
We are dependent upon technology services and electrical power to operate our business, and if we experience damage or service interruptions, our business may be adversely affected.
Our gaming operations rely heavily on technology services and an uninterrupted supply of electrical power. Our security system and all of our slot machines are controlled by computers and reliant on electrical power to operate. Without electrical power or a failure of the technology services needed to run the computers, we may be unable to run all or parts of gaming operations. Any unscheduled interruption in our technology services or interruption in the supply of electrical power is likely to result in an immediate, and possibly substantial, loss of revenues due to a shutdown of our gaming operations.
Although our systems have been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks, and similar events.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved staff comments.
ITEM 2.
ITEM 2. PROPERTIES
Please also see the discussion of our properties contained in this annual report on Form 10-K under the caption “Item 1. Business - Our Gaming and Entertainment Properties.”
Stratosphere
The Stratosphere is located at 2000 Las Vegas Boulevard South on the Las Vegas Strip on approximately 34 acres owned by us.
Arizona Charlie’s Decatur
Arizona Charlie’s Decatur is located at 740 South Decatur Boulevard, Las Vegas, Nevada on approximately 17 acres owned by us. In addition, Arizona Charlie’s Decatur leases office, storage and laundry space located in an adjacent shopping center.
Arizona Charlie’s Boulder
Arizona Charlie’s Boulder is located at 4575 Boulder Highway, Las Vegas, Nevada on approximately 24 acres owned by us.
Aquarius Casino Resort
Aquarius Casino Resort is located at 1900 South Casino Drive, Laughlin, Nevada on approximately 18 acres owned by us.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are, from time to time, parties to various legal proceedings arising out of our businesses. We believe, however, that there are no proceedings pending or threatened against us, which, if determined adversely, would have a material adverse effect upon our business financial conditions, results of operations or liquidity.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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, 2007, there was no public market for our common equity. The indenture governing our 7.85% senior secured notes and the terms of the $60.0 million senior secured revolving credit facility restricted our payment of dividends and distributions. On February 15, 2008, in connection with the Acquisition, we repaid in full, all outstanding borrowings and terminated all commitments under the senior secured credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
No established public trading market exists for our equity securities. There are no plans, proposals, arrangements or understandings with any person with regard to the development of a trading market in any of our equity securities.
There are no outstanding options or warrants to purchase, or securities convertible into, our common equity. All of our membership interests are subject to sale pursuant to Rule 144 under the Securities Act, subject to the limitations set forth therein. We have not agreed with any security holder to register any of our common equity for sale by any security holder. None of our common equity is being, or has been publicly proposed to be, publicly offered by us.
As of the closing of the Acquisition, 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.
There are no securities authorized for issuance under equity compensation plans and we do not anticipate authorizing securities for issuance under equity compensation plans in the foreseeable future.
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, 2007, 2006, 2005, 2004, and 2003, and for the years ended December 31, 2007, 2006, 2005, 2004, and 2003, each has been derived from our audited consolidated financial statements at those dates and for those periods.
(1)
Total debt, including current portion, consists of the current and long-term portions of capital lease obligations and notes payable, including for 2003 notes payable to related parties.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Except for historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties. Future results could differ materially from those discussed below for many reasons, including the risks described in Item 1A of this annual report on Form 10-K and elsewhere in this document.
Aquarius Transaction
On November 28, 2005, AREP Laughlin Corporation entered into an agreement to purchase the Flamingo Laughlin Hotel and Casino, now known as the Aquarius Casino Resort, or the Aquarius, in Laughlin, Nevada from Harrah’s Operating Company, Inc. AREP Laughlin Corporation was formed by our former indirect parent, Icahn Enterprises Holdings L.P., or IEH, to acquire, own and operate the Aquarius, and IEH contributed 100% of the stock of AREP Laughlin to ACEP on April 4, 2006. The transaction was approved by the Nevada Gaming Commission upon recommendation of the Nevada Gaming Control Board and closed on May 19, 2006. The purchase price was $114.0 million, including working capital amounts. Accordingly, our financial statements include the financial position and results of operations of the Aquarius from May 19, 2006 forward.
Overview
We own and operate four gaming and entertainment properties in Clark County, Nevada. The four properties are the Stratosphere Casino Hotel & Tower, which is located on the Las Vegas Strip and caters to visitors to Las Vegas, two off-Strip casinos, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder, which cater primarily to residents of Las Vegas and the surrounding communities, and the Aquarius Casino Resort, formerly known as the Flamingo Laughlin Hotel and Casino, in Laughlin, Nevada, which caters to visitors to Laughlin. The Stratosphere is one of the most recognized landmarks in Las Vegas, our two Arizona Charlie’s properties are well-known casinos in their respective marketplaces and the Aquarius has the largest hotel in Laughlin. Each of our properties offers customers a value-oriented experience by providing competitive odds in our casinos, quality rooms in our hotels, award-winning dining facilities and, at the Stratosphere and Aquarius, an offering of competitive value-oriented entertainment attractions. We believe the value we offer our patrons, together with a strong focus on customer service, will enable us to continue to attract customers to our properties.
Patron Gaming Volume
The information contained in the following table relates to Clark County, Nevada and was obtained from the Las Vegas Convention and Visitors Authority and the Nevada Gaming Control Board.
We use certain key measurements to evaluate operating revenue. Casino revenue measurements include “table games drop” and “slot coin-in,” which are measures of the total amounts wagered by patrons. 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 revenue. Hotel revenue measurements include hotel occupancy rate, which is the average percentage of available hotel rooms occupied during a period, and average daily room rate, which is the average price of occupied rooms per day. Food and beverage revenue measurements include number of covers, which is the number of guest checks, and the average check amount.
Results of Operations
As disclosed in Note 1 to our consolidated financial statements, we acquired the Aquarius on May 19, 2006. Net revenues and income from operations at the Aquarius for the year ended December 31, 2007, were $107.3 million and $13.6 million, respectively.
The following discussion of the results of operations at our gaming properties excludes the results of Aquarius, because the partial year results for the Aquarius in 2006, does not allow for accurate comparisons.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Gross revenues increased 3.3% to $362.6 million for the year ended December 31, 2007 from $351.0 million for the year ended December 31, 2006. This increase was primarily due to an increase in slot and hotel revenues, as discussed below.
Casino Revenues
Casino revenues consist of revenues from slot machines, table games, poker, race and sports book, bingo and keno. Casino revenues increased 2.6% to $184.2 million, or 50.8% of gross revenues, for year ended December 31, 2007 from $179.6 million, or 51.2% of gross revenues, for the year ended December 31, 2006. This increase was primarily due to an increase in slot revenue, due to a 2.6% increase in hold percentage, partially offset by a decrease in table games revenue, due to a 2.0% decrease in table drop, decreased poker revenue and decreased race and sports revenue. For the year ended December 31, 2007, slot machine revenues were $153.3 million, or 83.2% of casino revenues, and table game revenues were $25.0 million, or 13.6% of casino revenues, compared to $145.6 million and $25.6 million, respectively, for the year ended December 31, 2006. Other casino revenues, consisting of race and sports book, poker, bingo and keno, were $5.9 million and $8.4 million for the years ended December 31, 2007 and 2006, respectively.
Non-Casino Revenues
Hotel revenues increased 7.5% to $70.3 million, or 19.4% of gross revenues, for the year ended December 31, 2007 from $65.4 million, or 18.6% of gross revenues, for the year ended December 31, 2006. This increase was primarily due to a 7.8% increase in average daily room rate.
Food and beverage revenues increased 0.8% to $72.9 million, or 20.1% of gross revenues, for the year ended December 31, 2007, from $72.3 million, or 20.6% of gross revenues, for the year ended December 31, 2006. This
increase was due to an increase in the average check amount partially offset by a decrease in the number of covers.
Tower, retail and other revenues increased 4.5% to $35.2 million, or 9.7% of gross revenues, for the year ended December 31, 2007 from $33.7 million, or 9.6% of gross revenues, for the year ended December 31, 2006. This increase was primarily due to increased retail and leasing rental revenue.
Promotional Allowances
Promotional allowances are comprised of the retail value of goods and services provided to casino patrons under various marketing programs. As a percentage of casino revenues, promotional allowances increased to 14.0% for the year ended December 31, 2007 from 12.8% for the year ended December 31, 2006. This increase was primarily due to increased marketing promotions, especially at the Stratosphere and Arizona Charlie’s Boulder.
Operating Expenses
Casino operating expenses decreased 2.9% to $63.2 million, or 34.3% of casino revenues, for the year ended December 31, 2007, from $65.1 million, or 36.2% of casino revenues, for the year ended December 31, 2006. This decrease was primarily due to decreased participation expenses. Participation expense includes fees paid to game owners for use of their games.
Hotel operating expenses decreased 0.4% to $27.7 million, or 39.4% of hotel revenues, for the year ended December 31, 2007, from $27.8 million, or 42.5% of hotel revenues, for the year ended December 31, 2006. This decrease was primarily due to decreased commissions and broker fees and a decrease in the hotel occupancy rate.
Food and beverage operating expenses increased 9.9% to $57.5 million, or 78.9% of food and beverage revenues, for the year ended December 31, 2007, from $52.3 million, or 72.3% of food and beverage revenues, for the year ended December 31, 2006. This increase was primarily due to an increase in labor and food costs.
Other operating expenses decreased 4.5% to $14.7 million, or 41.8% of tower, retail and other revenues, for the year ended December 31, 2007, from $15.4 million, or 45.7% of tower, retail and other revenues, for the year ended December 31, 2006. This decrease was primarily due to a decrease in labor costs and entertainer fees, due to the cancellation of the afternoon show, Viva Las Vegas, at the Stratosphere, in mid-2006.
Selling, general and administrative expenses were primarily comprised of payroll, marketing, advertising, utilities and other administrative expenses. These expenses increased 3.2% to $87.8 million, or 24.2% of gross revenues, for the year ended December 31, 2007, from $85.1 million, or 24.2% of gross revenues, for the year ended December 31, 2006. This increase was primarily due to an increase in labor costs.
Interest Expense
Interest expense decreased 3.3% to $20.6 million for the year ended December 31, 2007, from $21.3 million for the year ended December 31, 2006. The decrease of $0.7 million was primarily due to a reduction in the outstanding borrowings under the senior secured revolving credit facility during 2006 and the reversal of a portion of the accrued interest related to the decrease in the unrecognized tax benefit.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Gross revenues increased 0.2% to $351.0 million for the year ended December 31, 2006 from $350.3 million for the year ended December 31, 2005. This increase was primarily due to an increase in hotel and food and beverage revenues, partially offset by a decrease in casino revenues as discussed below.
Casino Revenues
Casino revenues consist of revenues from slot machines, table games, poker, race and sports book, bingo and keno. Casino revenues decreased 1.8% to $179.6 million, or 51.2% of gross revenues, for year ended December 31, 2006 from $182.9 million, or 52.2% of gross revenues, for the year ended December 31, 2005. This decrease was primarily due to a decline in slot revenue due to less coin in, caused by increases in the price of gas, which adversely affects automobile traffic to Las Vegas, construction disruption at the Stratosphere and Arizona Charlie’s Boulder, and the entrance of a new competitor in the market served by Arizona Charlie’s Decatur. For the year ended December 31, 2006, slot machine revenues were $145.6 million, or 81.1% of casino revenues, and table game revenues were $25.6 million, or 14.3% of casino revenues, compared to $149.2 million and $25.2 million, respectively, for the year ended December 31, 2005. Other casino revenues, consisting of race and sports book, poker, bingo and keno, were $8.4 million and $8.5 million for the years ended December 31, 2006 and 2005, respectively.
Non-Casino Revenues
Hotel revenues increased 5.7% to $65.4 million, or 18.6% of gross revenues, for the year ended December 31, 2006 from $61.9 million, or 17.7% of gross revenues, for the year ended December 31, 2005. This increase was primarily due to a 3.1% increase in hotel occupancy rate and a 2.5% increase in average room rate.
Food and beverage revenues increased 3.1% to $72.3 million, or 20.6% of gross revenues, for the year ended December 31, 2006, from $70.1 million, or 20.0% of gross revenues, for the year ended December 31, 2005. This increase was due to an increase in the average check amount partially offset by a decrease in the number of covers.
Tower, retail and other revenues decreased 4.8% to $33.7 million, or 9.6% of gross revenues, for the year ended December 31, 2006 from $35.4 million, or 10.1% of gross revenues, for the year ended December 31, 2005. This decrease was primarily due to a reduction in tower revenues caused by the removal of a roller coaster from the tower pod.
Promotional Allowances
Promotional allowances are comprised of the retail value of goods and services provided to casino patrons under various marketing programs. As a percentage of casino revenues, promotional allowances increased to 12.8% for the year ended December 31, 2006 from 12.2% for the year ended December 31, 2005. This increase was primarily due to increased marketing promotions, especially at Arizona Charlie’s Decatur and Arizona Charlie’s Boulder.
Operating Expenses
Casino operating expenses increased 3.0% to $65.1 million, or 36.2% of casino revenues, for the year ended December 31, 2006, from $63.2 million, or 34.6% of casino revenues, for the year ended December 31, 2005. This increase was primarily due to higher participation expenses and labor costs. Participation expense includes fees paid to game owners for use of their games.
Hotel operating expenses increased 3.0% to $27.8 million, or 42.5% of hotel revenues, for the year ended December 31, 2006, from $27.0 million, or 43.6% of hotel revenues, for the year ended December 31, 2005. This increase was primarily due to higher labor costs as a result of the increase in occupancy rate.
Food and beverage operating expenses increased 1.0% to $52.3 million, or 72.3% of food and beverage revenues, for the year ended December 31, 2006, from $51.8 million, or 73.9% of food and beverage revenues, for the year ended December 31, 2005. This increase was primarily due to an increase in labor costs.
Other operating expenses remained flat at $15.4 million, or 45.7% of tower, retail and other revenues, for the year ended December 31, 2006, from 43.5% of tower, retail and other revenues, for the year ended December 31, 2005.
Selling, general and administrative expenses were primarily comprised of payroll, marketing, advertising, utilities and other administrative expenses. These expenses increased 4.7% to $85.1 million, or 24.2% of gross revenues, for the year ended December 31, 2006, from $81.3 million, or 23.2% of gross revenues, for the year ended December 31, 2005. This increase was primarily due to an increase in marketing expenses.
Interest Expense
Interest expense increased 13.3% to $21.3 million for the year ended December 31, 2006, from $18.8 million for the year ended December 31, 2005. The increase of $2.5 million was due to the borrowings under our senior secured revolving credit facility which was used to fund the acquisition of the Aquarius.
Financial Condition
Liquidity and Capital Resources
Our primary source of cash is from the operation of our properties. For the year ended December 31, 2007, net cash provided by operating activities (including the operations of the Aquarius) totaled $73.4 million. In May 2006, we entered into an amendment to the senior secured revolving credit facility, increasing the amount of borrowings allowed by it to $60.0 million, subject to us complying with financial and other covenants (discussed below), until May 12, 2010. We borrowed the maximum amount available under the facility, $60.0 million, in order to fund our acquisition of the Aquarius. On February 15, 2008, in connection with the Acquisition, we repaid in full, all outstanding borrowings and terminated all commitments under the senior secured credit facility. At December 31, 2007, we had cash and cash equivalents of $107.3 million.
Our primary use of cash during the year ended December 31, 2007 was for operating expenses, to pay interest on our 7.85% senior secured notes due 2012 and interest under our senior secured revolving credit facility. Our capital
spending was approximately $22.5 million for the year ended December 31, 2007. For the year ended 2007, capital spending included $11.4 million to purchase new and convert existing slot machines and $2.4 million for Aquarius hotel renovations. Currently we estimate our capital spending to be approximately $20.0 million, primarily for slot machines and minor projects. This amount will be re-evaluated over the next three to six months.
In addition to our regular capital spending plan, we were required to put $54.0 million in reserve for capital projects, as part of our financing related to the acquisition of our membership interests. These projects include approximately $19.0 million for the Aquarius hotel renovation, approximately $25.0 million renovation at the Stratosphere and approximately $10.0 million at Decatur for an event room and other projects. These funds are required to be spent over the next 12 to 18 months.
We funded the acquisition of the Aquarius with existing cash and borrowings of $60.0 million, under our senior secured revolving credit facility. We intend to fund the planned capital improvements with existing cash and cash flow from operations. The purchase price, including direct acquisition costs for the Aquarius, was $114.0 million. We currently estimate the cost of the improvements to be approximately $52.1 million through 2008, of which approximately $30.3 million had been expended, through December 31, 2007. The capital improvement plan includes replacing slot machines, refurbishment of the casino, upgraded technologies, hotel renovations, signage and various other improvements. The replacements of slot machines, refurbishment of the casino and the technology upgrade were completed in 2006 and 2007.
We believe operating cash flows will be adequate to meet our anticipated requirements for working capital, capital spending and scheduled interest payments on the Goldman Term Loans, lease payments and other indebtedness at least through the next twelve months. However, additional financing, if needed, may not be available to us, or if available, the financing may not be on terms favorable to us. Our estimates of our reasonably anticipated liquidity needs may not be accurate and new business opportunities or other unforeseen events could occur, resulting in the need to raise additional funds from outside sources.
On February 20, 2008, in connection with the closing of the Acquisition, certain of our wholly owned indirect subsidiaries obtained term loans in an aggregate amount of approximately $1.1 billion from Goldman Sachs Mortgage Company, or the Goldman Term Loans, pursuant to certain mortgage and mezzanine loan agreements.
The Goldman Term Loans have an initial term of two years with two one-year extension options and a blended annual interest rate of LIBOR (3.1% at February 20, 2008) plus 3.00% during the initial term and LIBOR plus 3.25% during any extension term. Approximately $56.5 million of the Goldman Term Loans is held for a capital expenditure reserve, a deferred maintenance and an environmental reserve. In addition, the Goldman Term Loans contain important affirmative and negative financial covenants customary for loans of this nature, which may restrict our ability to conduct our gaming operations or pursue development opportunities if desired. Certain of our assets, including the Stratosphere Casino Hotel & Tower, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder, and the Aquarius Casino Resort, secure the Goldman Term Loans. In connection with the Goldman Term Loans, an interest rate cap agreement was purchased to cap LIBOR at 4.75%. The fees incurred in connection with the interest rate cap agreement totaling $1.3 million will be amortized to interest expense, using the effective interest method, over the two-year life of the agreement.
Until the closing of the Acquisition, our 7.85% senior secured notes due 2012 prohibited the incurrence of debt and the issuance of disqualified or preferred stock, as defined, by us and our restricted subsidiaries, with certain exceptions, provided that we may incur debt or issue disqualified or preferred stock if, immediately after such incurrence or issuance, the ratio of consolidated cash flow to fixed charges (each as defined in the indenture of the 7.85% senior secured notes due 2012) for the most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional indebtedness is incurred or disqualified or preferred stock is issued would have been at least 2.0 to 1.0, determined on a pro forma basis giving effect to the debt incurrence or issuance. As of December 31, 2007, such ratio was 5.4 to 1.0. The notes allowed us, and our restricted subsidiaries, to incur indebtedness, among other things, of up to $50.0 million under credit facilities, non-recourse financing of up to $15.0 million to finance the construction, purchase or lease of personal or real property used in our business, permitted affiliate subordinated indebtedness (as defined), additional 7.85% senior secured notes due 2012 in an aggregate principal amount not to exceed 2.0 times net cash proceeds received from equity offerings and permitted affiliate subordinated debt and additional indebtedness of up to $10 million.
Additionally, until the closing of the Acquisition, we had a senior secured revolving credit facility that allowed for borrowings of up to $60.0 million, including the issuance of letters of credit of up to $10.0 million. The facility contained restrictive covenants similar to those contained in the 7.85% senior secured notes due 2012. In addition, the facility required that, as of the last date of each fiscal quarter, our ratio of consolidated first lien debt to consolidated cash flow be not more than 1.0 to 1.0. As of December 31, 2007, this ratio was 0.4 to 1.0. At December 31, 2007, there were $40.0
million of borrowings outstanding under the facility and availability of $20.0 million.
Pursuant to the terms of the Agreement, prior to the closing of the Acquisition, AEP was required to cause us to repay from funds provided by AEP, the principal, interest, any prepayment penalty or premium and any other obligation due under the terms of our 7.85% senior secured notes due 2012 and our senior secured credit facility. On February 15, 2008, in connection with the closing of the Acquisition, ACEP repaid all of its outstanding 7.85% senior secured notes due 2012, which were tendered pursuant to ACEP’s previously announced tender offer and consent solicitation. In addition, ACEP has repaid in full all amounts outstanding, and terminated all commitments, under its senior secured revolving credit facility with Bear Stearns Corporate Lending Inc., as administrative agent, and the other lenders thereunder.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
Contractual Obligations
The following table sets forth, contractual obligations of ACEP at December 31, 2007.
Critical Accounting Policies
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. 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.
We also reward customers, through the use of loyalty programs, with 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 programs, named Ultimate Rewards and A.C.E. Rewards, whereby participants can accumulate points for casino wagering that can currently be redeemed for cash, lodging, food and beverages, and merchandise. 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. Points expire after twelve months. 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 as well as workers compensation claims and major medical claims for non-union employees. 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.
Income Taxes. Prior to the closing of the Acquisition, for federal income tax purposes, our taxable income or loss was included in the consolidated income tax return of AEP. We entered into a tax allocation agreement with AEP, which provided for payments of tax liabilities to AEP, calculated as if we filed a consolidated income tax return separate from AEP. Additionally, the agreement provided for payments from AEP to us for any previously paid tax liabilities that are reduced as a result of subsequent determinations by any governmental authority, or as a result of any tax losses or credits that are allowed to be carried back to prior years. The tax allocation agreement was terminated on February 20, 2008, in accordance with the terms of the Agreement.
We account for income tax assets and liabilities in accordance with Statement of Financial Accounting Standards, or SFAS, “Accounting for Income Taxes,” No. 109. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. We maintain valuation allowances where it is determined more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, we take into account such factors as prior earnings history, expected future earnings, carryback and carryforward periods, and tax planning strategies. As of December 31, 2007, based on the factors above, we expect to realize full tax benefit from our deferred tax assets and have determined that no valuation allowance is warranted.
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 July 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109”, or FIN 48. FIN 48, which clarifies Statement No. 109, “Accounting for Income Taxes,” establishes the criterion that an individual tax position has to meet for some or all of the benefits of that position to be recognized in our financial statements. On initial application, FIN 48 will be applied to all tax positions for which the statute of limitations remains open. Only tax positions that meet the more-likely-than-not recognition threshold at the adoption date will be recognized or continue to be recognized.
FIN 48 is effective for fiscal years beginning after December 15, 2006, and was adopted by us on January 1, 2007. The adoption of FIN 48 did not have a material impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, where fair value is the relevant measurement attribute. The standard does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of SFAS No. 157 did not have a material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.” SFAS No. 159, which amends SFAS No. 115, allows certain financial assets and liabilities to be recognized, at our election, at fair market value, with any gains or losses for the period recorded in the statement of income. SFAS No. 159 included available-for-sales securities in the assets eligible for this treatment. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and interim periods in those fiscal years. The adoption of SFAS No. 159 did not have a material impact on our consolidated financial statements.
Forward Looking Statements
With the exception of historical facts, the matters discussed in this report 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.
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.
Trends and Other Uncertainties
We refer you to Item 1A Risk Factors for a discussion of trends, uncertainties and other factors that could affect us.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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. As of December 31, 2007, there were $40.0 million of borrowings outstanding under our senior secured revolving credit facility. On February 15, 2008, we repaid in full all amounts outstanding, and terminated all commitments, under our senior secured revolving credit facility with Bear Stearns Corporate Lending Inc., as administrative agent, and the other lenders thereunder.
The fair value of our debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities. As such, the estimated fair value of the 7.85% senior secured notes due 2012, was approximately $222.3 million as of December 31, 2007. Pursuant to the terms of the Agreement, prior to the closing of the Acquisition, AEP was required to cause us to repay from funds provided by AEP, the principal, interest, any prepayment penalty or premium and any other obligation due under the terms of our 7.85% senior secured notes due 2012 and our senior secured credit facility, and all such amounts were repaid on February 15, 2008, at a price of $1,040.75 per $1,000 principal amount, for a value of $223.8 million.
On February 20, 2008, in connection with the closing of the Acquisition, certain of our wholly owned indirect subsidiaries obtained term loans in an aggregate amount of approximately $1.1 billion from the Goldman Term Loans pursuant to certain mortgage and mezzanine loan agreements.
The Goldman Term Loans have an initial term of two years with two one-year extension options and a blended annual interest rate of LIBOR (3.1% at February 20, 2008) plus 3.00% during the initial term and LIBOR plus 3.25% during any extension term. Approximately $56.5 million of the Goldman Term Loans is held for a capital expenditure reserve, a deferred maintenance and an environmental reserve. In addition, the Goldman Term Loans contain important affirmative and negative financial covenants customary for loans of this nature, which may restrict our ability to conduct our gaming operations or pursue development opportunities if desired. Certain of our assets, including the Stratosphere Casino Hotel & Tower, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder, and the Aquarius Casino Resort, secure the Goldman Term Loans. In connection with the Goldman Term Loans, an interest rate cap agreement was purchased to cap LIBOR at 4.75%. The fees incurred in connection with the interest rate cap agreement totaling $1.3 million will be amortized to interest expense, using the effective interest method, over the two-year life of the agreement.
For the year ended December 31, 2007, we incurred approximately $20.6 million in interest expense. Certain amounts of our outstanding indebtedness for the year were based upon a variable, LIBOR rate plus a premium. A 1% increase in the LIBOR would have increased our interest cost for 2007 by approximately $406,000. If the Goldman Term Loans had existed for the year ended December 31, 2007, a 1% increase in the LIBOR would have increased our interest cost for 2007 by approximately $11.3 million.
Other than the interest rate cap agreements we are required to maintain under the terms of the Goldman Term Loans, we do not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and the Member
American Casino & Entertainment Properties LLC
We have audited the accompanying consolidated balance sheets of American Casino & Entertainment Properties LLC, or the Company, as of December 31, 2007 and 2006, and the related consolidated statements of income, member’s equity and cash flows for each of the years in the three-year period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Casino & Entertainment Properties LLC as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Reno, Nevada
March 19, 2008
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED STATEMENTS OF INCOME
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 MEMBER’S EQUITY
(in thousands)
See notes to consolidated financial statements.
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
Note 1. Description of Business and Summary of Significant Accounting Policies
The Company
American Casino & Entertainment Properties LLC (ACEP or the “Company”) was formed in Delaware on December 29, 2003. The Company is a holding company that was formed for the purpose of acquiring the entities that own and operate the Stratosphere Casino Hotel & Tower, or the Stratosphere, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder in Las Vegas, Nevada. Stratosphere had been owned by a subsidiary of our former indirect parent, Icahn Enterprises Holdings L.P., or the IEH. Arizona Charlie’s Decatur and Arizona Charlie’s Boulder were owned by Carl C. Icahn and one of his affiliated entities. Our management team has been responsible for the management of all three properties since 2002. We purchased the Aquarius Casino Resort, or the Aquarius, on May 19, 2006, from Harrah’s Operating Company, Inc.
For the periods presented, ACEP was a subsidiary of American Entertainment Properties Corp., or AEP, and its ultimate parent was Icahn Enterprises L.P., or IELP, a Delaware master limited partnership the units of which are traded on the New York Stock Exchange. As of December 31, 2007, affiliates of Mr. Carl C. Icahn owned 10,304,013 preferred units and 64,288,061 depositary units, which represented approximately 86.5% of the outstanding preferred units and approximately 91.2% of the outstanding depositary units of IELP. Mr. Icahn is the Chairman of the Board of Directors of Icahn Enterprises G.P. Inc., or IEGP, IELP’s general partner.
ACEP owns and operates four gaming and entertainment properties in southern Nevada; the Stratosphere, Arizona Charlie’s Decatur, Arizona Charlie’s Boulder and the Aquarius. In January 2004, ACEP entered into a membership interest purchase agreement with Starfire Holding Corporation, or Starfire, which is wholly-owned by Mr. Icahn, in which ACEP agreed to purchase all of the membership interests in Charlie’s Holding LLC, a newly-formed entity that owns Arizona Charlie’s Decatur and Arizona Charlie’s Boulder. The closing of this acquisition was approved by the Nevada Gaming Commission upon the recommendation of the Nevada State Gaming Control Board and was completed on May 26, 2004. The purchase price was $125.9 million. Additionally, in January 2004, ACEP entered into a contribution agreement with AEP and IEH, in which IEH agreed to contribute 100% of the outstanding capital stock of Stratosphere Corporation, which was approved by the Nevada Gaming Commission upon the recommendation of the Nevada State Gaming Control Board. These transactions represent a reorganization of entities under the common control of Mr. Icahn. Accordingly, the historical cost basis of the underlying net assets was retained over the period of common ownership for all periods presented. Pursuant to ACEP’s purchase agreement with Starfire, certain contributions of $35.1 million and certain distributions of $187.8 million were made to and by ACEP which included the acquisition of Arizona Charlie’s.
On April 22, 2007, AEP, our former direct parent, entered into a Membership Interest Purchase Agreement, or the Agreement, with W2007/ACEP Holdings, LLC, or Holdings, an affiliate of Whitehall Street Real Estate Funds, a series of real estate investment funds affiliated with Goldman, Sachs & Co., to sell all of our issued and outstanding membership interests to Holdings, for $1.3 billion plus or minus certain adjustments such as working capital, more fully described in the Agreement. Pursuant to the Assignment and Assumption Agreement, dated December 4, 2007, between Holdings and W2007/ACEP Managers Voteco, LLC, or Voteco, Holdings assigned all of its rights, obligations and interests under the Agreement to Voteco. The acquisition, or the Acquisition, closed at a purchase price of $1.2 billion on February 20, 2008.
On February 20, 2008, upon the consummation of the closing of the Acquisition contemplated by the Agreement, ACEP, Voteco and Holdings entered into an Amended and Restated Limited Liability Company Agreement of ACEP or the Amended Operating Agreement. On February 20, 2008, in connection with the closing of the Acquisition, each member of Voteco (Stuart Rothenberg, Brahm Cramer and Jonathan Langer), Holdings and Voteco entered into a Transfer Restriction Agreement.
On February 20, 2008, in connection with the closing of the Acquisition, certain of our wholly owned indirect subsidiaries obtained term loans in an aggregate amount of approximately $1.1 billion from Goldman Sachs Mortgage Company, or the Goldman Term Loans, pursuant to certain mortgage and mezzanine loan agreements.
The Goldman Term Loans have an initial term of two years with two one-year extension options and a blended annual interest rate of LIBOR plus 3.00% during the initial term and LIBOR plus 3.25% during any extension term. Approximately $56.5 million of the Goldman Term Loans is held for a capital expenditure reserve, a deferred maintenance and an environmental reserve. In addition, the Goldman Term Loans contain important affirmative and negative financial covenants customary for loans of this nature, which may restrict our ability to conduct our gaming operations or pursue development opportunities if desired. Certain of our assets, including the Stratosphere Casino Hotel & Tower, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder, and the Aquarius Casino Resort, secure the Goldman Term Loans.
On February 20, 2008, upon consummation of the Acquisition, we issued and sold 100% of our Class B membership interests, or Class B Interests, to Holdings for approximately $225.1 million. Except as otherwise expressly required by law, holders of our Class B Interests have no voting rights. The sale of our Class B Interests to Holdings is exempt from registration under the Securities Act pursuant to Section 4(2) thereof.
On January 24, 2008, the Nevada Gaming Commission issued an order of registration of ACEP as constituted after the consummation of the Acquisition. The order (1) prohibits Voteco or Holdings or their respective affiliates from selling, assigning, transferring, pledging or otherwise disposing of our membership interests or any other security convertible into or exchangeable from our class A membership interests, or Class A Interests, or Class B Interests, without the prior approval of the Nevada Gaming Commission, (2) prohibits the direct or indirect members of Voteco from selling, assigning, transferring, pledging or otherwise disposing of any direct or indirect membership interest in Voteco without the prior administrative approval of the Chairman of the Nevada State Gaming Control Board or his designee, and (3) prohibits ACEP from declaring cash dividends or distributions on any class of membership interest of ACEP beneficially owned in whole or in part by Holdings or Voteco or their respective affiliates, without the prior approval of the Nevada Gaming Commission.
On February 20, 2008, in connection with the closing of the Acquisition, each member of Voteco (Stuart Rothenberg, Brahm Cramer and Jonathan Langer), Holdings and Voteco entered in to a Transfer Restriction Agreement. The Transfer Restriction Agreements provides, among other things, that:
•
Holdings has the right to acquire Class A Interests from Voteco on each occasion that Class B Interests held by Holdings would be transferred to a proposed purchaser who, in connection with such proposed sale, has obtained all licenses, permits, registrations, authorizations, consents, waivers, orders, findings of suitability or other approvals required to be obtained from, and has made all findings, notices or declarations required to be made with, all gaming authorities under all applicable gaming laws,
•
A specific purchase price, as determined in accordance with the Transfer Restriction Agreement, will be paid to acquire the Class A Interests from Voteco, and
•
Voteco will not transfer ownership of Class A Interests owned by it except pursuant to such option of Holdings.
On February 20, 2008, upon consummation of the Acquisition, Voteco acquired control of ACEP from our previous direct parent, AEP. AEP sold all the issued and outstanding membership interests of ACEP to Voteco pursuant to the Agreement. The membership interests of ACEP acquired by Voteco were redeemed and canceled pursuant to the terms of the Amended Operating Agreement entered into by ACEP, Voteco and Holdings upon the consummation of the Acquisition. Voteco acquired 100% of our voting securities by purchasing 100% of our newly issued Class A Interest in exchange for consideration in the amount of $30. The source of funds used by Voteco to purchase the Class A Interest were contributions of capital made to Voteco by each of its three members.
Prior to the consummation of the Acquisition, we were managed by our sole member, AEP, and did not have a board of directors. On February 20, 2008, upon consummation of the Acquisition, Stuart Rothenberg, Brahm Cramer and Jonathan Langer, each a member of Voteco, were appointed as members of our board. Each of the members of Voteco are party to the Transfer Restriction Agreement.
On February 20, 2008, upon the consummation of the Acquisition, ACEP, Voteco and Holdings entered into the Amended Operating Agreement. Pursuant to the Amended Operating Agreement, holders of Class A Interests will be entitled to one vote per interest in all matters to be voted on by our voting members. Except as otherwise expressly required by law, holders of Class B Interests will have no right to vote on any matters to be voted on by our members. Holders of Class A Interests and Class B Interests will have no preemptive rights, no other rights to subscribe for additional interests, no conversion rights and no redemption rights, will not benefit from any sinking fund, and will not have any preferential rights upon a liquidation. The Amended Operating Agreement contains provisions for indemnification of the members of our board and our officers and their respective affiliates.
On February 21, 2008, Icahn Enterprises L.P., or IELP, and ACEP issued a press release announcing the closing of the Acquisition and, in connection with the closing of the Acquisition, that ACEP has accepted for payment and has repaid all of its outstanding 7.85% senior secured notes due 2012, which were tendered pursuant to ACEP’s previously announced tender offer and consent solicitation. In addition, ACEP has repaid in full all amounts outstanding, and terminated all commitments, under its senior secured revolving credit facility with Bear Stearns Corporate Lending Inc., as administrative agent, and the other lenders there under.
Principles of Consolidation and Combination
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.
Casino Revenues 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. 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.
We also reward customers, through the use of loyalty programs, with points based on amounts wagered, that can be redeemed for a specified period of time for cash. We deduct the cash incentive amounts from casino revenue.
The estimated costs of providing complimentaries, included as casino expenses, are as follows:
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks, interest-bearing deposits, money market funds and debt instruments purchased with an original maturity of 90 days or less.
Investments Restricted
Investments-restricted consist primarily of funds pledged for Nevada sales and use tax, unpaid sports book tickets, workers compensation benefits and general liability claims. 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, all of which are maintained with what management believes to be high credit quality financial institutions, based on the financial markets today. 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, 2007, 2006 and 2005, we capitalized interest of $21,000, $110,000 and $0, respectively.
Long-Lived Assets
We periodically evaluate our long-lived assets in accordance with the application of Statement of Financial Accounting Standards, or SFAS, No. 144 for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Inherent in the reviews of the carrying amounts of the above assets are various estimates. First, management must determine the usage of the asset. Assets must be tested at the lowest level for which identifiable cash flows exist. This 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 operating property.
Unamortized Debt Issue Costs
Debt issuance costs incurred in connection with the issuance of debt are capitalized and amortized to interest expense using the effective interest method. For the years ended December 31, 2007, 2006 and 2005, amortization of debt issue costs totaled $1.2 million, $1.1 million and $1.1 million, respectively, and are included in interest expense on the accompanying consolidated statements of income.
Slot Club Liability
We offer programs, named Ultimate Rewards and A.C.E. Rewards, whereby participants can accumulate points for casino wagering that can currently be redeemed for cash, lodging, food and beverages, and merchandise. 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. Points expire after twelve months. Slot club liability is included in accrued expenses on the consolidated balance sheet.
Debt
The fair value of our debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities. As such, the estimated fair value of the 7.85% senior secured notes due 2012, was approximately $222.3 million as of December 31, 2007. Pursuant to the terms of the Agreement, prior to the closing of the Acquisition, AEP was required to cause us to repay from funds provided by AEP, the principal, interest, any prepayment penalty or premium and any other obligation due under the terms of our 7.85% senior secured notes due 2012 and our senior secured credit facility, and all such amounts were repaid on February 15, 2008, at a price of $1,040.75 per $1,000 principal amount, for a value of $223.8 million.
Sales, Advertising and Promotion
Sales, advertising and promotion costs are expensed as incurred and were approximately $18.9 million, $13.8 million and $10.4 million for the years ended December 31, 2007, 2006 and 2005, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of income.
Income Taxes
Prior to the closing of the Acquisition, for federal income tax purposes, our taxable income or loss is included in the consolidated income tax return of AEP. We entered into a tax allocation agreement with AEP, which provided for payments of tax liabilities to AEP, calculated as if we filed a consolidated income tax return separate from AEP. Additionally, the agreement provided for payments from AEP to us for any previously paid tax liabilities that are reduced as a result of subsequent determinations by any governmental authority, or as a result of any tax losses or credits that are allowed to be carried back to prior years. The tax allocation agreement was terminated on February 20, 2008, in accordance with the terms of the Agreement.
We account for income tax assets and liabilities in accordance with SFAS No. 109, “Accounting for Income Taxes”. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The Company maintains valuation allowances where it is determined more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the Company’s tax provision in the period of change. In determining whether a valuation allowance is warranted, the Company takes into account such factors as prior earnings history, expected future earnings, carryback and carryforward periods, and tax planning strategies. As of December 31, 2007, based on the factors above, the Company expects to realize full tax benefit from its deferred tax assets and has determined that no valuation allowance is warranted.
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 prior years consolidated financial statements to conform to the current fiscal year presentation. These reclassifications had no effect on net income.
Recently Issued Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109”, or FIN 48. FIN 48, which clarifies Statement No. 109, “Accounting for Income Taxes,” establishes the criterion that an individual tax position has to meet for some or all of the benefits of that position to be recognized in our financial statements. On initial application, FIN 48 will be applied to all tax positions for which the statute of limitations remains open. Only tax positions that meet the more-likely-than-not recognition threshold at the adoption date will be recognized or continue to be recognized.
FIN 48 is effective for fiscal years beginning after December 15, 2006, and was adopted by us on January 1, 2007. The adoption of FIN 48 did not have a material impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, where fair value is the relevant measurement attribute. The standard does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of SFAS No. 157 did not have a material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.” SFAS No. 159, which amends SFAS No. 115, allows certain financial assets and liabilities to be recognized, at our election, at fair market value, with any gains or losses for the period recorded in the statement of income. SFAS No. 159 included available-for-sales securities in the assets eligible for this treatment. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and interim periods in those fiscal years. The adoption of SFAS No. 159 did not have a material impact on our 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, 2007, 2006 and 2005 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 $4.0 million at December 31, 2007 and 2006. Accumulated depreciation and amortization at December 31, 2007 and 2006 includes amounts recorded for capital leases of $1.4 million and $1.1 million, respectively.
Note 5. Accrued Expenses
Accrued expenses consist of the following:
Note 6. Leases
The future minimum lease payments to be received under non-cancelable operating leases for years subsequent to December 31, 2007 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.
For the years ended December 31, 2007, 2006 and 2005, we recorded rental revenue of $9.3 million, $7.8 million and $7.3 million, respectively.
Future minimum lease payments under capital leases with initial or remaining terms of one year or more consist of the following at December 31, 2007:
The Company had no operating leases, as a lessee, as of December 31, 2007, 2006 and 2005.
Note 7. Income Taxes
The income tax provision (benefit) attributable to income from operations for the fiscal years ended December 31, 2007, 2006 and 2005 is comprised of the following:
Deferred Tax Assets and Liabilities
The tax effect of significant temporary differences and carryforwards representing deferred tax assets and liabilities (the difference between financial statement carrying values and the tax basis of assets and liabilities) for the Company is as follows at December 31, 2007 and 2006:
The provision for income taxes differs from the amount computed at the federal statutory rate as a result of the following:
The Company adopted the provisions of FIN 48, on January 1, 2007. There was no increase or decrease in the liability for unrecognized tax benefits as a result of the implementation of FIN 48. As of the date of adoption, the Company’s unrecognized tax benefits totaled $4.9 million.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
All of the unrecognized tax benefits at December 31, 2007, if recognized, would affect the annual effective tax rate. We recognize interest accrued related to unrecognized tax benefits in interest expense and penalties, if applicable, as a component of income tax expense. The amount of accrued interest and penalties was approximately $0.5 million and approximately $1.1 million as of December 31, 2007 and January 1, 2007, respectively. The decrease in the accrued interest and penalties during the twelve months ended December 31, 2007 is a result of the decrease in the unrecognized tax benefit during the period. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could materially change as a result of the expiration of statutes of limitation prior to December 31, 2008.
The Company files income tax returns in the U.S. federal jurisdiction and has no income tax filing requirements in any state or foreign jurisdiction. The Company is no longer subject to U.S. federal examinations by tax authorities for years before 2004.
Note 8. Debt
On January 29, 2004, the Company issued $215.0 million in aggregate principal amount of 7.85% senior secured notes due 2012. The net proceeds from the sale of the notes were used in connection with the acquisition of two Las Vegas, Nevada gaming and entertainment properties from affiliated parties described above, to repay intercompany debt described above and for distributions. The notes had a fixed annual interest rate of 7.85%, which was payable every six months on February 1 and August 1, commencing August 1, 2004. As mentioned in Note 1, pursuant to the terms of the Agreement, prior to the closing of the Acquisition, AEP was required to cause us to repay from funds provided by AEP, the principal, interest, any prepayment penalty or premium and any other obligation due under the terms of our 7.85% senior secured notes due 2012 and our senior secured credit facility. On February 15, 2008, ACEP repaid all of its outstanding 7.85% senior secured notes due 2012, at a price of $1,040.75 per $1,000 principal amount, for a value of $223.8 million.
The payment obligations under the $215.0 million 7.85% senior secured notes due 2012 issued by ACEP was fully and unconditionally guaranteed by all of our significant operating subsidiaries. The notes were subject to compliance with certain covenants. At December 31, 2007, we were in compliance with the note covenants.
In accordance with positions established by the Securities and Exchange Commission, separate information with respect to the parent, co-issuer, guarantor subsidiaries and non-guarantor subsidiaries was not required as the parent and co-issuer had no independent assets or operations, the guarantees were full and unconditional and joint and several, and the total assets, stockholders’ equity, revenues, income from operations before income taxes and cash flows from operating activities of the non-guarantor subsidiaries was less than 3% of ACEP’s consolidated amounts.
A syndicate of lenders had provided a non-amortizing $60.0 million revolving credit facility. The commitments were available to the Company in the form of revolving loans, and include a letter of credit facility (subject to a $10.0 million sublimit). The proceeds of loans under the senior secured revolving credit facility were available to provide working capital and for other general corporate purposes. The outstanding principal balance accrued interest at a fixed rate which is equal to one month LIBOR plus 1.5% per annum, which totaled 6.35% at December 31, 2007. We had availability under our credit facility of $20.0 million at December 31, 2007, subject to continuing compliance with certain covenants. As of December 31, 2007, we were in compliance with the debt covenants. At December 31, 2007 there was $40.0 million outstanding under our senior secured revolving credit facility. On February 15, 2008, we repaid in full all amounts outstanding, and terminated all commitments, under its senior secured revolving credit facility with Bear Stearns Corporate Lending Inc., as administrative agent, and the other lenders thereunder.
On February 15, 2008, in connection with the closing of the Acquisition, ACEP repaid all of its outstanding 7.85% senior secured notes due 2012, which were tendered pursuant to ACEP’s previously announced tender offer
and consent solicitation. In addition, ACEP has repaid in full all amounts outstanding, and terminated all commitments, under its senior secured revolving credit facility with Bear Stearns Corporate Lending Inc., as administrative agent, and the other lenders there under. The costs related to the early extinguishment of debt totaled $13.6 million and consisted mainly of prepayment penalties and the write-off of deferred financing costs.
On February 20, 2008, in connection with the closing of the Acquisition, certain of our wholly owned indirect subsidiaries obtained term loans in an aggregate amount of approximately $1.1 billion from Goldman Sachs Mortgage Company, or the Goldman Term Loans, pursuant to certain mortgage and mezzanine loan agreements.
The Goldman Term Loans have an initial term of two years with two one-year extension options and a blended annual interest rate of LIBOR (3.1% at February 20, 2008) plus 3.00% during the initial term and LIBOR plus 3.25% during any extension term. Approximately $56.5 million of the Goldman Term Loans is held for a capital expenditure reserve, a deferred maintenance and an environmental reserve. In addition, the Goldman Term Loans contain important affirmative and negative financial covenants customary for loans of this nature, which may restrict our ability to conduct our gaming operations or pursue development opportunities if desired. Certain of our assets, including the Stratosphere Casino Hotel & Tower, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder, and the Aquarius Casino Resort, secure the Goldman Term Loans. In connection with the Goldman Term Loans, an interest rate cap agreement was purchased to cap LIBOR at 4.75%. The fees incurred in connection with the interest rate cap agreement totaling $1.3 million will be amortized to interest expense, using the effective interest method, over the two-year life of the agreement.
Note 9. Related Party Transactions
As of May 26, 2004, we entered into an intercompany services arrangement, to provide management and consulting services, with Atlantic Coast Entertainment Holdings, Inc., the former owner of The Sands Hotel and Casino in Atlantic City, New Jersey, which was controlled by affiliates of Mr. Icahn at that date and currently is controlled by IELP. We are compensated based upon an allocation of salaries plus an overhead charge of 15% of the salary allocation plus reimbursement of reasonable out-of-pocket expenses. During 2007, 2006 and 2005, we billed Atlantic Cost Entertainment Holdings, Inc. and its affiliates approximately $119,000, $360,000 and $708,000, respectively. As of the date of the Acquisition, the intercompany services arrangement was terminated.
During 2007, 2006 and 2005, we made payments to XO Holdings, Inc., which, since January 2003, has been controlled by affiliates of Mr. Icahn, for certain telecommunications services provided to us in an amount equal to approximately $199,500, $213,300 and $191,200, respectively. The amounts paid for the provided services approximated their fair value. As of the date of the Acquisition, XO is no longer a related party transaction.
As of December 31, 2007 and 2006, we have accrued a $0 and $513,000, respectively, income tax receivable from AEP pursuant to the provision of the tax allocation agreement. As of December 31, 2007 and 2006, we have accrued related party payables of $0 and $89,000, respectively, to New Seabury for an income tax overpayment. The tax allocation agreement was terminated on February 20, 2008, in accordance with the terms of the Acquisition agreement.
As of December 31, 2007 and 2006, in connection with the transactions described above, the Company was owed approximately $0 and $472,000, respectively, from related parties.
Note 10. Employee Benefit Plans
Approximately 39% 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 $9.0 million, $8.7 million and $8.6 million for the years ended December 31, 2007, 2006 and 2005, respectively. The Company has no obligation for funding the plans beyond payments made based upon hours worked.
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 currently matches, within prescribed limits, 50% of eligible employees’ contributions up to 6% of any individual’s earnings. The Company recorded $1.0 million, $0.7 million and $0.4 million, for matching contributions for the years ended December 31, 2007, 2006 and 2005, respectively.
Effective January 1, 2005, we established a management incentive plan, or the MIP, to provide members of our executive management, other than our Chief Executive Officer, and certain employees, with additional
compensation for their contribution to the achievement of our corporate objectives. Provided that we achieve our EBITDA goals which are determined annually by our board of directors, a participant in the plan shall be entitled to a financial award under computed as the product of (1) base salary, (2) individual performance factors determined by each participant’s attainment of predetermined goals and (3) bonus as a percentage of base salary. A financial award under the MIP includes a cash award and a deferred bonus award, both components of which are within a pre-established range based upon the participant’s position level. Where a participant holds more than one position level during the fiscal year, the financial award will be prorated based upon service time within each position level. The deferred portion of the bonus award is paid out over a four year vesting period. Pursuant to the plan, payment of the awards will be made after completion of the annual audit but no later than March 15 of the year following the end of the previous fiscal year, as defined in the plan. All payment awards will be reduced by amounts required to be withheld for taxes at the time payments are made. In addition, unless our Chief Executive Officer and board of directors determine otherwise, a participant in the plan who is no longer our employee on the date of the award payment will not be entitled to payment of the award unless the participant (1) dies, (2) becomes permanently disabled, (3) enters military service, (4) takes an approved leave of absence or (5) is appointed or elected to public office; provided that the participant was an active employee for a minimum of 90 consecutive calendar days during the fiscal year (as defined in the plan). The plan is administered by our vice president of human resources, subject to control and supervision of our Chief Executive Officer and board of directors.
On June 25, 2007, the Board of Directors of ACEP, approved a resolution to (i) amend the MIP effective January 1, 2005, and (ii) establish the EBITDA Goals for fiscal year 2007 under the MIP, as amended. The EBITDA Goals (and related potential bonus as a percentage of base salary) as adopted by the Board of Directors for fiscal year 2007 are set forth in Exhibit A to the MIP as filed with the Securities and Exchange Commission on January 20, 2006, on the Company’s Current Report on Form 8-K.
As amended, the MIP provides that with respect to financial awards for fiscal year 2007, in the event of a Sale (as defined in the Amendment), a participant will be entitled to receive, assuming that such participant satisfies the relevant individual performance goals: (i) a 20% increase in the potential bonus amount; (ii) if the Sale occurs in fiscal year 2007, a pro rata determination of the financial award for such year, based on the period between January 1, 2007 and the closing date of the Sale; (iii) all of the financial award for fiscal year 2007 as a cash award without any deferred bonus award component to the financial award for such year; and (iv) all previous outstanding deferred bonus awards payable in full at the same time as the payment of the cash award for fiscal year 2007.
As of the date of the Acquisition, the MIP was terminated.
Awards of $2.7 million and $190,000 were made under the MIP in 2007 and 2006, respectively.
Note 11. Commitments & Contingencies
On December 19, 2007, each of Richard P. Brown and Denise Barton, each an Executive, entered into an Amended and Restated Employment Agreement (individually, the Amended Agreement, and, collectively, the Amended Agreements) with the Company, effective January 1, 2007 and April 1, 2007, respectively. The Amended Agreements amend and restate in their entirety the employment agreements. The agreements include provisions for base salary and bonus, as well as, termination and “Change of Control” provisions.
Our tax returns are subject to examination by the Internal Revenue Service and other taxing authorities. We regularly assess the potential outcomes of these examinations in determining the adequacy of the provision for income taxes and income tax liabilities. In determining necessary reserves, we must make assumptions and judgments about potential actions by taxing authorities, partially based on past experiences. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental, and we believe we have adequately provided for any reasonable and foreseeable outcomes related to uncertain tax matters. At the successful conclusion of an examination or the expiration of the exposure period, reserve amounts will be reversed back into income as a reduction of income tax expense. Reserve amounts are included as other long-term liabilities on the consolidated balance sheet.
We also adopted a Key Employee Plan in conjunction with the Acquisition, which allows for certain key employees to be paid one year’s salary upon meeting certain conditions. The employee must be employed in good standing at the closing date and must complete the transition period, defined as up to 60 days after closing, if requested by Voteco.
Legal Proceedings
We are, from time to time, parties to various legal proceedings arising out of our businesses. We believe, however, that other than the proceedings discussed below, 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.
Note 12. Acquisitions
On May 19, 2006 we purchased the Aquarius from Harrah’s Operating Company, Inc. We acquired certain assets and liabilities of the Aquarius pursuant to the purchase agreement. The total amount paid for the Aquarius, including direct acquisition costs and working capital amounts was $114.0 million and was allocated as follows (in thousands):
The customer list is being amortized on a straight-line method over a five year period.
The following (unaudited) pro forma combined results of operations have been prepared as if the acquisition of the Aquarius had occurred at January 1, 2005.
The historical financial statements for Aquarius included in the pro forma information have been prepared from the separate records maintained by the property and may not be indicative of the conditions that would have existed if the property had been operated as an unaffiliated business. The pro forma information is presented for informational purposes only and is not intended to be a projection of future results.
Note 13. Subsequent Events
On February 20, 2008, Voteco purchased our issued and outstanding membership interests. The total amount paid for our membership interests including direct acquisition costs, reserves, prepayments and working capital amounts was approximately $1.3 billion dollars. The transaction was funded with a combination of long-term borrowings of approximately $1.1 billion and the sale of equity interests of approximately $200 million.
The following unaudited preliminary allocation of the purchase price has been prepared based upon currently available information and assumptions that are deemed appropriate by management. The preliminary information is presented for informational purposes only and is not intended to be a projection of future results, and is subject to adjustments for up to 12 months following the transaction date.
The following table sets forth the preliminary allocation of the purchase price (in thousands):
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Management is required to base its assessment of the effectiveness of our internal control over financial reporting on a suitable, recognized control framework, such as the framework developed by the Committee of Sponsoring Organizations (COSO). The COSO framework, published in Internal Control-Integrated Framework, is known as the COSO Report. Our Management has chosen the COSO framework on which to base its assessment. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.
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 temporary 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 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the
company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
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
On February 20, 2008, upon consummation of the Acquisition, our directors and executive officers are as follows:
The following table sets forth certain information as of December 31, 2007, concerning certain key employees:
Stuart Rothenberg has been a managing director and a partner of Goldman Sachs since 1996. He has been head of the Real Estate Principal Investment Area of Goldman Sachs since 2003 and was the Chief Operating Officer of the Real Estate Principal Investment Area of Goldman Sachs from 1998 to 2003. Mr. Rothenberg is the president and a member of the Board of Directors of The Archon Group, a member of the International Advisory Board for Eurohypo, a member of the Board of Directors of Kerzner International, and a former director of Starwood Lodging Trust. He is a trustee of the Goldman Sachs Foundation, the Urban Land Institute and the Chapin School. He is a member of the Board of Directors of the Mt. Sinai Pediatrics Center Foundation, the University of Pennsylvania Undergraduate Financial Aid Committee, the Real Estate Roundtable and the Zell/Lurie Real Estate Center.
Brahm Cramer has been a managing director of Goldman Sachs since 2000 and a partner of Goldman Sachs since 2002. He has been the Chief Operating Officer of the Real Estate Principal Investment Area of Goldman Sachs since 2003 and he was the Chief Financial Officer of the Real Estate Principal Investment Area of Goldman Sachs from 1999 to 2003. Mr. Cramer serves on the Boards of The Archon Group’s Commercial and Residential Companies and the Board of Civic Builders (a New York-based non-profit organization whose mission is to build charter school facilities).
Jonathan Langer is a partner at Goldman Sachs & Co. where he is head of US acquisitions and global head of hospitality and gaming investing for the Real Estate Principal Investment Area. He is a member of the Whitehall Investment Committee and the GS Real Estate Partners Fund Investment Committee. Since July 2006 he has been a board member of the Colony Resorts LVH Acquisitions, LLC. Prior to joining Goldman Sachs, Mr. Langer was an associate at JMB Realty from 1992 to 1994.
Richard P. Brown has served as our President, Chief Executive Officer and a director of American Entertainment Properties Corp. and American Casino & Entertainment Properties Finance Corp. since inception. Mr. Brown has over 16 years experience in the gaming industry. Mr. Brown has been the President and Chief Executive Officer of each of the Stratosphere, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder since June 2002. From January 2001 to June 2002, he served as Chief Operating Officer for all three properties. Prior to joining Stratosphere
Gaming Corporation in March 2000 as Executive Vice President of Marketing, Mr. Brown held executive positions with Harrah’s Entertainment and Hilton Gaming Corporation. Since October 2002, Mr. Brown has served as President and Chief Executive Officer of GB Holdings, Inc., which filed for Chapter 11 bankruptcy protection on September 29, 2005. Since October 2003, he has served as President and Chief Executive Officer of Atlantic Coast Entertainment Holdings, Inc. Mr. Brown has been licensed by the Nevada State Gaming Control Commission.
Denise Barton has served as the Senior Vice President, Chief Financial Officer, Treasurer and Secretary of American Entertainment Properties Corp., American Casino & Entertainment Properties Finance Corp. and American Casino & Entertainment Properties LLC since inception. Ms. Barton has been Senior Vice President and Chief Financial Officer of each of the Stratosphere, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder since February 2003. Ms. Barton joined the Stratosphere as Vice President of Finance and Chief Financial Officer in August 2002. From February 1999 to June 2002, she served as Chief Financial Officer for Lowestfare.com, a travel company controlled by affiliates of Mr. Icahn. Ms. Barton was employed by KPMG LLP, certified public accountants, from January 1990 to February 1999. Ms. Barton is a certified public accountant. Since December 2003, Ms. Barton has served as Vice President, Chief Financial Officer and Principal Accounting Officer of GB Holdings, Inc., which filed for Chapter 11 bankruptcy protection on September 29, 2005. Since December 2003, she has served as Vice President, Chief Financial Officer and Principal Accounting Officer of Atlantic Coast Entertainment Holdings, Inc. Ms. Barton has been licensed by the Nevada State Gaming Control Commission.
Ronald P. Lurie has served as our Executive Vice President and General Manager of Arizona Charlie’s Decatur since inception and 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.
Mark Majetich has served as our Senior Vice President and General Manager of Arizona Charlie’s Boulder since April 2004, and Vice President and General Manager for Arizona Charlie’s Boulder since May 2001. He served as Director of Operations at Arizona Charlie’s Boulder from February 2001 until May 2001. From June 2000 until January 2001, he was Director of Hotel Operations for the Stratosphere. From November 1992 until August 1999, Mr. Majetich held various positions at the Excalibur Hotel/Casino, including most recently, Hotel Manager. He has more than 25 years of experience in the gaming industry.
Howard G. Toy has served as Senior Vice President and General Manager of the Stratosphere Casino Hotel and Tower since June of 2007. Prior to that, he was Executive Vice President and Managing Director of the New Frontier Hotel and casino. During his four year tenure there, Mr. Toy was integral in the development of the Trump Tower and the Montreux Resort and Casino, a 3,000 all suite project intended to replace the aging Frontier. From 2000 to 2004, he served as Regional General Manager for the Shaner Operating Group, developing their Luxury Hotel Division and running their flagship Marriott. From 1990 to 2000, Mr. Toy served as Vice President of Operations for the Ruffin Hotel Group where he was one of four to start the Hotel Division in 1992, acting as takeover or General Manager of every property acquired, including a two year period as President and Chief Operating Officer of the Nassau Marriott Resort and Crystal Palace Casino in Nassau, Bahamas. Prior to 1990, he served as a General Manager for Sheraton Hotels and held Executive and Corp positions in Hilton and Embassy Suites products.
Richard N. Charles has served as Senior Vice President and General Manager of Aquarius Casino Resort since August 2007. From 2002 to joining the Aquarius, he served as Chief Operating Officer for the Sandia Resort and Casino in Albuquerque, NM. Mr. Charles brings over 25 years of gaming and hospitality experience and has also held senior management positions with Gaylord Entertainment, Nashville TN, Concorde Resort and Casino, in Aruba, Resorts International Casino & Hotel and Playboy Hotel & Casino both in Atlantic City, NJ.
No family relationships exist between any directors or executive officers of ACEP.
Each of Messrs. Rothenberg, Cramer and Langer were appointed to our board of directors pursuant to the terms of our Amended and Restated Limited Liability Company Agreement entered into in connection with the closing of the Acquisition.
Audit Committee
As of December 31, 2007, the Board of Directors of AEP had established an audit committee consisting of Mr. Leidesdorf, Mr. Nelson and Mr. Wasserman.
The audit committee met formally at least once every quarter, and more often if necessary. The audit committee reviewed potential conflicts of interest which may have arisen between us and our affiliates.
The Board of Directors of AEP determined that AEP did not have an ‘audit committee financial expert,’ within the meaning of Item 401(h) of Regulation S-K, serving on the Audit Committee. AEP believed that each member of the audit committee was financially literate and possesses sufficient experience, both professionally and by virtue of his service as a director and member of the audit committee of AEP, 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 seek to recruit a member who would qualify as an ‘audit committee financial expert’ within the meaning of Item 401(h) of Regulation S-K.
As of December 31, 2007, Jack G. Wasserman had been chosen to preside at executive sessions of our non-management directors.
Audit Committee Report
The audit committee has confirmed that: (1) the audit committee reviewed and discussed our 2007 audited financial statements with management, (2) the audit committee has discussed with our independent auditors the matters required to be discussed by SAS 61 (Codification of Statements on Auditing Standards, AU § 380), (3) the audit committee has received the written disclosures and the letter from the independent accountants required by Independence Standards Board Standard No. 1; 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 2007 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:
Stuart Rothenberg
Brahm Cramer
Jonathan Langer
Code of Ethics
We have adopted a code of ethics that applies to our Chief Executive Officer, or CEO, and senior financial officers, or persons performing similar functions. The Code of Business Conduct and Ethics is included herewith as Exhibit 14.1.
Corporate Governance Guidelines
Our Corporate Governance Guidelines may be obtained without charge, by writing to American Casino & Entertainment Properties LLC, 2000 Las Vegas Boulevard South Las Vegas, NV, 89104, attention: Public Relations.
Section 16(a) Beneficial Ownership Reporting Compliance
Not applicable.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Committee Report
The board of directors reviewed and discussed the Compensation Disclosure and Analysis with management. Based on that review and discussion, the board of directors recommended that the Compensation Disclosure & Analysis be included in this annual report on Form 10-K.
This report is provided by the board of directors:
Stuart Rothenberg
Brahm Cramer
Jonathan Langer
Compensation Committee Interlocks and Insider Participation
As of December 31, 2007, none of our executive officers served on the compensation committee (or equivalent), or the board of directors of another entity whose executive officer(s) served on our board of directors.
Compensation Discussion and Analysis
Overview
The board of directors does not have a standing compensation committee. The entire board of directors participates in deliberations concerning executive compensation. The board of directors of ACEP annually reviews the performance, salary and bonus of the CEO and Chief Financial Officer. Our CEO 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 of directors. We feel it is beneficial to have our entire board of directors participate in discussions and decision-making concerning executive compensation. The board of directors does not delegate the authority to establish executive officer compensation to any other person and has not retained any compensation consultants to determine or recommend the amount or form of executive and director compensation. Instead, the board of directors has relied on recommendations from our human resources personnel.
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 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. Our annual bonuses are intended to reward particular achievement during the year, motivate future performance and attract and retain highly qualified key employees. We do not pay compensation in options, units or other equity-based awards.
In determining the base salary and bonus for each executive, the board of directors evaluates our overall performance and the executive’s performance and contributions during the prior year.
Base Salary
Base salaries for executive officers are determined based on job responsibilities and individual contribution. The entire board of directors participates in deliberations with respect to base salary.
Management Incentive Plan
Effective January 1, 2005, we established a management incentive plan, or the MIP, to provide members of our executive management, other than our CEO, with additional compensation for their contribution to the achievement of our corporate objectives. Provided that we achieve our EBITDA goals which are determined annually by our board of directors, a participant in the plan shall be entitled to a financial award under the plan computed as the product of (1) base salary, (2) individual performance factors determined by each participant’s attainment of predetermined goals and (3) bonus as a percentage of base salary. A financial award under the MIP includes a cash award and a deferred bonus award, both components of which are within a pre-established range based upon the participant’s position level. Where a participant holds more than one position level during the fiscal year, the financial award will be prorated based upon service time within each position level. The deferred portion of the bonus award is paid out over a four year vesting period. Pursuant to the plan, payment of the awards will be made after completion of the annual audit but no later than March 15 of the year following the end of the previous fiscal year, as defined in the MIP. All payment awards will be reduced by amounts required to be withheld for taxes at the time payments are made. In addition, unless our CEO and board of directors determine otherwise, a participant in the plan who is no longer our employee on the date of the award payment will not be entitled to payment of the award unless the participant (1) dies, (2) becomes permanently disabled, (3) enters military service, (4) takes an approved leave of absence or (5) is appointed or elected to public office; provided that the participant was an active employee for a minimum of 90 consecutive calendar days during the fiscal year (as defined in the plan). The plan is administered by our vice president of human resources, subject to control and supervision of our CEO and board of directors.
On June 25, 2007, the Board of Directors of ACEP, approved a resolution to (i) amend the MIP effective January 1, 2005, and (ii) establish the EBITDA Goals for fiscal year 2007 under the MIP, as amended. The EBITDA Goals (and related potential bonus as a percentage of base salary) as adopted by the Board of Directors for fiscal year 2007 are set forth in Exhibit A to the MIP as filed with the Securities and Exchange Commission on January 20, 2006, on the Company’s Current Report on Form 8-K.
As amended, the MIP provides that with respect to financial awards for fiscal year 2007, in the event of a Sale (as defined in the Amendment), a participant will be entitled to receive, assuming that such participant satisfies the relevant individual performance goals: (i) a 20% increase in the potential bonus amount; (ii) if the Sale occurs in fiscal year 2007, a pro rata determination of the financial award for such year, based on the period between January 1, 2007 and the closing date of the Sale; (iii) all of the financial award for fiscal year 2007 as a cash award without any deferred bonus award component to the financial award for such year; and (iv) all previous outstanding deferred bonus awards payable in full at the same time as the payment of the cash award for fiscal year 2007.
As of the date of the Acquisition, the MIP was terminated.
Awards of $2.7 million and $190,000 were made under the MIP in 2007 and 2006, respectively.
We also adopted a Key Employee Plan in conjunction with the Acquisition, which allows for certain key employees to be paid one year’s salary upon meeting certain conditions. The employee must be employed in good standing at the closing date and must complete the transition period, defined as up to 60 days after closing, if requested by VoteCo. The obligation to make such payments will remain with AEP.
Benefits
Our executive officers participate in a retirement savings plan, health and paid-time off benefits designed to enable us to attract and retain our workforce in a competitive environment.
We have a retirement savings plan under Section 401(k) of the Internal Revenue Code covering our non-union, and certain of our 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. We currently match, within prescribed limits, 50% of eligible employees’ contributions up to 6% of their individual earnings. We recorded $1.0 million, $0.7 million and $0.4 million for matching contributions for the years ended December 31, 2007, 2006 and 2005, respectively.
Perquisites
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, 2007 and December 31, 2006, by our Chief Executive Officer, or CEO, Chief Financial Officer, or CFO, and our three other most highly compensated executive officers and key employees for services rendered in all capacities for the year.
Summary of Compensation
Potential Payments Upon Termination Or Change In Control
We have arrangements with certain of the Named Executive Officers that may provide them with compensation following termination of employment. These arrangements are discussed below under “Employment Agreements”.
Plan-Based and Equity Awards
We do not have any stock award, option or non-equity incentive plans.
Option Grants in Last Fiscal Year
We have not implemented a stock option or other similar plan.
Employment Agreements
On December 19, 2007, each of Richard P. Brown and Denise Barton, each an Executive, entered into an Amended and Restated Employment Agreement (individually, the Amended Agreement, and, collectively, the Amended Agreements) with American Casino & Entertainment Properties LLC, or the Company, effective January 1, 2007 and April 1, 2007, respectively. The Amended Agreements amend and restate in their entirety the employment agreements filed by the Company as Exhibits 10.1 and 10.2 to our current Report on Form 8-K filed with the SEC on April 26, 2007.
Pursuant to their respective Agreements, Mr. Brown will serve as President and CEO of the Company and Ms. Barton will serve as CFO of the Company. The Agreements for Mr. Brown and Ms. Barton will terminate on December 31, 2008 and March 31, 2009, respectively, unless otherwise terminated earlier pursuant to the terms of such Agreement.
Pursuant to the Agreements, each of Mr. Brown and Ms. Barton is entitled to an annual base salary of $625,000 and $380,000, respectively, and will be eligible to receive an annual bonus, as determined in the sole discretion of the Board, which shall be based upon the Company meeting certain performance targets.
The employment agreements were amended to provide for increases in the potential annual bonus amounts payable to each Executive. Otherwise, the Amended Agreements are identical to the employment agreements previously filed. The Amended Agreements are filed as Exhibits 10.1 and 10.2 to our current Report on Form 8-K filed with the SEC on December 27, 2007.
Upon termination from employment following a change of control, each of Mr. Brown and Ms. Barton is entitled to receive within 60 days following the closing of the change of control transaction, a lump-sum bonus payment in the amounts of $1,000,000 and $505,000 respectively. To be eligible to receive the lump-sum bonus payments, the executive officers must be employed in good standing as of the date of the closing of the change of control transaction and have complied with the terms of the respective Amended Agreement, including the execution of a severance and release agreement. In addition, upon a change of control, the executive officers are entitled to receive any base salary due and unpaid, any bonus compensation earned, vested, due and unpaid, and any compensation due in respect to accrued but unused vacation days.
Upon termination from employment without cause, each of Mr. Brown and Ms. Barton is entitled to receive within 15 days following the termination base salary due and unpaid, any bonus compensation earned, vested, due and unpaid, any compensation due in respect to accrued but unused vacation days, and a severance payment equal to one year’s then current base salary, conditioned upon the executive officer’s execution of a severance and release agreement. In addition, upon termination from employment without cause before the closing of a change of control transaction but after we have entered into a binding agreement for a change of control transaction, within 15 days following the closing of the change of control transaction, Mr. Brown is entitled to receive an additional payment equal to the difference between $1,000,000 and the severance payment previously paid to Mr. Brown, and Ms. Barton is entitled to receive an additional payment equal to the difference between $505,000 and the severance payment previously paid to Ms. Barton. To be eligible to receive the additional payments, the executive officers must be employed in good standing as of the date we entered into the binding agreement for a change of control transaction, the executive officers must have complied with the terms of the respective Amended Agreement, including the execution of a severance and release agreement, the closing of the change of control transaction must have occurred on or before December 31, 2008, and the change of control transaction must have involved a party with respect to which the terminated executive officer was actively involved in the negotiations of the change of control transaction before termination of employment.
Pursuant to the terms of the Amended Agreements, a change of control transaction means: (i) the consummation of any transaction (including, without limitation, any merger or consolidation), the result of which is that any person, other than Carl Icahn or certain related parties, becomes the beneficial owner, directly or indirectly, of more than 50% of our voting securities, measured by voting power rather than number of shares; (ii) the sale, transfer or other disposition of all or substantially all of our assets; or (iii) the sale, transfer or other disposition of all of our interest in the Stratosphere Las Vegas Hotel & Casino.
Compensation of Directors
The following table provides compensation information for our former directors in 2007.
Jack G. Wasserman, William A Leidesdorf and James L Nelson each received compensation for their service as members of the board of directors, for 2007, in the amount of $15,000. They were also reimbursed for reasonable out-of-pocket expenses incurred in connection with their attendance at meetings of the AEP board of directors. In addition, Mr. Wasserman received fees of $3,000 for his service as chair of our Compliance Committee. Messrs. Brown and Meister did not receive any compensation for their service as members of the board of directors in 2007.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Voteco owns 100% of our issued and outstanding Class A Interest. Holdings owns 100% of our issued and outstanding Class B Interest. The address of Voteco is 85 Broad Street, New York, NY 10004 and the address of Holdings is 85 Broad Street, New York, NY 10004.
Messrs. Cramer, Rothenberg and Langer own 100% of the membership interests of Voteco.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
As of December 31, 2007, affiliates of Mr. Icahn owned approximately 91.2% of the outstanding depositary units and approximately 86.5% of the outstanding preferred units of IELP. IELP’s general partner is IEGP, which is a wholly-owned subsidiary of Beckton Corp. As of December 31, 2007, all of the capital stock of Beckton was owned by Mr. Icahn. IELP’s business is conducted through a subsidiary limited partnership, IEH, in which IELP owns a 99% limited partnership interest. IEGP has a 1% general partnership interest in each of IELP and IEH. IEH owned 100% of AEP, which was our direct parent, until the closing of the Acquisition.
Related Party Transaction Policy
As of December 31, 2007, our former parent, IELP, had adopted a related party transaction policy which applies to IELP and its subsidiaries, including us. A related person transaction was defined asany transaction or any series of similar transactions in which IELP or its subsidiaries, including us, is a participant and any related person has a direct or indirect material interest. Examples of a related person include any person who is one of our directors or executive officer, any person who is a director or executive officer of IEGP, IELP’s general partner, a person known by IELP to the beneficial owner of more than 5% of any class of our or IELP’s voting securities, any immediate family member of any of the foregoing, and any entity in which any of the foregoing persons is employed or has a 5% or greater beneficial ownership interest.
Prior to the closing of the Acquisition, we and IELP recognized that related person transactions can present potential or actual conflicts of interest. Accordingly, pursuant to IELP’s related party transaction policy, prior to the closing of the Acquisition, we followed certain procedures for reviewing related person transactions. These procedures were designed to ensure that transactions with related persons are fair to us and in our best interests. If a proposed transaction appeared to or did involve a related person, the transaction was presented to our audit committee for review. The audit committee was authorized to retain and pay such independent advisors as it deemed necessary to properly evaluate the proposed transaction, including, without limitation, outside legal counsel and financial advisors to determine the fair value of the transaction.
In addition, the indenture governing our 7.85% notes due 2012 restricted us from entering into transactions with affiliates involving aggregate consideration in excess of $2.0 million unless the transaction was approved by a majority of the disinterested directors on our board of directors or aggregate consideration in excess of $10.0 million unless an accounting, appraisal or investment banking firm of recognized standing issues an opinion as to the fairness to us or our subsidiaries of the transaction. On February 15, 2008, in connection with the closing of the Acquisition, ACEP repaid all of its outstanding 7.85% senior secured notes due 2012, which were tendered pursuant to ACEP’s previously announced tender offer and consent solicitation.
Prior to the closing of the Acquisition, all related person transactions that were approved or ratified by the audit committee were disclosed to the full board of directors. All related person transactions were also disclosed in our applicable filings if required by the Securities Act of 1933 and the Securities Exchange Act of 1934 and related rules and regulations.
Tax Allocation Agreement
We and our subsidiaries entered into a tax allocation agreement with our former parent, AEP. The tax allocation agreement was terminated on February 20, 2008, in accordance with the terms of the Acquisition agreement. The tax allocation agreement provided for payments to our parent of the tax liabilities, which we refer to as the standalone tax liabilities, of us and our subsidiaries, calculated as if we and our subsidiaries were a group of corporations filing consolidated income tax returns separately from our parent, which we refer to as the standalone group. The tax allocation agreement also provided for payments by our parent to us whenever previously paid standalone tax liabilities must be reduced either as a result of a subsequent determination such as by a governmental authority, or as a result of the incurrence by the standalone group of net operating losses, net capital losses or credits that could have been carried back to prior years if we had filed tax returns as a stand alone group. As of December 31, 2007, we have a $0 income tax receivable from AEP and a $0 income tax payable to New Seabury, pursuant to the provision of the tax allocation agreement. As of December 31, 2007, we were owed $0 from AEP, related to the tax allocation agreement.
Other Transactions
On May 26, 2004, we entered into an intercompany services arrangement, to provide management and consulting services, with Atlantic Coast Entertainment Holdings, Inc., the former owner of The Sands Hotel and Casino in Atlantic City, New Jersey, which was controlled by affiliates of Mr. Icahn at that date and currently is controlled by IELP. We are compensated based upon an allocation of salaries plus an overhead charge of 15% of the salary allocation plus reimbursement of reasonable out-of-pocket expenses. During 2007, we billed Atlantic Coast and its affiliates approximately $119,000. As December 31, 2007, we were owed $0 related to the intercompany services arrangement. As of the date of the Acquisition, the intercompany services arrangement was terminated.
During 2007, we made payments to XO Holdings, Inc., which, since January 2003, has been controlled by affiliates of Mr. Icahn, for certain telecommunications services provided to us in an amount equal to approximately $199,500. The amounts paid for the provided services approximated their fair value. As of the date of the Acquisition, XO Holdings, Inc. is no longer a related party.
Director Independence
We believe that Messrs. Rothenberg, Cramer and Langer 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 2007 and 2006 services:
Grant Thornton, LLP, did not provide any services related to financial information systems design and implementation during 2007 or 2006.
(1)
Audit fees also include fees for work associated with Sarbanes-Oxley.
(2)
Other fees include fees for work related to compliance with Nevada Gaming Regulations.
It is the policy of the Audit Committee to pre-approve all engagements and fees of the independent public accountant and during 2007 and 2006 all such engagements and fees were pre-approved.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. and 2. Financial Statements and Schedules
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities indicated with respect to the Board of Directors of American Casino & Entertainment Properties LLC, on behalf of the Registrant in the capacities and on the dates indicated:
/s/ Richard P. Brown
Richard P. Brown
President, Chief Executive Officer
March 26, 2008
(Principal Executive Officer)
/s/ Denise Barton
Denise Barton
Senior Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)
March 26, 2008
/s/ Stuart Rothenberg
Stuart Rothenberg
Board Member
March 26, 2008
/s/ Brahm Cramer
Brahm Cramer
Board Member
March 26, 2008
/s/ Jonathan Langer
Jonathan Langer
Board Member
March 26, 2008
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, 2007. 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.