SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community

TMCNet:  AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[March 31, 2014]

AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) With the exception of historical facts, the matters discussed in this annual report on Form 10-K are forward looking statements. Forward-looking statements may relate to, among other things, future actions, future performance generally, business development activities, future capital expenditures, strategies, the outcome of contingencies such as legal proceedings, future financial results, financing sources and availability and the effects of regulation and competition. Also, please see Risk Factors in Item 1A of this annual report on Form 10-K. When we use the words "believe," "intend," "expect," "may," "will," "should," "anticipate," "could," "estimate," "plan," "predict," "project," or their negatives, or other similar expressions, the statements which include those words are usually forward-looking statements. When we describe strategy that involves risks or uncertainties, we are making forward-looking statements.


These forward-looking statements are based on the current plans and expectations of our management and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. These factors include, but are not limited to: the size of our indebtedness, our indebtedness' effect on our business, the adverse effect of government regulation and other matters affecting the gaming industry, increased operating costs of our properties, increased competition in the gaming industry, adverse effects of economic downturns and terrorism, our failure to make necessary capital expenditures, increased costs associated with our growth strategy, the loss of key personnel, risks associated with geographical market concentration, our failure to satisfy our working capital needs from operations or our indebtedness, our inability to raise additional money, our dependence on water, energy and technology services, adverse effects of increasing energy costs, and the availability of and costs associated with potential sources of financing.

You should also read, among other things, the risks and uncertainties described in the section entitled Risk Factors in Item 1A of this annual report on Form 10-K.

We warn you that forward-looking statements are only predictions. Actual events or results may differ as a result of risks that we face. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update them.

The following discussion contains management's discussion and analysis of financial condition and results of operations. Management's discussion and analysis should be read in conjunction with, and is qualified in its entirety by reference to, our audited financial statements and related notes.

31 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 in Laughlin, Nevada, which caters to visitors to and residents of Laughlin.

We believe that the Stratosphere is one of the most recognizable landmarks in Las Vegas, our two Arizona Charlie's properties are well-known casinos in their respective marketplaces and the Aquarius is the largest hotel by number of rooms in Laughlin.

We currently offer gaming, hotel, dining, entertainment, retail and other amenities at our properties. We use certain key measurements to evaluate operating revenues. Casino revenue measurements include "table games drop" and "slot coin in", which are measures of the total amounts wagered by customers.

Win or hold percentage represents the percentage of table games drop or slot coin in that is won by the casino and recorded as casino revenues. Hotel revenue measurements include hotel occupancy rate, which is the average percentage of available hotel rooms occupied during a period, and average daily room rate, which is the average price of occupied rooms per day. Food and beverage revenue measurements include number of covers, which is the number of guests served, and the average check amount per guest.

Our operating results greatly depend on the volume of customers at our properties, which in turn affects our gaming revenues and the price we can charge for our non-gaming amenities. A substantial portion of our revenue is generated from our gaming operations; more specifically slot play (including video poker). Approximately 54.7% of our gross revenue in 2013 was generated from our gaming operations. Hotel and food and beverage sales generated similar percentages of our gross revenue during fiscal year 2013, with hotel sales representing 17.6% and food and beverage sales representing 18.8%. The majority of our revenue is cash-based through customers wagering with cash or paying for non-gaming amenities with cash or credit card.

Our expenses also depend on the volume of customers at our properties. The volume of customers that visit our properties directly affects our labor, which represented approximately 51.8% of our expenses during fiscal year 2013, and the amount we spend on marketing, which represented approximately 3.1% of our expenses during fiscal year 2013. However, we incur a significant amount of costs that do not vary directly with changes in the volume of customers. As a result, it is difficult to reduce costs to match reductions in demand, which results in reduced operating margins. Because our business is capital intensive, we rely heavily on the ability of our properties to generate operating cash flow to repay debt financing, fund maintenance capital expenditures and provide excess cash for future development.

The Las Vegas and Laughlin Markets All of our properties are located in the Las Vegas and Laughlin, Nevada markets.

Accordingly, our results of operations are driven by economic conditions in these markets.

Las Vegas is one of the largest entertainment markets in the country. We believe that 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.

According to the Las Vegas Convention and Visitors Authority, or LVCVA, the number of visitors traveling to Las Vegas has increased over the last ten years from 35.5 million visitors in 2003 to 39.7 million visitors in 2013. The number of hotel and motel rooms in Las Vegas has increased from 130,482 at the end of 2003 to 150,593 at the end of 2013, giving Las Vegas the most hotel and motel rooms of any metropolitan area in the world. Despite this significant increase in the supply of rooms, the Las Vegas hotel occupancy rate exceeded 88% for each of the years from 1999 through 2008. Hotel occupancy remained relatively flat at 87.1% for 2013 compared to 87.4% in 2012, which is below the peak of 94.0% in 2007. Las Vegas tourism remained flat in 2013 according to the LVCVA as visitor volume was approximately 39.7 million people in 2013 and 2012. The hotel ADR increased by 2.4% in 2013 compared to the prior year.

32 Las Vegas Strip gaming revenues have grown as Las Vegas visitations and hotel room counts have grown. Between 2003 and 2013, gaming revenues on the Las Vegas Strip experienced a compound annual growth of 1.0%. Gaming revenues for 2013 totaled approximately $6.5 billion, a 4.8% increase from 2012. As was the case in 2012, baccarat play, which is favored by high-end international guests, was a significant contributor to gaming revenue growth on the Las Vegas Strip in 2013.

Our properties do not target the baccarat player.

According to the LVCVA, Las Vegas has been the United States' top-ranked destination for trade shows for the last ten years. The number of trade show and convention attendees in Las Vegas decreased from approximately 5.7 million in 2003 to 5.1 million in 2013. Convention attendance increased 3.3% during 2013 compared to 2012 and has increased 13% compared to 2009.

We believe that the growth in the Las Vegas tourist market has been enhanced by a dedicated program of the LVCVA and major Las Vegas hotels to promote Las Vegas as an exciting vacation destination and convention site, the increased capacity of McCarran International Airport and the introduction of large, themed destination resorts in Las Vegas.

Nevada has enjoyed population growth that includes an increasing number of retirees and other active gaming customers. A majority of Nevada's growth has occurred in Las Vegas, which is located in Clark County. The population of Clark County has grown from 1.6 million people in 2003 to approximately 2.0 million people in 2013, a compound annual growth rate of 2.3%. In comparison, the United States population increased at a compound annual growth rate of 0.8% during this period. From 2012 to 2013, according to the US Census Bureau, it is estimated that Las Vegas experienced a 1.4% increase in population.

The Laughlin area economy is primarily dependent on the gaming and tourism industry. Visitor volume and occupancy rates have declined on an annual basis over the past several years while the number of hotel rooms has remained fairly constant. The 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 10,333 rooms and its gaming revenue for 2013 was $455 million, down 1.5% from 2012.

Debt Restructuring and Refinancing On July 3, 2013, the Company and certain of its subsidiaries, Guarantors, entered into a First Lien Credit and Guaranty Agreement, or First Lien Credit Agreement. Pursuant to the terms of the First Lien Credit Agreement, the First Lien Lenders provided the Company with senior secured loan facilities in an aggregate principal amount of $230 million, consisting of $215 million of senior secured term loans, or First Lien Term Loans, and $15 million of senior secured revolving credit facility, or Revolving Facility (the Revolving Facility together with the First Lien Term Loans, the "First Lien Facilities").

On July 3, 2013, the Company and the Guarantors entered into a Second Lien Credit and Guaranty Agreement, or Second Lien Credit Agreement. Pursuant to the terms of the Second Lien Credit Agreement, the Second Lien Lenders provided the Company with secured second lien term loans in the aggregate principal amount of $120 million, the Second Lien Term Loans. The proceeds from the First Lien Term Loans and Second Lien Term Loans were used to purchase the outstanding 11% Senior Secured Notes that were tendered in connection with the Issuer's previously announced tender offer and to redeem the remaining outstanding 11% Senior Secured Notes.

On February 24, 2014, we entered into an amendment of the First Lien Credit Agreement. Among other changes, the Amendment reduces the interest rates on the Term Loans by 125 basis points per annum. Interest will now accrue, at our election, (i) at the adjusted eurodollar rate plus 3.50% per annum or (ii) at the Base Rate plus 2.50% per annum. Additionally, the minimum adjusted eurodollar rate was reduced by 25 basis points from 1.25% per annum to 1.00% per annum. We expect to reduce our cash paid on interest by approximately $3.2 million in the first year.

33 Results of Operations The following table sets forth the results of our operations for the periods indicated.

Year ended December 31, 2013 2012 2011 (in millions) Income Statement Data: Revenues: Casino $ 199.0 $ 200.7 $ 202.2 Hotel 64.0 64.1 64.0 Food and beverage 68.3 66.9 68.4 Tower, retail and other 32.3 33.2 32.7 Gross revenues 363.6 364.9 367.3 Less promotional allowances 26.2 25.1 24.7 Net revenues 337.4 339.8 342.6 Costs and expenses: Casino 64.1 65.1 66.1 Hotel 32.5 34.1 34.3 Food and beverage 52.6 51.6 51.3 Other operating expenses 11.3 11.5 12.0Selling, general and administrative 115.1 116.0 113.2 Pre-opening costs 0.1 0.1 - Depreciation and amortization 31.7 33.3 39.1 Impairment of assets - - 0.3 Total costs and expenses 307.4 311.7 316.3 Income from operations $ 30.0 $ 28.1 $ 26.3 EBITDA Reconciliation: Net loss $ (15.1) $ (15.8) $ (20.3) Interest expense 37.3 42.8 45.2 Depreciation and amortization 31.7 33.3 39.1 EBITDA $ 53.9 $ 60.3 $ 64.0 Regulation G, "Conditions for Use of Non-GAAP Financial Measures," prescribes the conditions for use of non-GAAP financial information in public disclosures.

We believe that our presentation of EBITDA is an important supplemental measure of our operating performance to investors. EBITDA is a commonly used measure of performance in our industry which we believe, when considered with measures calculated in accordance with United States Generally Accepted Accounting Principles (GAAP), gives investors a more complete understanding of operating results before the impact of investing and financing transactions and income taxes and facilitates comparisons between us and our competitors. We believe this measure will be used by investors in their assessment of our operating performance and the valuation of our Company.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012 During 2013, the United States continued its slow recovery from the long economic recession that ended in 2009. According to the Lee Business School Center for Business and Economic Research at the University of Nevada Las Vegas, or CBER, at the trough in 2009, U.S. per capita GDP was 5.3% below its peak. As of the third quarter of 2013, U.S. per capita GDP had regained 98% of its recessionary loss. CBER also reported strong increases in consumer confidence during most of 2013. As the United States economy continues to recover, Las Vegas has shown positive economic signs. According to the Las Vegas Convention and Visitors Authority, or LVCVA, the number of visitors to Las Vegas grew each year from 2010 to 2012 and was down only 0.1% in 2013. Despite the slight decrease, the 39.7 million visitors in 2013 exceeded the prerecession peak of 39.2 million visitors in 2007. Employment in Las Vegas is increasing and unemployment is decreasing. Las Vegas housing prices have increased and mortgage defaults have slowed. The number of visitors to Laughlin decreased 1.3% in 2013, a decline of approximately 27,000 visitors. The number of room nights and occupancy, however, increased. Total gaming revenue in Clark County has increased each year beginning in 2010 and increased 2.9% in 2013. After deducting Baccarat, a game preferred by mostly wealthy international visitors, Clark County gaming revenue increased approximately 0.7% in 2013 compared to 2012. Although economic indicators are favorable in the United States and Clark County, accelerated growth has not occurred. Operators in all of our markets continue to use aggressive promotions and discounted prices to attract customers and increase occupancies at their properties. Competition for customers is intense. All of these factors have impacted our results.

34 Our consolidated gross revenues decreased 0.4% to $363.6 million for the year ended December 31, 2013 from $364.9 million for the year ended December 31, 2012. Consolidated income from operations and EBITDA increased 6.8% and decreased 10.6% to $30.0 million and $53.9 million for the year ended December 31, 2013 compared to $28.1 million and $60.3 million for the year ended December 31, 2012. The decreases in our gross revenues and EBITDA are due primarily to decreases in gaming, tower and entertainment revenues.

Income from operations and EBITDA for the year ended December 31, 2013 were positively impacted by a 0.8% decrease in selling, general and administrative expenses. The decrease in selling, general and administrative expenses for the year ended December 31, 2013 was due largely to a credit to sales tax expense of approximately $1.1 million to reverse previously accrued taxes on complimentary meals provided to customers and employees. During the year ended December 31, 2012, we accrued approximately $677,000 in expenses for sales taxes on complimentary meals provided to customers and employees based on a decision by the Nevada Tax Commission. In addition, income from operations and EBITDA for the year ended December 31, 2012 were negatively impacted by approximately $840,000 in expenses related to a terminated refinancing of the 11% Senior Secured Notes. EBITDA for the year ended December 31, 2013 was negatively impacted by a $7.9 million charge for the early redemption of debt related to the redemption of the remaining aggregate principal amount of our 11% Senior Secured Notes, of which approximately $6.3 million was non-cash. EBITDA for the year ended December 31, 2012 was also negatively impacted by a $1.1 million charge for the early redemption of debt related to the voluntary redemption of 5% of the aggregate principal amount of our 11% Senior Secured Notes, of which approximately $737,000 was non-cash. We also expensed approximately $500,000 for management fees for the year ended December 31, 2013, compared to $1.0 million for the year ended December 31, 2012. Finally, ACEP Interactive, our licensed internet gaming subsidiary, spent approximately $835,000 during the year ended December 31, 2013 to operate acePLAYPoker.com, which became operational in February 2013, compared to approximately $135,000 in the year ended December 31, 2012. As a result, our consolidated net operating margin increased to 8.9% for the year ended December 31, 2013 compared to 8.3% for the year ended December 31, 2012.

Casino Casino revenues consist of revenues from slot machines, table games, poker, race and sports book, bingo and keno. Casino revenues decreased 0.8% to $199.0 million for the year ended December 31, 2013, compared to $200.7 million for the year ended December 31, 2012. Decreased revenues at the Stratosphere and Arizona Charlie's Decatur were partially offset by higher revenues at the Aquarius and Arizona Charlie's Boulder. For the year ended December 31, 2013, our slot coin-in increased 0.2% while table drop declined 3.9% compared to the year ended December 31, 2012. For the year ended December 31, 2013, slot machine revenues were 85.3% of casino revenues and table game revenues were 11.4% of casino revenues, compared to 85.1% and 11.8% of casino revenues, respectively, for the year ended December 31, 2012. Other casino revenues, consisting of race and sports book, poker, bingo and keno, increased 3.2% for the year ended December 31, 2013 compared to the year ended December 31, 2012. Race and sports book revenues increased 0.4% for the year ended December 31, 2013 compared to the year ended December 31, 2012 due to a 0.6 percentage point increase in hold partially offset by a 5.3% decline in handle. Bingo revenues increased 43.3% for the year ended December 31, 2013 compared to the year ended December 31, 2012 due primarily to a 1.8 percentage point increase in hold. Keno and poker revenues declined 49.1% and 2.4% respectively for the year ended December 31, 2013 compared to the year ended December 31, 2012. Keno revenues declined as our Keno offering at Aquarius was discontinued in January 2013. Casino operating expenses decreased 1.5% to $64.1 million, or 32.2% of casino revenues, for the year ended December 31, 2013, from $65.1 million or 32.4% of casino revenues, for the year ended December 31, 2012. This decrease was primarily due to decreased participation expenses, revenue taxes and labor costs. Participation expenses consist of fees paid to game owners for use of their games. Despite the decline in revenues, our casino operating margin increased slightly to 67.8% for the year ended December 31, 2013 compared to 67.6% for the year ended December 31, 2012.

35 Hotel Hotel revenues decreased 0.2% to $64.0 million for the year ended December 31, 2013 from $64.1 million for the year ended December 31, 2012. Increased revenues at the Aquarius and the Arizona Charlie's properties were offset by decreased revenues at the Stratosphere for the year ended December 31, 2013 compared to the year ended December 31, 2012. Overall occupancy decreased to 64.9% for the year ended December 31, 2013 compared to 67.4% for the year ended December 31, 2012. The decline in overall room occupancy was due largely to declines at the Stratosphere, which fell to 79.1% for the year ended December 31, 2013, compared to 84.6% for the year ended December 31, 2012. The loss of a tour operator contract was responsible for the decline in occupancy at the Stratosphere as rooms sold in the tour and travel segment declined 56.7% compared to the year ended December 31, 2012. Stratosphere revenue for the year ended December 31, 2013 was positively impacted by a 71.6% increase in resort fee income. Our overall ADR decreased 0.5% for the year ended December 31, 2013 compared to the year ended December 31, 2012. Our hotel expenses decreased 4.7% to $32.5 million for the year ended December 31, 2013, compared to $34.1 million for the Year ended December 31, 2012. The decrease in hotel expenses was due primarily to decreased labor costs, supplies expenses and commissions and broker fees. Our hotel operating margin increased to 49.2% for the year ended December 31, 2013 as compared to 46.8% for the year ended December 31, 2012.

Food and Beverage Food and beverage revenues increased 2.1% to $68.3 million for the year ended December 31, 2013 compared to $66.9 million for the year ended December 31, 2012. Revenues increased for all properties except the Aquarius. The decline in revenues at the Aquarius was primarily due to changes to our coffee venue. Our Starbucks franchise agreement ended on February 28, 2013 and was replaced with a temporary coffee venue with limited service. A permanent replacement, Duet Coffee and Wine, opened on August 16, 2013. Overall, average revenue per cover for the year ended December 31, 2013 increased 3.5% compared to the year ended December 31, 2012, while food covers and beverage covers decreased 1.3% and 1.0%, respectively. Our food and beverage expenses increased 1.9% to $52.6 million for the year ended December 31, 2013 compared to $51.6 million for the year ended December 31, 2012 due primarily to increased labor and food and beverage cost of goods. Our food and beverage operating margin increased slightly to 23.0% for the year ended December 31, 2013 as compared to 22.9% for the year ended December 31, 2012.

Tower, Retail, Entertainment and Other Tower, retail and other revenues decreased 2.7% to $32.3 million for the year ended December 31, 2013 from $33.2 million for the year ended December 31, 2012.

Tower revenues decreased 1.2% for the year ended December 31, 2013, compared to the year ended December 31, 2012. The primary reason for the decrease in Tower revenues for year ended December 31, 2013 compared to the year ended December 31, 2012 was a 6.1% increase in average revenue per guest admission offset by a 6.9% decrease in admissions. Entertainment revenue declined 35.2% for the year ended December 31, 2013, compared to the year ended December 31, 2012. The decrease in entertainment revenue was due primarily to fewer performances and lower average ticket prices. The Bite show at the Stratosphere closed on October 31, 2012 and its replacement, Pin Up, debuted on March 2, 2013. Retail revenue increased 1.0% for the year ended December 31, 2013, compared to the year ended December 31, 2012. Other operating income decreased 0.5% for the year ended December 31, 2013, compared to the year ended December 31, 2012. The decrease was primarily due to lower management fee and project development revenues.

Other operating expenses decreased 1.7% to $11.3 million for the year ended December 31, 2013, compared to $11.5 million for the year ended December 31, 2012. This decrease was primarily due to lower entertainer fees and equipment rental expenses.

Promotional Allowances Promotional allowances are comprised of the retail value of goods and services provided to casino customers under various marketing programs. As a percentage of casino revenues, promotional allowances increased to 13.2% for the year ended December 31, 2013 compared to 12.5% for the year ended December 31, 2012. The increase was due primarily to increased food and beverage promotions.

36 Pre-opening Expense We incurred $119,000 in pre-opening costs for the year ended December 31, 2013 compared to $72,000 for the year ended December 31, 2012. Pre-opening costs for the year ended December 31, 2013 were primarily comprised of equipment, labor costs and supplies for Pin Up, a burlesque show at the Stratosphere and equipment and supplies for the Duet Coffee and Wine venue at the Aquarius. Pin Up opened to the public on March 2, 2013 and Duet Coffee and Wine opened on August 16, 2013. Pre-opening expenses associated with Pin Up and Duet Coffee and Wine were approximately $114,000 and $5,000 respectively. Pre-opening costs for the year ended December 31, 2012 consisted primarily of equipment, labor costs and supplies for the McCall's Heartland Grill restaurant venue and Pin Up, a burlesque show at the Stratosphere. Pre-opening expenses associated with McCall's Heartland Grill and Pin Up were approximately $55,000 and $17,000 respectively. McCall's Heartland Grill opened to the public on October 25, 2012.

Selling, General and Administrative Selling, general and administrative expenses are primarily comprised of payroll, marketing, advertising, utilities and other administrative expenses. These expenses decreased 0.8% to $115.1 million, or 31.7% of gross revenues, for the year ended December 31, 2013, compared to $116.0 million, or 31.8% of gross revenues, for the year ended December 31, 2012. The decline in expenses was due primarily to reduced sales tax expenses, legal fees, and management fees partially offset by increased marketing related expenses. For the year ended December 31, 2013 sales tax expenses include a credit of approximately $1.1 million for the reversal of prior accruals for taxes on complimentary and employee meals. In May 2013, the Nevada Tax Commission ratified a settlement agreement with a group of casinos stipulating that the Nevada Department of Taxation would not collect taxes on future complimentary and employee meals in exchange for the casinos dropping claims against the Nevada Department of Taxation for taxes that have already been paid. The settlement was contingent on legislative action by the Nevada Legislature. In June 2013, the Nevada Legislature approved and the Governor of Nevada subsequently signed A.B. 506, which exempts complimentary meals provided to customers and employees from taxation. Conversely, sales tax expenses for the year ended December 31, 2012 includes approximately $248,000 for an audit assessment related to a Nevada Department of Taxation audit and $677,000 in accrued sales tax expenses for complimentary and employee meals. During 2013, our management agreement with a related party expired, resulting in $500,000 in savings. During the year ended December 31, 2012 we incurred approximately $840,000 in expenses related to a terminated refinancing of the 11% Senior Secured Notes. In addition, we expensed approximately $835,000 related to our interactive gaming initiative during the year ended December 31, 2013 compared to approximately $135,000 during the year ended December 31, 2012.

Interest Expense Interest expense decreased 12.9% to $37.3 million for the year ended December 31, 2013, compared to $42.8 million for the year ended December 31, 2012. The decrease was due primarily to the redemption of the 11% Senior Secured Notes and issuance of the First Lien Facilities and Second Lien Credit Agreement.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Generally weak economic conditions persisting throughout the United States continue to negatively impact tourism in Southern Nevada. Las Vegas, however, experienced some positive trends in overall demand in 2012. For the year ended December 31, 2012, the LVCVA reported year-over-year increases in visitor volume, room nights occupied and ADR. While gross gaming revenues have shown monthly year-over-year increases, a significant contributor was baccarat play, which is favored by high-end international guests. Our properties do not target the baccarat player. Unlike Las Vegas, Laughlin, NV continued to experience declining demand and revenues in 2012 according to the LVCVA. The Clark County and Las Vegas local economies continue to be characterized by high unemployment; however, real estate values, and taxable sales have begun to improve. In order to increase occupancies and visitor traffic to casinos, operators in both the tourist and local markets have become more aggressive with promotions that include gaming incentives, reduced room rates, reduced entertainment prices, and food incentives to drive traffic to their properties. All of these factors have impacted our operations.

37 Our consolidated gross revenues decreased 0.7% to $364.9 million for the year ended December 31, 2012 from $367.3 million for the year ended December 31, 2011. Consolidated income from operations and EBITDA increased 6.8% and decreased 5.8% to $28.1 million and $60.3 million for the year ended December 31, 2012 compared to $26.3 million and $64.0 million for the year ended December 31, 2011. The decreases in our gross revenues and EBITDA are due primarily to decreases in gaming and food and beverage revenues. Gross revenues and EBITDA were impacted by the 21 day closure of the Stratosphere's Top of the World restaurant for renovations in November and December 2012. Top of the World revenues declined 0.3% for the year ended December 31, 2012 compared to the year ended December 31, 2011. Income from operations and EBITDA for the year ended December 31, 2012 benefited from a decrease in advertising expenses.

Advertising expenses for the year ended December 31, 2012 were $5.8 million compared to $7.4 million for the year ended December 31, 2011. Advertising expenses for the year ended December 31, 2011 were impacted by the launch of the Elevate Your Expectations advertising campaign for the Stratosphere and an advertising campaign supporting the opening of Ron's Steakhouse at Arizona Charlie's Decatur. For the year ended December 31, 2012, depreciation and amortization expense, decreased 14.8% to $33.3 million compared to $39.1 million for the year ended December 31, 2011 as many assets became fully depreciated during 2011. Income from operations and EBITDA for the year ended December 31, 2012 were negatively impacted by a 2.5% increase in selling, general and administrative expenses. The increase in selling, general and administrative expenses for the year ended December 31, 2012 was due largely to the following items: (1) a 65.2% increase in repair and maintenance expenses to approximately $3.8 million for the year ended December 31, 2012 compared to approximately $2.3 million for the year ended December 31, 2011 due to projects at the Aquarius, Arizona Charlie's Decatur and Arizona Charlie's Boulder; (2) approximately $840,000 in expenses related to a terminated refinancing of the 11% Senior Secured Notes and (3) we began to accrue for sales taxes on complimentary meals provided to customers and employees based on a decision by the Nevada Tax Commission which, resulted in approximately $677,000 in expenses. EBITDA for the year ended December 31, 2012 was also negatively impacted by a $1.1 million charge for the early redemption of debt related to the voluntary redemption of 5% of the aggregate principal amount of our 11% Senior Secured Notes, of which approximately $737,000 was non-cash. During the year ended December 31, 2011, EBITDA was negatively impacted by a $1.4 million charge for the early redemption of 5% of our 11% Senior Secured Notes, of which $1.0 million was non-cash. In addition, during the year ended December 31, 2011, we recognized a non-cash loss on impairment of assets of approximately $290,000. We also expensed approximately $1.0 million for management fees for the year ended December 31, 2012, compared to $1.1 million for the year ended December 31, 2011. As a result, our consolidated net operating margin increased to 8.3% for the year ended December 31, 2012 compared to 7.7% for the year ended December 31, 2011.

Casino Casino revenues consist of revenues from slot machines, table games, poker, race and sports book, bingo and keno. Casino revenues decreased 0.7% to $200.7 million for the year ended December 31, 2012, compared to $202.2 million for the year ended December 31, 2011. Decreased revenues at the two Arizona Charlie's properties were partially offset by higher revenues at the Stratosphere and the Aquarius. The revenue declines for the two Arizona Charlie's properties were due to lower slot and table customer counts, intense competition and high levels of promotional activity among the casinos within the Las Vegas locals market and a relatively weak local economy. Additionally, our slot hold decreased 0.1 percentage points. For the year ended December 31, 2012, slot machine revenues were 85.1% of casino revenues and table game revenues were 11.8% of casino revenues, compared to 85.1% and 11.4% of casino revenues, respectively, for the year ended December 31, 2011. Other casino revenues, consisting of race and sports book, poker, bingo and keno, decreased 11.3% for the year ended December 31, 2012 compared to the year ended December 31, 2011. Race and sports book revenues increased 4.8% for the year ended December 31, 2012 compared to the year ended December 31, 2011 due to a 0.6 percentage point increase in hold partially offset by an 1.0% decline in handle. Bingo and poker revenues declined 48.6% and 4.0% respectively for the year ended December 31, 2012 compared to the year ended December 31, 2011. Bingo revenues decreased due to a 9.7% decrease in the number of patrons and a 3.6 percentage point decrease in hold. Increased promotional activity and special game offerings by our competitors helped drive the decrease in patrons. Casino operating expenses decreased 1.5% to $65.1 million, or 32.4% of casino revenues, for the year ended December 31, 2012, from $66.1 million or 32.7% of casino revenues, for the year ended December 31, 2011.

This decrease was primarily due to decreased participation expenses, revenue taxes and repair and maintenance expenses.

38 Participation expense consists of fees paid to game owners for use of their games. Repair and maintenance expenses declined because we spent approximately $186,000 to replace bill validators and monitors on our slot machines for the year ended December 31, 2012 compared to $468,000 for the year ended December 31, 2011. Our casino operating margin increased to 67.6% for the year ended December 31, 2012 compared to 67.3% for the year ended December 31, 2011.

Hotel Hotel revenues increased 0.2% to $64.1 million for the year ended December 31, 2012 from $64.0 million for the year ended December 31, 2011. Increased revenues at the Aquarius were offset by decreased revenues for the Stratosphere for the year ended December 31, 2012 compared to the year ended December 31, 2011.

Overall occupancy increased to 67.4% for the year ended December 31, 2012 compared to 66.7% for the year ended December 31, 2011. Our overall ADR decreased 0.6% for the year ended December 31, 2012 compared to the year ended December 31, 2011. Our hotel expenses decreased 0.6% to $34.1 million for the year ended December 31, 2012, compared to $34.3 million for the Year ended December 31, 2011. The decrease in hotel expenses was due primarily to decreased supplies expenses and bad debt write offs. Due to the small increase in revenues and decline in expenses, our hotel operating margin increased to 46.8% for the year ended December 31, 2012 as compared to 46.4% for the year ended December 31, 2011.

Food and Beverage Food and beverage revenues decreased 2.2% to $66.9 million for the year ended December 31, 2012 compared to $68.4 million for the year ended December 31, 2011. Revenues were impacted by the closure of the Top of the World restaurant at the Stratosphere for 21 days in November and December 2012 for renovations.

Top of the World revenues declined 0.3% for the year ended December 31, 2012 compared to the year ended December 31, 2011. Overall, average revenue per cover for the year ended December 31, 2012 increased 3.5% compared to the year ended December 31, 2011, while food covers and beverage covers decreased 5.5% and 3.2%, respectively. Our food and beverage expenses increased 0.6% to $51.6 million for the year ended December 31, 2012 compared to $51.3 million for the year ended December 31, 2011 due primarily to increased labor costs. Our food and beverage operating margin decreased to 22.9% for the year ended December 31, 2012 as compared to 25.0% for the year ended December 31, 2011. Stratosphere's new restaurant, McCall's Heartland Grill, opened to the public on October 25, 2012. As is often the case for a new restaurant, McCall's Heartland Grill was not as efficient as it will be over time and we expect revenue to build.

Tower, Retail, Entertainment and Other Tower, retail and other revenues increased 1.5% to $33.2 million for the year ended December 31, 2012 from $32.7 million for the year ended December 31, 2011.

Tower revenues increased 0.8% for the year ended December 31, 2012, compared to the year ended December 31, 2011. The primary reason for the increase in Tower revenues for year ended December 31, 2012 compared to the year ended December 31, 2011 was a 5.2% increase in average revenue per guest admission and an 8.0% increase in Sky Jump revenues. Entertainment revenue declined 0.1% for the year ended December 31, 2012, compared to the year ended December 31, 2011. The decrease in revenue was due in part to the closure of the Bite show at the Stratosphere on October 31, 2012. Retail revenue decreased 2.0% for the year ended December 31, 2012, compared to the year ended December 31, 2011. Retail revenues declined due to increased tenant vacancies and rent concessions. Other operating income increased 8.6% for the year ended December 31, 2012, compared to the year ended December 31, 2011. The increase was primarily due to higher ATM commission revenues and rental income. Other operating expenses decreased 4.2% to $11.5 million for the year ended December 31, 2012, compared to $12.0 million for the year ended December 31, 2011. This decrease was primarily due to lower labor costs, repair and maintenance expenses, entertainment fees and property taxes.

Promotional Allowances Promotional allowances are comprised of the retail value of goods and services provided to casino customers under various marketing programs. As a percentage of casino revenues, promotional allowances increased to 12.5% for the year ended December 31, 2012 compared to 12.2% for the year ended December 31, 2011.

Increased room and show promotional activity was partially offset by decreased food and beverage promotions.

39 Pre-opening Expense We incurred $72,000 in pre-opening costs for the year ended December 31, 2012 compared to none for the year ended December 31, 2011. Pre-opening costs for the year ended December 31, 2012 were primarily comprised of equipment, labor costs and supplies for the McCall's Heartland Grill restaurant venue at the Stratosphere and Pin Up, a burlesque show at the Stratosphere. Pre-opening expenses associated with McCall's Heartland Grill and Pin Up were approximately $55,000 and $17,000 respectively. McCall's Heartland Grill opened to the public on October 25, 2012 and Pin Up opened to the public on March 2, 2013.

Selling, General and Administrative Selling, general and administrative expenses are primarily comprised of payroll, marketing, advertising, utilities and other administrative expenses. These expenses increased 2.5% to $116.0 million, or 31.8% of gross revenues, for the year ended December 31, 2012, compared to $113.2 million, or 30.8% of gross revenues, for the year ended December 31, 2011. During the year ended December 31, 2012 we incurred approximately $840,000 in expenses related to a terminated refinancing of the 11% Senior Secured Notes. In addition, sales tax expenses for the year ended December 31, 2012 includes approximately $248,000 for an audit assessment related to a Nevada Department of Taxation audit. Additionally, as a result of a decision by the Nevada Tax Commission, we began to accrue for sales taxes on complimentary meals provided to customers and employees resulting in an additional $677,000 in expenses. Repair and maintenance expenses increased 65.2% to approximately $3.8 million for the year ended December 31, 2012 compared to approximately $2.3 million for the year ended December 31, 2011 due to projects at the Aquarius, Arizona Charlie's Decatur and Arizona Charlie's Boulder. These increases were partially offset by decreases in advertising expenses, utilities and property taxes. Advertising expenses for the year ended December 31, 2012 were $5.8 million compared to $7.4 million for the year ended December 31, 2011.

The primary reason for higher advertising expenses during the year ended December 31, 2011 was the Elevate Your Expectations advertising campaign for the Stratosphere and an advertising campaign supporting the opening of Ron's Steakhouse at Arizona Charlie's Decatur.

Impairment of Assets We account for indefinite-lived intangible assets in accordance with applicable guidance; accordingly, we perform an annual impairment test of indefinite-lived intangible assets in the fourth quarter of each year and whenever a triggering event occurs which causes us to perform an impairment test. As of November 1, 2012 we performed an impairment test which found that none of our intangible assets were impaired. However, future impairment related asset write-downs are possible for Arizona Charlie's Boulder in particular if declining revenue trends continue. During the three months ended December 31, 2011, due to continued levels of high unemployment and reduced customer spending, we revised our Arizona Charlie's Boulder revenue forecasts. As of November 1, 2011 we performed an impairment test which resulted in the non-cash write-down of the Arizona Charlie's Boulder trade names by $290,000.

Long-lived assets, which are to be held and used, including intangibles and property and equipment, are periodically reviewed by management for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. If an indicator of impairment exists, the Company compares the estimated future cash flows of the asset, on an undiscounted basis, to the carrying value of the asset. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then impairment is measured as the difference between fair value and carrying value, with fair value typically based on a discounted cash flow model. If an asset is still under development, future cash flows include remaining construction costs.

Interest Expense Interest expense decreased 5.3% to $42.8 million for the year ended December 31, 2012, compared to $45.2 million for the year ended December 31, 2011. The decrease was due primarily to the redemption of 5% of the aggregate principal amount of our 11% Senior Secured Notes on May 31, 2011 and the redemption of an additional 5% of the aggregate principle amount of our 11% Senior Secured Notes on April 30, 2012.

40 Financial Condition Liquidity and Capital Resources The following liquidity and capital resources discussion contains certain forward-looking statements with respect to our business, financial condition, results of operations, dispositions, acquisitions, renovation projects and our subsidiaries, which involve risks and uncertainties that cannot be predicted or quantified, and consequently, actual results may differ materially from those expressed or implied herein. Such risks and uncertainties include, but are not limited to, financial market risks, the ability to maintain existing management, competition within the gaming industry, the cyclical nature of the hotel business and gaming business, economic conditions, regulatory matters and litigation and other risks described in our filings with the Securities and Exchange Commission. In addition, renovation projects entail significant risks, including shortages of materials or skilled labor, unforeseen regulatory problems, work stoppages, weather interference, floods, unanticipated cost increases, and disruption to business. The anticipated costs and construction periods are based on budgets, conceptual design documents and construction schedule estimates. There can be no assurance that the budgeted costs or construction period will be met. All forward-looking statements are based on our current expectations and projections about future events.

During the year ended December 31, 2013, our Net Cash Provided by Operating Activities was approximately $24.3 million, compared to $24.8 million for the year ended December 31, 2012. Cash flows used in investing activities were $12.4 million for the year ended December 31, 2013, and consisted primarily of $13.9 million of capital expenditures (including approximately $1.3 million in non-cash items), of which approximately $2.0 million was spent on slot machine replacements and conversions, $2.0 million on upgrading and replacing the building controls at the Stratosphere and Aquarius, $3.7 million for renovations to our hotel rooms, public areas and food and beverage venues, $1.1 million on information technology and $3.4 million on our facilities and operations. During the year ended December 31, 2012, our total capital expenditures were $17.4 million (including approximately $900,000 in non-cash items), of which approximately $2.0 million was spent on slot machine replacements and conversions, $1.3 million on a replacement fire safety system at the Stratosphere, $4.7 million for renovations to our hotel rooms, public areas and food and beverage venues, $1.4 million on information technology and $8.0 million on our facilities and operations. Cash flows used in investing activities were $19.9 million for the year ended December 31, 2013. Proceeds from the issuance of the First Lien Facilities and Second Lien Term Loans of $329.3 million were used together with cash on hand to redeem the remaining aggregate principal amount the 11% Senior Secured Notes.

Our primary cash requirements for 2014 are expected to include (i) expenses associated with ongoing day-to-day operations, (ii) interest and principal payments on indebtedness, (iii) payments for design and development costs of future projects, and (iv) regular maintenance and other capital expenditures which will be evaluated throughout the year.

Our 2014 capital expenditure budget of approximately $22.3 million includes approximately $4.9 million for slot machines and conversions. In addition, we are evaluating additional improvements to our properties that we believe will enhance the overall guest experience.

On February 24, 2014, we entered into an amendment of the First Lien Credit Agreement. Among other changes, the Amendment reduces the interest rates on the Term Loans by 125 basis points per annum. Interest will now accrue, at our election, (i) at the adjusted eurodollar rate plus 3.50% per annum or (ii) at the Base Rate plus 2.50% per annum. Additionally, the minimum adjusted eurodollar rate was reduced by 25 basis points from 1.25% per annum to 1.00% per annum. We expect to reduce our cash paid on interest by approximately $3.2 million in the first year.

At December 31, 2013, we had unrestricted cash and cash equivalents of $55.2 million. We believe our cash flow from operations and our cash balances will be sufficient to fund our operations, interest payments and capital expenditures for the next 12 months. However, our ability to fund our operations, make payments on our debt and fund planned capital expenditures will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control as well as the factors described in the section entitled Risk Factors in Item 1A. As a result, we expect our primary source of cash to come from the operation of our properties.

41 We believe that our cash flows from operations, restricted cash, and existing cash balances will be adequate to satisfy our anticipated uses of capital during the next twelve months. However, our forecasts of operations and estimates of our reasonably anticipated liquidity needs may change and further deterioration in the Las Vegas, Laughlin and U.S. economies, or other unforeseen events could occur, resulting in the need to raise additional funds from outside sources.

Additional financing, if needed, may not be available to us, or if available, the financing may not be on terms favorable to us.

The table below sets forth our contractual obligations as of December 31, 2013.

Payments due by Period Less than 1-3 4-5 More than Contractual Obligations Total 1 Year Years Years 5 Years (in thousands) Debt1 $ 333,925 $ 2,150 $ 4,300 $ 4,300 $ 323,175 Interest on debt 152,320 26,728 53,135 52,502 19,955 Capital leases, including interest2 7,454 470 170 170 6,644 Operating leases 56 39 17 - - Other Contractual Obligations 576 576 - - - Total $ 494,331 $ 29,963 $ 57,622 $ 56,972 $ 349,774 (1) Does not reflect unamortized discount of $5.4 million.

(2) Contractual obligations for capital leases include amounts due under a 99-year lease for storage space located at the Arizona Charlie's Decatur property. We are currently making monthly payments for the storage space of approximately $8 thousand.

Off-Balance Sheet Liabilities We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. As such, we are required to make estimates and assumptions about the effects of matters that are inherently uncertain. Those estimates and assumptions are derived and continually evaluated based on historical experiences, current facts and circumstances, and changes in the business environment. However, actual results may sometimes differ materially from estimates under different conditions. We have summarized our significant accounting policies in Note 1 to our consolidated financial statements. Of the accounting policies, we believe the following may involve a higher degree of judgment and complexity.

Revenue Recognition Casino revenue is recorded as the net win from gaming activities (the difference between gaming wins and losses). Casino revenues are net of accruals for anticipated payouts of progressive and certain other slot machine jackpots.

Contingent rental income is recognized when the right to receive such rental income is established according to the lease agreements. All other revenues are recognized as the services are provided. Gross revenues include the retail value of rooms, food and beverage and other items that are provided to customers on a complimentary basis. Such amounts are then deducted as promotional allowances.

Promotional allowances also include incentives for goods and services earned in our slot club and other gaming programs.

The Company collects taxes from customers at the point of sale on transactions subject to sales and other taxes. Revenues are recorded net of any taxes collected.

We also reward customers, through the use of loyalty programs, with Free Play and points based on amounts wagered, that can be redeemed for a specified period of time for cash or non-cash awards. We deduct the cash incentive amounts from casino revenue.

42 Slot Club Liability We offer a program, named ace|PLAY, whereby participants can accumulate points for casino wagering that can currently be redeemed for cash, free play, lodging, food and beverages, and merchandise. Participant points expire after thirteen months of no activity. A liability is recorded for the estimate of unredeemed points based upon redemption history at our casinos. Changes in the program, increases in membership and changes in the redemption patterns of the participants can impact this liability. Slot club liability is included in accrued expenses on the consolidated balance sheet.

Self-Insurance We retain the obligation for certain losses related to customers' claims of personal injuries incurred while on our properties, for the first $100,000 per claim. Effective February 20, 2014, we will retain the obligation for losses related to Worker's Compensation claims for the first $350,000 per incident. We accrue for outstanding reported claims, claims that have been incurred but not reported and projected claims based upon management's estimates of the aggregate liability for uninsured claims using historical experience, and adjusting company's estimates and the estimated trends in claim values. Although management believes it has the ability to adequately project and record estimated claim payments, it is possible that actual results could differ significantly from the recorded liabilities.

Intangible Assets and Long-Lived Assets Our finite-lived intangible assets consist of a non-compete agreement and player loyalty plan, and our indefinite-lived intangible assets consist of trade names.

Acquired assets are recorded at fair value on the date of acquisition.

Finite-lived intangible assets are amortized over the estimated period to be benefited. Indefinite-lived intangible assets are not amortized, but are reviewed annually for impairment, during the fourth quarter.

We account for indefinite-lived intangible assets in accordance with applicable guidance. For indefinite-lived intangible assets, we perform an annual impairment test of these assets in the fourth quarter of each year and between annual dates in certain circumstances. For assets to be disposed of we recognize the asset at the lower of carrying value or fair market value, less costs of disposal, as estimated based on comparable asset sales, solicited offers, or a discounted cash flow model. For long-lived assets to be held and used, we review for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We then compare the estimated undiscounted future cash flows of the asset to the carrying value of the asset.

The asset is not impaired if the undiscounted future cash flows exceed its carrying value. If the carrying value exceeds the undiscounted future cash flows, then an impairment charge is recorded, typically measured using a discounted cash flow model, which is based on the estimated future results of the relevant reporting property discounted using our weighted-average cost of capital and market indicators of terminal year free cash flow multiples. If an asset is under development, future cash flows include remaining construction costs. All recognized impairment charges are recorded as operating expenses.

Management must make various assumptions and estimates in performing its impairment testing. For instance, management must first determine the usage of the asset. To the extent management decides that an asset will be sold or abandoned, it is more likely that impairment may be recognized. Assets must be tested at the lowest level for which identifiable cash flows exist, which means that some assets must be grouped, and management has some discretion in the grouping of assets. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates. If our ongoing estimates of future cash flows are not met, we may have to record additional impairment charges in future accounting periods. Our estimates of cash flows are based on the current regulatory, social and economic climates, recent operating information and budgets of the various properties where we conduct operations.

These estimates could be negatively impacted by changes in federal, state or local regulations, economic downturns, or other events affecting various forms of travel and access to our properties.

See Results of Operations above for a discussion of write-downs and impairment charges recorded during the year ended December 31, 2011. The majority of the impairment charges recorded for the year ended December 31, 2011 are primarily related to the ongoing recession, which has caused us to reduce our estimates for projected revenue and cash flows, has reduced overall industry valuations, and has caused an increase in discount rates in the credit and equity markets.

43 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 None.

[ Back To Technology News's Homepage ]

OTHER NEWS PROVIDERS







Technology Marketing Corporation

800 Connecticut Ave, 1st Floor East, Norwalk, CT 06854 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2014 Technology Marketing Corporation. All rights reserved | Privacy Policy