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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission file number: 333-118149
American Casino & Entertainment Properties LLC
(Exact name of registrant as specified in its charter)
Delaware | 20-0573058 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
2000 Las Vegas Boulevard South Las Vegas, NV | 89104 | |
(Address of registrant’s principal executive offices) | (Zip Code) |
(702) 380-7777
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
None
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yesþ Noo
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§220.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o Not applicable.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act, (Check one):
Large accelerated filero Accelerated filero Non-Accelerated filerþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
As of the last business day of the registrant’s most recently completed second fiscal quarter, none of the voting and non-voting common equity was held by non-affiliates.
The registrant’s common equity is not listed or traded on any exchange or market.
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2006
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2006
TABLE OF CONTENTS
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PART I
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 found nowhere 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 American Casino & Entertainment Properties Finance Corp., Stratosphere Corporation and its wholly-owned subsidiaries, Stratosphere Gaming Corporation, Stratosphere Land Corporation, Stratosphere Advertising Agency and Stratosphere Leasing, LLC; and Charlie’s Holding LLC and its wholly-owned subsidiaries, Arizona Charlie’s, LLC, Fresca, LLC, and AREP Laughlin Corporation. 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.
ACEP is an indirect subsidiary of, and its ultimate parent is, American Real Estate Partners, L.P., or AREP, a Delaware master limited partnership the units of which are traded on the New York Stock Exchange. As of December 31, 2006, affiliates of Carl C. Icahn owned 9,813,346 preferred units and 55,655,382 depositary units, which represented approximately 86.5% of the outstanding preferred units and approximately 90.0% of the outstanding depositary units of AREP. Mr. Icahn is the Chairman of the Board of Directors of American Property Investors, Inc., or API, AREP’s general partner. AREP 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, American Real Estate Holdings Limited Partnership, or AREH. AREH is a holding company for AREP’s operating subsidiaries and investments. The general partner of AREH is API.
Stratosphere had been previously owned by AREH. Arizona Charlie’s Decatur and Arizona Charlie’s Boulder were owned by Mr. Icahn and one of his affiliated entities. 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.
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 indirect parent, American Real Estate Holdings Limited Partnership, or AREH, to acquire, own and operate the Aquarius, and AREH 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.
Our parent, AREP, has stated that, in furtherance of its strategy to maximize value for its unitholders and in light of favorable market conditions, it is currently evaluating alternatives for recapitalizing, refinancing our existing debt or selling us.
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
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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 A.C.E. Rewards Club program 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. 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, 2006. 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.
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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, a six 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, 2006, 2005 and 2004, approximately 68.2%, 70.7% and 70.6%, respectively, of the Stratosphere’s gaming revenue was generated by slot machine play and 27.3%, 25.9% and 27.4%, 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. We refurbished approximately 1,700 of our guest rooms in the three years ended December 31, 2006.
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 awarded “Best All-Around Restaurant” and “Best Romantic Restaurant” by America Online’s “City’s Best 2006”. In addition, it has been awarded the “2006 Visitors Choice Awards” for “Favorite Gourmet Restaurant” and “Favorite Restaurant Overall” and has been granted the “Award of Excellence” from Wine Spectator Magazine for 10 straight 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:
• | 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; | ||
• | X Scream, which opened in October 2003, 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 | ||
• | 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:
• | event space and wedding chapels, at levels 103 and 104; | ||
• | Romance at Top of the World, a 156-seat lounge, at level 107; and | ||
• | indoor/outdoor observation decks, at levels 108 and 109, containing a gift shop, Starbucks®, snack bar, free-standing vending machines featuring snacks and souvenirs designed to capitalize on the unique nature of the Tower. |
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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 51 shops, six of which are food venues, and 11 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 1,400 slot machines, 15 table games, a race and sports book, a 24-hour bingo parlor, a keno lounge and a poker lounge.
Approximately 57.0% 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, 2006, 2005 and 2004, approximately 89.7%, 89.3% and 90.0%, respectively, of the property’s gaming revenue was generated by slot machine play and 5.3%, 4.9% and 5.1%, 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 four restaurants, one of which is an independently run franchised, Subway® and Roman’s Pizza®. Another independent franchise, the Outback Steakhouse®, opened in January 2007, and replaced the Yukon Grille. 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 race and sports book and a 24-hour bingo
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parlor. The additional gaming space features approximately 230 new slot machines, a new A.C.E. Rewards center, and a new hotel front desk.
Approximately 51.0% 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, 2006, 2005 and 2004, approximately 89.3%, 88.1% and 89.1%, respectively, of gaming revenue was generated by slot machine play and 6.0%, 7.1% and 7.0%, 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.
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.
A small gift shop located adjacent to the casino provides a limited range of inexpensive gift items, candy, newspapers, magazines and cigarettes.
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. We currently estimate the cost of the improvements to be approximately $40.0 million through 2008, of which approximately $24.4 million had been expended, through December 31, 2006. Completed capital improvements to the Aquarius include renovations to the casino and common areas, new slot machines and new signage. Currently planned 2007 capital improvements to the Aquarius include renovations to our suites as well as standard rooms in our California tower.
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 170 miles southeast of Laughlin.
Casino
The Aquarius contains approximately 57,000 square feet of gaming space with approximately 1,100 slot machines, 49 table games, a race and sports book, a keno lounge and a four table poker room.
Approximately 31.0% 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.
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From the date of acquisition through December 31, 2006, approximately 80.5% of the property’s gaming revenue was generated by slot machine play and 15.5%, 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 one cappuccino cart and three franchised fast food restaurants, another independent franchise, the Outback Steakhouse® is under construction, which will replace the Taurus Steakhouse. The Aquarius also has four bars, one of which is an entertainment lounge, and one lounge patio.
Retail and Entertainment
The ballroom and convention center is approximately 19,300 square feet and 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 and is a Las Vegas style showroom. 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 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.
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.
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, 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 one 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.
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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. Currently, Outback Steakhouse® is developing a restaurant in the site of the property’s former Beef Barron Steakhouse.
Trademarks
Action Cash, Arizona Charlie’s Boulder, Arizona Charlie’s Decatur, Arizona Charlie’s, Inc., Arizona Charlie’s Hotel Casino, Big Shot, Crazy Armadillo, Frisco Market Buffet, Insanity the Ride, Lucky’s Cafe, Nobody Offers You More!, Roxy’s Diner, Stratosphere, Stratosphere Casino Hotel & Tower, Stratosphere Gaming Corporation, Stratosphere Tower, Top of the World, Ultimate Action Cash, Ultimate Rewards, X Scream, Yukon Grille, Naga and Romance at Top of the World are certain of our material trademarks, trade names and service marks. We currently have a trademark application pending before the United States Patent and Trade Office for the “Aquarius Casino Resort.” Certain other trademarks, trade names and service marks used are the property of third parties.
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.
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 Casino Resort competes primarily with other Laughlin hotels and casinos located along the Colorado River.
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.
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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 29.6 million visitors in 1996 to 38.9 million visitors in 2006, a compound annual growth rate of 2.8%. The number of hotel and motel rooms in Las Vegas has increased by over 33%, from 99,072 at the end of 1996 to 132,605 at the end of 2006, 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 1996 through 2006.
Las Vegas Strip gaming revenues have grown as Las Vegas visitations and hotel room count have grown. Between 1996 and 2006, gaming revenues on the Las Vegas Strip experienced a compound annual growth of 6.4%
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 2.9 million in 1996 to 6.3 million in 2006, representing a compound annual growth rate of 7.9%. Trade show attendees spent approximately $8.2 billion in 2006.
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. The population of Clark County has grown from 1,055,435 in 1995 to 1,796,380 in 2005, a compound annual growth rate of 5.5%. In comparison, the United States population increased at a compound annual growth rate of 1.1% during this period. In 2004, median household income in Clark County was $44,821, compared with the national median income of $44,684.
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 11,000 rooms and its gaming revenue for 2006 and 2005 was $0.6 billion.
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:
• | preventing unsavory or unsuitable persons from being directly or indirectly involved with gaming at any time or in any capacity; | ||
• | establishing and maintaining responsible accounting practices and procedures; | ||
• | 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; | ||
• | preventing cheating and fraudulent practices; and | ||
• | 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.
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Owner and Operator Licensing Requirements
Our casinos are licensed by the Nevada Gaming Authorities as corporate and limited liability company licensees, which we refer to herein as company licensees. Under their gaming licenses, our casinos are required to pay periodic fees and taxes. The gaming licenses are not transferable.
To date, our casino properties 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.
Our Registration Requirements
We have been found suitable by the Nevada Gaming Commission to own the equity interests of Charlie’s Holding the stock of Stratosphere Corporation and the stock of AREP Laughlin Corporation. We have also been registered by the Nevada Gaming Commission as a holding company, which we refer to herein as a registered company, for the purposes of the Nevada Gaming Control Act. American Entertainment Properties Corp., or AEP, our direct parent, has been found suitable by the Nevada Gaming Commission to own our equity interests and to be registered by the Nevada Gaming Commission as a holding company. Charlie’s Holding has been found suitable by the Nevada Gaming Commission to own the equity securities of its licensed subsidiaries.
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 us 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 of Beneficial Securities Holders
Regardless of the number of equity interests held, any beneficial holder of our 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 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
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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 publicly traded 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 publicly traded 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 publicly traded 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 publicly traded 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 publicly traded registered company’s voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include:
• | voting on all matters voted on by stockholders or interest holders; | ||
• | making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and | ||
• | other activities that the Nevada Gaming Commission may determine to be consistent with such investment intent. |
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. We will be subject to disciplinary action if, after we receive notice that a person is unsuitable to hold an equity interest or to have any other relationship with, we:
• | pay that person any dividend or interest upon any voting securities; | ||
• | allow that person to exercise, directly or indirectly, any voting right held by that person; | ||
• | pay remuneration in any form to that person for services rendered or otherwise; or | ||
• | fail 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. |
Gaming Laws Relating to Securities Ownership
The Nevada Gaming Commission may, in its discretion, require the holder of any debt or similar securities of a registered company to file applications, 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:
• | pays to the unsuitable person any dividend, interest or any distribution whatsoever; | ||
• | recognizes any voting right by the unsuitable person in connection with the securities; | ||
• | pays the unsuitable person remuneration in any form; or | ||
• | makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction. |
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We are 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.
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. On July 13, 2005, the Nevada Gaming Commission granted us prior approval to make public offerings of debt securities for a period of ten months, subject to certain conditions, or the Shelf Approval. The Shelf Approval also applies to any affiliated company wholly-owned by us which is a publicly traded corporation or would thereby become a publicly traded corporation pursuant to a public offering. The Shelf Approval may be rescinded for good cause without prior notice upon the issuance of an interlocutory stop order by the Chairman of the Nevada State Gaming Control Board. The Shelf Approval does not constitute a finding, recommendation or approval by any of the Nevada Gaming Authorities as to the accuracy or adequacy of the offering document or the investment merits of the securities. Any statement indicating otherwise is unlawful.
Approval of Changes in Control
We must obtain prior approval of the Nevada Gaming Commission with respect to a change in control through:
• | merger; | ||
• | consolidation; | ||
• | stock or asset acquisitions; | ||
• | management or consulting agreements; or | ||
• | 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:
• | assure the financial stability of corporate gaming operators and their affiliates; | ||
• | preserve the beneficial aspects of conducting business in the corporate form; and | ||
• | 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 either monthly, quarterly or annually and are based upon:
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• | a percentage of gross revenues received; | ||
• | the number of gaming devices operated; or | ||
• | 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:
• | knowingly violates any laws of the foreign jurisdiction pertaining to the foreign gaming operation; | ||
• | fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations; | ||
• | 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; | ||
• | 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 | ||
• | 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, 2006, we had approximately 5,340 employees, of whom approximately 2,060 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
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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. RISK FACTORS
We cannot guarantee that we will be able to recover our investment made in connection with the acquisition of the Aquarius.
On May 19, 2006, our wholly-owned subsidiary, AREP Laughlin, acquired the Aquarius from affiliates of Harrah’s. The transaction was completed pursuant to an asset purchase agreement, dated as of November 28, 2005, between AREP Laughlin, AREP Boardwalk LLC, a wholly-owned subsidiary of AREP, Harrah’s and certain affiliated entities. Under the agreement, AREP Laughlin acquired the Aquarius, and AREP Boardwalk Properties LLC, as assignee of AREP Boardwalk LLC, acquired 7.7 acres of land in Atlantic City, New Jersey, known as the Traymore site, for an aggregate purchase price of approximately $170.0 million, subject to adjustment. The portion of the purchase price attributable to the Aquarius is approximately $109.0 million.
In addition, we currently plan to spend approximately $40.0 million through 2008 to refurbish rooms, upgrade amenities and acquire new gaming equipment for the Aquarius, of which approximately $24.4 million had been expended through December 31, 2006, primarily to refurbish the casino and to replace slot machines. Acquisitions generally involve significant risks, including difficulties in the assimilation of the operations, services and corporate culture of the acquired company.
Under the terms of our acquisition, the seller of the Aquarius was able to retain a portion of the Aquarius’ player database. Therefore, they have a competitive advantage in regards to their ability to attract some of our top players to their casino in Laughlin, Nevada.
Operations for the Aquarius were adversely affected from the date of acquisition through December 31, 2006, primarily due to disruptions to the gaming floor related to the construction and upgrading of its casino floor, the addition of new slot machines and the implementation of new marketing programs intended to change customer mix. We expect that the current construction program will be substantially completed in 2007. However, the decrease in Aquarius results has adversely affected our results in 2006 and likely will have an adverse effect on results in the future.
The anticipated benefits from the acquisition of the Aquarius are based on certain assumptions, including, anticipated benefits from our programs to upgrade and refurbish the facilities, the first phase of which, the upgrade of the casino floor with new slot machines, was completed in 2006. As a result, we cannot be certain that we will realize the anticipated benefits.
Our operating results for the year ended December 31, 2006 have been adversely affected by a number of factors that have affected and may continue to affect results in 2007.
For the year ended December 31, 2006, our net income decreased from the year ended December 31, 2005. We attribute this decrease to a number of factors, including, but not limited to, increased gas prices, which affect traffic to Las Vegas and Laughlin, construction disruption at the Stratosphere and Arizona Charlie’s Boulder and Aquarius, and the entrance of a new competitor in the market served by Arizona Charlie’s Decatur. These factors have affected and may continue to affect our operating results in 2007.
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 effect 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,
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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:
• | potential changes in the tax or regulatory environment which impose additional restrictions or increase operating costs; | ||
• | our properties use significant amounts of electricity, natural gas and other forms of energy, and energy price increases may reduce our profitability; | ||
• | our properties use significant amounts of water and a water shortage may adversely affect our operations; | ||
• | an increase in the cost of health care benefits for our employees could have a negative impact on our profitability; | ||
• | 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; | ||
• | our reliance on slot machine revenues and the concentration of manufacturing of slot machines in certain companies could impose additional costs on us; and | ||
• | 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:
• | we compete with many world class destination resorts with greater name recognition, different attractions, amenities and entertainment options; | ||
• | we compete with the continued growth of gaming on Native American tribal lands; | ||
• | the existence of legalized gambling in other jurisdictions may reduce the number of visitors to our properties; | ||
• | 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 | ||
• | 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 property and as a
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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 gas 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 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.
Our management team may devote a portion of their time to the management of other gaming and entertainment properties owned by American Real Estate Partners, L.P., or AREP and not owned by us, which would divert their focus from our properties.
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 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:
• | local economic and competitive conditions; | ||
• | inaccessibility due to inclement weather, road construction or closure of primary access routes; | ||
• | decline in air passenger traffic due to higher ticket costs or fears concerning air travel; | ||
• | natural and other disasters; | ||
• | 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 | ||
• | 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 are an indirect subsidiary of American Real Estate Partners, L.P., which will be able to make all decisions concerning us.
We are an indirect subsidiary of AREP. Mr. Icahn currently owns 100% of American Property Investors, Inc., or API, the general partner of AREP and American Real Estate Holdings Limited Partnership, or AREH, and approximately 86.5% of AREP’s outstanding preferred units and approximately 90.0% of AREP’s outstanding depositary units. As a result, Mr. Icahn has the ability to appoint the board of directors of API, which in turn will have the power to appoint our parent’s board of directors, which will control many aspects of our operations and affairs. AREP or Mr. Icahn may pursue other business opportunities in the gaming and entertainment industry and there is no requirement that any additional business opportunities be presented to us. Furthermore, three members of our board of directors are also directors of AREP. These directors have obligations to us as well as to AREP and may have conflicts of interest with respect to matters potentially or actually involving or affecting us. We cannot assure you that any conflicts between us and AREP will be resolved in our favor.
We may be subject to the pension liabilities of our affiliates.
Mr. Icahn currently owns 100% of API and approximately 86.5% of AREP’s outstanding preferred units and approximately 90% of AREP’s outstanding depositary units. Applicable pension and tax laws make each member of a “controlled group” of entities, generally defined as entities in which there are at least an 80% common ownership interest, jointly and severally liable for certain pension plan obligations of any member of the controlled group. These pension obligations include ongoing contributions to fund the plan, as well as liability for any unfunded liabilities that may exist at the time the plan is terminated. In addition, the failure to pay these pension obligations when due may result in the creation of liens in favor of the pension plan or the Pension Benefit Guaranty Corporation, or the PBGC, against the assets of each member of the controlled group.
As a result of the more than 80% ownership interest in us by Mr. Icahn’s affiliates, we and our subsidiaries are subject to the pension liabilities of all entities in which Mr. Icahn has a direct or indirect ownership interest of at least 80%. One such entity, ACF Industries LLC, is the sponsor of several pension plans which are under funded by a total of approximately $21.8 million on an ongoing actuarial basis and $135.2 million if those plans were terminated, as most recently reported by the plans’ actuaries. These liabilities could increase or decrease, depending on a number of factors, including future changes in promised benefits, investment returns, and the assumptions used to calculate the liability. As members of the controlled group, we would be liable for any failure of ACF to make ongoing pension contributions or to pay the unfunded liabilities upon a termination of the ACF pension plans. In addition, other entities now or in the future within the controlled group that includes us may have pension plan obligations that are, or may become, under funded and we would be liable for any failure of such entities to make ongoing pension contributions or to pay the unfunded liabilities upon a termination of such plans.
The current under funded status of the ACF pension plans requires ACF to notify the PBGC of certain “reportable events,” such as if we cease to be a member of the ACF controlled group, or if we make certain extraordinary dividends or stock redemptions. The obligation to report could cause us to seek to delay or reconsider the occurrence of such reportable events.
Starfire Holding Corporation, which is 100% owned by Mr. Icahn, has undertaken to indemnify us and our subsidiaries from losses resulting from any imposition of certain pension funding or termination liabilities that may be imposed on us and our subsidiaries or our assets as a result of being a member of the Icahn controlled group. The Starfire indemnity (which does not extend to pension liabilities of AREP and its subsidiaries, including us, that would be imposed on us as a result of our or AREP’s interests in these subsidiaries and not as a result of Mr. Icahn and his affiliates more that 80% ownership interest in us) provides, among other things, that so long as such contingent liabilities exist and could be imposed on us, Starfire will not make any distributions to its stockholders that would reduce its net worth to below $250.0 million. Nonetheless, Starfire may not be able to fund its indemnification obligations to us.
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Item 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved staff comments.
ITEM 2. 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. 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no public market for our common equity. We are wholly-owned by AEP. The indenture governing our 7.85% senior secured notes and the terms of the $60.0 million senior secured revolving credit facility restrict our payment of dividends and distributions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain of our selected historical consolidated financial data (see note 1 of notes to the 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.
On May 26, 2004, we completed the purchase of Charlie’s Holding, a newly formed entity that acquired Arizona Charlie’s Decatur and Arizona Charlie’s Boulder, from Mr. Icahn and Starfire Holding Corporation, which is wholly-owned by Mr. Icahn. Additionally, on that date, AREH contributed to us 100% of the capital stock of Stratosphere Corporation. 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 for all dates prior to May 26, 2004. Our financial statements for periods preceding the acquisitions were presented on a combined basis. As a result of obtaining the formal approval from the Nevada gaming authorities of the acquisition of Charlie’s Holding, the accounting presentation now requires consolidation. Accordingly, our financial statements for all periods (including for periods preceding the acquisitions) are consolidated.
The selected historical consolidated financial data as of December 31, 2006, 2005, 2004, 2003, and 2002, and for the years ended December 31, 2006, 2005, 2004, 2003, and 2002, each has been derived from our audited consolidated financial statements at those dates and for those periods.
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Years Ended December 31, | ||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
(in thousands, except ratios) | ||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Casino | $ | 220,814 | $ | 182,939 | $ | 167,972 | $ | 147,888 | $ | 143,057 | ||||||||||
Hotel | 75,587 | 61,861 | 54,653 | 47,259 | 44,263 | |||||||||||||||
Food and beverage | 83,667 | 70,060 | 66,953 | 59,583 | 56,349 | |||||||||||||||
Tower, retail and other | 35,912 | 35,413 | 33,778 | 30,336 | 28,247 | |||||||||||||||
Gross revenues | 415,980 | 350,273 | 323,356 | 285,066 | 271,916 | |||||||||||||||
Less promotional allowances | 30,281 | 22,291 | 23,375 | 22,255 | 21,893 | |||||||||||||||
Net revenues | 385,699 | 327,982 | 299,981 | 262,811 | 250,023 | |||||||||||||||
Cost and expenses: | ||||||||||||||||||||
Casino | 80,060 | 63,216 | 61,985 | 61,284 | 59,879 | |||||||||||||||
Hotel | 33,419 | 26,957 | 24,272 | 22,074 | 20,142 | |||||||||||||||
Food and beverage | 60,052 | 51,784 | 48,495 | 44,990 | 43,393 | |||||||||||||||
Other operating expenses | 16,856 | 15,372 | 14,035 | 14,008 | 14,934 | |||||||||||||||
Selling, general and administrative | 107,073 | 81,321 | 78,720 | 74,985 | 80,019 | |||||||||||||||
Depreciation and amortization | 28,620 | 23,305 | 23,516 | 20,222 | 20,209 | |||||||||||||||
Pre-opening costs | 1,904 | — | — | — | — | |||||||||||||||
(Gain) loss on sale of assets | 239 | (25 | ) | 96 | 1,401 | 354 | ||||||||||||||
Total costs and expenses | 328,223 | 261,930 | 251,119 | 238,964 | 238,930 | |||||||||||||||
Income from operations | 57,476 | 66,052 | 48,862 | 23,847 | 11,093 | |||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest income | 2,239 | 1,617 | 1,049 | 426 | 667 | |||||||||||||||
Interest expense | (21,314 | ) | (18,846 | ) | (18,939 | ) | (5,389 | ) | (5,990 | ) | ||||||||||
Total other expense | (19,075 | ) | (17,229 | ) | (17,890 | ) | (4,963 | ) | (5,323 | ) | ||||||||||
Income before income taxes | 38,401 | 48,823 | 30,972 | 18,884 | 5,770 | |||||||||||||||
Provision (benefit) for income taxes | 12,758 | 16,789 | 10,100 | (1,798 | ) | 4,907 | ||||||||||||||
Net income | $ | 25,643 | $ | 32,034 | $ | 20,872 | $ | 20,682 | $ | 863 | ||||||||||
OTHER FINANCIAL DATA: | ||||||||||||||||||||
Capital expenditures | $ | 46,851 | $ | 28,219 | $ | 14,009 | $ | 33,465 | $ | 22,878 |
As of December 31, | ||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 54,912 | $ | 108,316 | $ | 75,161 | $ | 77,258 | $ | 59,343 | ||||||||||
Total assets | 575,826 | 494,257 | 464,341 | 480,738 | 397,835 | |||||||||||||||
Total debt (1) | 257,825 | 218,298 | 218,748 | 105,243 | 101,655 | |||||||||||||||
Member’s equity | 257,741 | 232,098 | 200,996 | 330,345 | 259,953 |
(1) | Total debt, including current portion, consists of the current and long-term portions of capital lease obligations and notes payable, including for 2003 and 2002 notes payable to related parties. |
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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.
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 indirect parent, American Real Estate Holdings Limited Partnership, or AREH, to acquire, own and operate the Aquarius, and AREH 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, or the Aquarius, which caters to visitors to Laughlin. The Stratosphere is one of the most recognized landmarks in Las Vegas, our two Arizona Charlie’s properties are well-known casinos in their respective marketplaces and the Aquarius has the largest hotel in Laughlin. Each of our properties offers customers a value-oriented experience by providing competitive odds in our casinos, quality rooms in our hotels, award-winning dining facilities and, at the Stratosphere and Aquarius, an offering of competitive value-oriented entertainment attractions. We believe the value we offer our 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.
Years Ending December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Total gaming revenue | $ | 10,643,824,000 | $ | 9,716,860,000 | $ | 8,711,244,000 | ||||||
Number of slot machines | 131,430 | 130,945 | 131,197 | |||||||||
Number of table games | 4,511 | 4,450 | 4,347 | |||||||||
Number of visitors | 38,914,889 | 38,566,717 | 37,388,781 |
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.
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Results of Operations
Years Ended December 31, | |||||||||||||||||||||||||
Including | |||||||||||||||||||||||||
Aquarius | Excluding Aquarius | ||||||||||||||||||||||||
2006 to 2005 | 2005 to 2004 | ||||||||||||||||||||||||
2006 | 2006 | 2005 | 2004 | % Change | % Change | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Income Statement Data: | |||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||
Casino | $ | 220.8 | $ | 179.6 | $ | 182.9 | $ | 168.0 | -1.8 | % | 8.9 | % | |||||||||||||
Hotel | 75.6 | 65.4 | 61.9 | 54.7 | 5.7 | % | 13.2 | % | |||||||||||||||||
Food and beverage | 83.7 | 72.3 | 70.1 | 67.0 | 3.1 | % | 4.6 | % | |||||||||||||||||
Tower, retail and other | 35.9 | 33.7 | 35.4 | 33.8 | -4.8 | % | 4.7 | % | |||||||||||||||||
Gross revenues | 416.0 | 351.0 | 350.3 | 323.5 | 0.2 | % | 8.3 | % | |||||||||||||||||
Less promotional allowances | 30.3 | 22.9 | 22.3 | 23.4 | 2.7 | % | -4.7 | % | |||||||||||||||||
Net revenues | 385.7 | 328.1 | 328.0 | 300.1 | 0.0 | % | 9.3 | % | |||||||||||||||||
Costs and expenses: | |||||||||||||||||||||||||
Casino | 80.1 | 65.1 | 63.2 | 62.0 | 3.0 | % | 1.9 | % | |||||||||||||||||
Hotel | 33.4 | 27.8 | 27.0 | 24.3 | 3.0 | % | 11.1 | % | |||||||||||||||||
Food and beverage | 60.1 | 52.3 | 51.8 | 48.5 | 1.0 | % | 6.8 | % | |||||||||||||||||
Other operating expenses | 16.9 | 15.4 | 15.4 | 14.0 | 0.0 | % | 10.0 | % | |||||||||||||||||
Selling, general and administrative | 107.2 | 85.1 | 81.3 | 78.8 | 4.7 | % | 3.2 | % | |||||||||||||||||
Pre-opening costs | 1.9 | — | — | — | 0.0 | % | 0.0 | % | |||||||||||||||||
Depreciation and amortization | 28.6 | 24.6 | 23.3 | 23.5 | 5.6 | % | -0.9 | % | |||||||||||||||||
Total costs and expenses | 328.2 | 270.3 | 262.0 | 251.1 | 3.2 | % | 4.3 | % | |||||||||||||||||
Income from operations | $ | 57.5 | $ | 57.8 | $ | 66.0 | $ | 49.0 | -12.4 | % | 34.7 | % | |||||||||||||
As disclosed in Note 1 to our consolidated financial statements, we acquired the Aquarius on May 19, 2006. Net revenues and loss from operations at the Aquarius from the date of acquisition through December 31, 2006, were $57.6 million and $0.3 million, respectively. Operations for the Aquarius were adversely affected, primarily due to disruptions to the gaming floor related to the construction and upgrading of its casino floor, the addition of new slot machines and the implementation of new marketing programs intended to change customer mix.
The following discussion of the results of operations at our gaming properties excludes the results of Aquarius.
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.
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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 the roller coaster.
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.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Gross revenues increased 8.3% to $350.3 million for the year ended December 31, 2005 from $323.5 million for the year ended December 31, 2004. This increase was largely due to an increase in casino revenues, as well as increases in hotel, food and beverage, tower, retail and other revenues. The increases were primarily attributable to an increase in business volume, as discussed below.
Casino Revenues
Casino revenues consist of slot machines, table games, poker, race and sports book, bingo and keno. Casino revenues increased 8.9% to $182.9 million, or 52.2% of gross revenues, for the year ended December 31, 2005 from $168.0 million, or 51.9% of gross revenues, for the year ended December 31, 2004. Slot machine revenues were $149.2 million, or 81.6% of casino revenues, and table game revenues were $25.2 million, or 13.8% of casino revenues, for the year ended December 31, 2005 compared to $137.1 million, or 81.6% of casino revenues, and $25.1 million, or 14.9% of casino revenues, respectively, for the year ended December 31, 2004. The increase in casino revenues was primarily due to an increase in our slot hold percentage of 7.0%. Other casino revenues increased $2.7 million, or 46.6%, from $5.8 million for the year ended December 31, 2004 to $8.5 million for the year ended December 31, 2005.
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Non-Casino Revenues
Hotel revenues increased 13.2% to $61.9 million, or 17.7% of gross revenues, for the year ended December 31, 2005 from $54.7 million, or 16.9% of gross revenues, for the year ended December 31, 2004. This increase was primarily due to a 12.8% increase in the average daily room rate at the Stratosphere and a 1.9% increase in overall hotel occupancy. The increase in the average daily room rate was primarily attributable to an increase in direct bookings and a decrease in rooms sold through wholesalers.
Food and beverage revenues increased 4.6% to $70.1 million, or 20.0% of gross revenues, for the year ended December 31, 2005, from $67.0 million, or 20.7% of gross revenues, for the year ended December 31, 2004. This increase was primarily due to an increase in food and beverage covers of 3.7%.
Tower, retail and other revenues increased 4.7% to $35.4 million for the year ended December 31, 2005 from $33.8 million for the year ended December 31, 2004. This increase was primarily due to an increase in Stratosphere’s tower revenues as a result of more visitors and an increase in the average ticket price due to the opening of the Insanity ride, in March 2005.
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 decreased to 12.2% for the year ended December 31, 2005 from 13.9% for the year ended December 31, 2004. This decrease was primarily due to less aggressive promotional activities related to our slot operations.
Operating Expenses
Casino operating expenses increased 1.9% to $63.2 million, or 34.6% of casino revenues, for the year ended December 31, 2005 from $62.0 million, or 36.9% of casino revenues, for the year ended December 31, 2004. The increase was primarily due to costs related to increased utilization of participation games.
Hotel operating expenses increased 11.1% to $27.0 million, or 43.6% of hotel revenues, for the year ended December 31, 2005 from $24.3 million, or 44.4% of hotel revenues, for the year ended December 31, 2004. This increase was primarily due to an increase in labor costs and supplies associated with the increase in hotel occupancy. The decrease in operating expense as a percentage of hotel revenues was attributable to an increase in the average daily room rate.
Food and beverage operating expenses increased 6.8% to $51.8 million, or 73.9% of food and beverage revenues, for the year ended December 31, 2005 from $48.5 million, or 72.4% of food and beverage revenues, for the year ended December 31, 2004. This increase was primarily due to an increase in labor costs and costs associated with an increase in the number of covers.
Other operating expenses increased 10.0% to $15.4 million, or 43.5% of tower, retail and other revenues for the year ended December 31, 2005 from $14.0 million, or 41.4% of tower, retail and other revenues for the years ended December 31, 2004. This increase was primarily due to an increase in labor costs associated with the opening of the Insanity ride and the opening of a new gift shop.
Selling, general and administrative expenses were primarily comprised of payroll, marketing, advertising, repair and maintenance, utilities and other administrative expenses. These expenses increased 3.2% to $81.3 million, or 23.2% of gross revenues, for the year ended December 31, 2005 from $78.8 million, or 24.3% of gross revenues, for the year ended December 31, 2004. This increase was primarily due to an increase in payroll expenses, credit card fees and information technology maintenance contracts.
Interest Expense
Interest expense decreased to $18.8 million for the year ended December 31, 2005, from $18.9 million for the year ended December 31, 2004. Interest expense in 2005 and 2004 was primarily attributable to interest expense associated with the $215.0 million 7.85% senior secured notes due 2012, which were issued on January 29, 2004.
Financial Condition
Liquidity and Capital Resources
Our primary source of cash is from the operation of our properties. For the year ended December 31, 2006, net cash provided by operating activities (including the operations of the Aquarius) totaled $63.5 million compared to $62.3 million for the year ended December 31, 2005 and $54.6 million for the year ended December 31, 2004. In addition to cash from operations, cash is available to us, if necessary, under our senior secured revolving credit facility entered into by us, as borrower, and certain of our subsidiaries, as guarantors. In May 2006, we entered into an amendment to the senior secured revolving credit facility, increasing the amount of borrowings allowed by it to
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$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. At December 31, 2006, we had cash and cash equivalents of $54.9 million compared to $108.3 million in 2005 and $75.2 million in 2004.
Our primary use of cash during the year ended December 31, 2006 was for the acquisition of Aquarius as described below, operating expenses, capital spending, to pay interest on our 7.85% senior secured notes due 2012 and to repay borrowings and interest under our senior secured revolving credit facility. Our capital spending was approximately $46.9 million for the year ended December 31, 2006 compared to $28.2 million and $14.0 million for the years ended December 31, 2005 and 2004, respectively. For the year ended 2006, capital spending included $24.4 million for improvements to the Aquarius, $7.1 million for the casino expansion at Arizona Charlie’s Boulder, and $1.2 million to construct a new bar in the Stratosphere casino. We have estimated our 2007 capital spending for our existing facilities at approximately $31.1 million, which we anticipate to include approximately $14.9 million to purchase new and convert existing slot machines and approximately $8.5 million for remaining Aquarius hotel renovations. The remainder of our capital spending estimate for 2007 will be for upgrades or maintenance to our existing assets.
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 $40.0 million through 2008, of which approximately $24.4 million had been expended, through December 31, 2006. The capital improvement plan includes replacing slot machines, refurbishment of the casino, upgraded technologies, hotel renovations, signage and various other improvements.
We believe operating cash flows will be adequate to meet our anticipated requirements for working capital, capital spending and scheduled interest payments on the notes and under the senior secured revolving credit facility, 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.
Our 7.85% senior secured notes due 2012 restrict the payment of cash dividends or distributions, the purchase of equity interests, and the purchase, redemption, defeasance or acquisition of debt subordinated to the investments as “restricted payments.” The notes also prohibit 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, 2006, such ratio was 4.2 to 1.0. The notes also restrict the creation of liens, the sale of assets, mergers, consolidations or sales of substantially all of our assets, the lease or grant of a license, concession, other agreements to occupy, manage or use our assets, the issuance of capital stock of restricted subsidiaries and certain related party transactions. The notes allow 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 as described above, we have a senior secured revolving credit facility that allows for borrowings of up to $60.0 million, including the issuance of letters of credit of up to $10.0 million. Loans made under the senior secured revolving facility will mature and the commitments under them will terminate in May 2010. The facility contains restrictive covenants similar to those contained in the 7.85% senior secured notes due 2012. In addition, the facility requires 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, 2006, this ratio was 0.5 to 1.0. At December 31, 2006, there were $40.0 million of borrowings outstanding under the facility and availability of $20.0 million.
Our parent, AREP, has stated that, in furtherance of its strategy to maximize value for its unitholders and in light of favorable market conditions, it is currently evaluating alternatives for recapitalizing, refinancing our existing debt or selling us.
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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, 2006.
Payments due by Period | ||||||||||||||||||||
Less than | 1-3 | 4-5 | After | |||||||||||||||||
Contractual Obligations | Total | 1 Year | Years | Years | 5 Years | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Long-term debt | $ | 255,000 | $ | — | $ | — | $ | 40,000 | $ | 215,000 | ||||||||||
Interest on long-term debt | 102,258 | 19,618 | 39,235 | 34,897 | 8,508 | |||||||||||||||
Capital leases, including interest | 9,686 | 660 | 1,623 | 170 | 7,233 | |||||||||||||||
Other contractual obligations | 7,042 | 6,861 | 150 | 31 | — | |||||||||||||||
Total | $ | 373,986 | $ | 27,139 | $ | 41,008 | $ | 75,098 | $ | 230,741 | ||||||||||
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 a program 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 customer’s claims of personal injuries incurred while on our property 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. 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 provides for payments of tax liabilities to AEP, calculated as if we filed a consolidated income tax return separate from AEP. Additionally, the agreement provides 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.
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
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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, 2006, 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 issued FASB Interpretation 48, Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109. Interpretation 48, which clarifies Statement 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 the Company’s financial statements. On initial application, Interpretation 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. The cumulative effect of applying Interpretation 48 will be reported as an adjustment to retained earnings at the beginning of the period in which it is adopted.
Interpretation 48 is effective for fiscal years beginning after December 15, 2006, and will be adopted by the Company on January 1, 2007. The Company has not been able to complete its evaluation of the impact of adopting Interpretation 48 and as a result, is not able to estimate the effect the adoption will have on its financial position and results of operations, including its ability to comply with current debt covenants.
In September 2006, the SEC issued Staff Accounting Bulletin, or SAB No. 108, which provides guidance on the process of quantifying financial statement misstatements. In SAB No. 108, the SEC staff establishes an approach that requires quantification of financial statement errors, under both the iron-curtain and the roll-over methods, based on the effects of the error on each of our financial statements and the related financial statement disclosures. SAB No. 108 is generally effective for annual financial statements in the first fiscal year ending after November 15, 2006. The transition provisions of SAB No. 108 permits existing public companies to record the cumulative effect in the first year ending after November 15, 2006 by recording correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. The adoption of SAB No. 108 did not have a material impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 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 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We believe that the adoption of SFAS 157 will 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,”
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“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. 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. All of our debt is at a fixed rate of interest. We can borrow, from time to time, up to $60.0 million under the senior secured revolving credit facility. As of December 31, 2006, there were $40.0 million of borrowings outstanding under the facility.
The fair value of our long-term 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 long-term debt outstanding is approximately $222.3 million as of December 31, 2006.
For the year ended December 31, 2006, we incurred approximately $21.3 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 2006 by approximately $321,000. We do not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
31 | ||||
32 | ||||
33 | ||||
34 | ||||
35 | ||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and the Member
American Casino & Entertainment Properties LLC
American Casino & Entertainment Properties LLC
We have audited the accompanying consolidated balance sheets of American Casino & Entertainment Properties LLC (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, member’s/shareholder’s equity and cash flows for each of the years in the three-year period ended December 31, 2006. 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, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Reno, Nevada
March 2, 2007
March 2, 2007
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AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, | ||||||||
2006 | 2005 | |||||||
(in thousands) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 54,912 | $ | 108,316 | ||||
Cash and cash equivalents-restricted | 269 | 504 | ||||||
Investments-restricted | 3,457 | 2,828 | ||||||
Accounts receivable, net | 6,752 | 4,167 | ||||||
Related party receivables | 472 | 971 | ||||||
Deferred income taxes | 2,948 | 2,305 | ||||||
Other current assets | 16,773 | 12,092 | ||||||
Total Current Assets | 85,583 | 131,183 | ||||||
Property and equipment, net | 445,788 | 319,505 | ||||||
Debt issuance and deferred financing costs, net | 5,729 | 6,397 | ||||||
Deferred income taxes | 36,212 | 37,172 | ||||||
Customer List, net | 2,514 | — | ||||||
Total Other Assets | 44,455 | 43,569 | ||||||
TOTAL ASSETS | $ | 575,826 | $ | 494,257 | ||||
LIABILITIES AND MEMBER’S EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | 6,708 | 3,547 | ||||||
Accrued expenses | 33,168 | 23,387 | ||||||
Accrued payroll and related expenses | 14,391 | 11,042 | ||||||
Current portion of capital lease obligation | 496 | 473 | ||||||
Total Current Liabilities | 54,763 | 38,449 | ||||||
Long-Term Liabilities: | ||||||||
Long-term debt | 255,000 | 215,000 | ||||||
Capital lease obligations, less current portion | 2,329 | 2,825 | ||||||
Other | 5,993 | 5,885 | ||||||
Total Long-Term Liabilities | 263,322 | 223,710 | ||||||
Total Liabilities | 318,085 | 262,159 | ||||||
Commitments and Contingencies | ||||||||
Member’s Equity: | ||||||||
Member’s Equity | 257,741 | 232,098 | ||||||
Total Member’s Equity | 257,741 | 232,098 | ||||||
TOTAL LIABILITIES AND MEMBER’S EQUITY | $ | 575,826 | $ | 494,257 | ||||
See notes to consolidated financial statements.
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AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
(in thousands) | ||||||||||||
REVENUES: | ||||||||||||
Casino | $ | 220,814 | $ | 182,939 | $ | 167,972 | ||||||
Hotel | 75,587 | 61,861 | 54,653 | |||||||||
Food and beverage | 83,667 | 70,060 | 66,953 | |||||||||
Tower, retail and other | 35,912 | 35,413 | 33,778 | |||||||||
Gross revenues | 415,980 | 350,273 | 323,356 | |||||||||
Less promotional allowances | 30,281 | 22,291 | 23,375 | |||||||||
Net revenues | 385,699 | 327,982 | 299,981 | |||||||||
COSTS AND EXPENSES: | ||||||||||||
Casino | 80,060 | 63,216 | 61,985 | |||||||||
Hotel | 33,419 | 26,957 | 24,272 | |||||||||
Food and beverage | 60,052 | 51,784 | 48,495 | |||||||||
Other operating expenses | 16,856 | 15,372 | 14,035 | |||||||||
Selling, general and administrative | 107,073 | 81,321 | 78,720 | |||||||||
Depreciation and amortization | 28,620 | 23,305 | 23,516 | |||||||||
Pre-opening costs | 1,904 | — | — | |||||||||
(Gain) loss on sale of assets | 239 | (25 | ) | 96 | ||||||||
Total costs and expenses | 328,223 | 261,930 | 251,119 | |||||||||
INCOME FROM OPERATIONS | 57,476 | 66,052 | 48,862 | |||||||||
OTHER INCOME (EXPENSE): | ||||||||||||
Interest income | 2,239 | 1,617 | 1,049 | |||||||||
Interest expense | (21,314 | ) | (18,846 | ) | (18,939 | ) | ||||||
Total other expense, net | (19,075 | ) | (17,229 | ) | (17,890 | ) | ||||||
INCOME BEFORE INCOME TAXES | 38,401 | 48,823 | 30,972 | |||||||||
Provision for income taxes | 12,758 | 16,789 | 10,100 | |||||||||
NET INCOME | $ | 25,643 | $ | 32,034 | $ | 20,872 | ||||||
See notes to consolidated financial statements.
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AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
(in thousands) | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 25,643 | $ | 32,034 | $ | 20,872 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 28,620 | 23,305 | 23,516 | |||||||||
(Gain) loss on sale of assets | 239 | (25 | ) | 96 | ||||||||
Provision (benefit) for deferred income taxes | 317 | 9,645 | 7,431 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Restricted cash | 235 | (56 | ) | (448 | ) | |||||||
Accounts receivable, net | (686 | ) | (225 | ) | 109 | |||||||
Other current assets | (2,459 | ) | (715 | ) | 338 | |||||||
Accounts payable and accrued expenses | 11,452 | (2,296 | ) | 2,723 | ||||||||
Other | 108 | 628 | — | |||||||||
Net Cash Provided By Operating Activities | 63,469 | 62,295 | 54,637 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Decrease (increase) in investments – restricted | (629 | ) | (282 | ) | 427 | |||||||
Sale of marketable securities | — | — | 4,200 | |||||||||
Acquisition of property and equipment | (46,851 | ) | (28,219 | ) | (14,009 | ) | ||||||
Acquisition of Flamingo Laughlin, net of cash acquired | (109,439 | ) | — | — | ||||||||
Decrease (increase) in related party receivables | 499 | (232 | ) | (155 | ) | |||||||
Proceeds from sale of property and equipment | 468 | 43 | 420 | |||||||||
Net Cash Used In Investing Activities | (155,952 | ) | (28,690 | ) | (9,117 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Debt issuance and deferred financing costs | (448 | ) | — | (1,525 | ) | |||||||
Proceeds from notes payable | — | — | 215,000 | |||||||||
Proceeds from line of credit | 60,000 | — | — | |||||||||
Payments on line of credit | (20,000 | ) | — | — | ||||||||
Member contribution | — | — | 28,219 | |||||||||
Capital distribution | — | — | (61,916 | ) | ||||||||
Acquisition of Arizona Charlie’s | �� | — | (125,900 | ) | ||||||||
Payments on related party notes payable | — | — | (101,252 | ) | ||||||||
Payments on capital lease obligation | (473 | ) | (450 | ) | (243 | ) | ||||||
Net Cash Provided By (Used In) Financing Activities | 39,079 | (450 | ) | (47,617 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | (53,404 | ) | 33,155 | (2,097 | ) | |||||||
Cash and cash equivalents — beginning of period | 108,316 | 75,161 | 77,258 | |||||||||
Cash And Cash Equivalents — end of period | $ | 54,912 | $ | 108,316 | $ | 75,161 | ||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||||||
Cash paid during the period for interest, net of amounts capitalized | $ | 19,248 | $ | 17,188 | $ | 11,047 | ||||||
Cash paid for income taxes, net of refunds | $ | 14,750 | $ | 9,200 | $ | 1,811 | ||||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||
Utilization of tax losses by a related party | $ | — | $ | 932 | $ | — | ||||||
Assets contributed by parent | $ | — | $ | — | $ | 6,886 | ||||||
Change in deferred tax asset related to acquisition | $ | — | $ | — | $ | 2,490 | ||||||
Cancellation of common stock shares | $ | — | $ | — | $ | 10 | ||||||
See notes to consolidated financial statements.
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AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED STATEMENTS OF MEMBER’S/STOCKHOLDERS’ EQUITY
(in thousands)
(in thousands)
Additional | ||||||||||||||||||||
Common | Paid-In- | Member’s | Retained | |||||||||||||||||
Stock | Capital | Equity | Earnings | Total | ||||||||||||||||
Balances at December 31, 2003 | $ | 10 | $ | 293,460 | $ | — | $ | 36,875 | $ | 330,345 | ||||||||||
Cancellation of common shares | (10 | ) | 10 | — | — | — | ||||||||||||||
Change in deferred tax asset related to acquisition | — | 2,490 | — | — | 2,490 | |||||||||||||||
Contributions | — | 35,105 | — | — | 35,105 | |||||||||||||||
Distributions | — | (44,000 | ) | — | (17,916 | ) | (61,916 | ) | ||||||||||||
Acquisition of Arizona Charlie’s | — | (125,900 | ) | — | — | (125,900 | ) | |||||||||||||
Net Income | — | — | — | 20,872 | 20,872 | |||||||||||||||
Reclassification of equity as a result of reorganization | — | (161,165 | ) | 200,996 | (39,831 | ) | — | |||||||||||||
Balances at December 31, 2004 | — | — | 200,996 | — | 200,996 | |||||||||||||||
Distribution | — | — | (932 | ) | — | (932 | ) | |||||||||||||
Net Income | — | — | 32,034 | — | 32,034 | |||||||||||||||
Balances at December 31, 2005 | — | — | 232,098 | — | 232,098 | |||||||||||||||
Net Income | — | — | 25,643 | — | 25,643 | |||||||||||||||
Balances at December 31, 2006 | $ | — | $ | — | $ | 257,741 | $ | — | $ | 257,741 | ||||||||||
See notes to consolidated financial statements.
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AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
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 (Stratosphere), Arizona Charlie’s Decatur and Arizona Charlie’s Boulder in Las Vegas, Nevada. Stratosphere had been owned by a subsidiary of our indirect parent, American Real Estate Holdings Limited Partnership (AREH). 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 on May 19, 2006, from Harrah’s Operating Company, Inc.
ACEP is a subsidiary of American Entertainment Properties Corp. (AEP), and its ultimate parent is American Real Estate Partners, L.P. (AREP), a Delaware master limited partnership the units of which are traded on the New York Stock Exchange. As of December 31, 2006, affiliates of Mr. Carl C. Icahn owned 9,813,346 preferred units and 55,655,382 depositary units, which represented approximately 86.5% of the outstanding preferred units and approximately 90.0% of the outstanding depositary units of AREP. Mr. Icahn is the Chairman of the Board of Directors of American Property Investors, Inc., AREP’s general partner.
ACEP owns and operates four gaming and entertainment properties in southern Nevada; the Stratosphere Casino Hotel & Tower, Arizona Charlie’s Decatur, Arizona Charlie’s Boulder and Aquarius Casino Resort. 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 AREH, in which AREH 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 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 indirect parent, American Real Estate Holdings Limited Partnership, or AREH, to acquire, own and operate the Aquarius, and AREH 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.
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. For periods prior to May 26, 2004, the historical financial statements were presented on a combined basis. Subsequent to this date, 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
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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:
December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
(in thousands) | ||||||||||||
Food and Beverage | $ | 8,723 | $ | 7,101 | $ | 7,239 | ||||||
Rooms | 157 | 41 | 41 | |||||||||
Other | 36 | 33 | 34 | |||||||||
Total | $ | 8,916 | $ | 7,175 | $ | 7,314 | ||||||
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 high credit quality financial institutions. Cash and cash equivalents are in excess of Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses in such accounts.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or market and are included in other current assets.
Property and Equipment
Property and equipment purchased are stated at cost. Assets held under capital leases are stated at the lower of the present value of the future minimum lease payments or fair value at the inception of the lease. Expenditures for additions, renewals and improvements are capitalized and depreciated over their useful lives. Costs of repairs and maintenance are expensed when incurred. Leasehold acquisition costs are amortized over the shorter of their estimated useful lives or the term of the respective leases once the assets are placed in service.
Depreciation and amortization of property and equipment are computed using the straight-line method over the following useful lives:
Buildings and improvements | 36-39 years | |||
Furniture, fixtures and equipment | 3-15 years | |||
Land improvements | 15 years |
The Company capitalizes interest incurred on debt during the course of qualifying construction projects. Such costs are added to the asset base and amortized over the related assets’ estimated useful lives. For the years ended December 31, 2006, 2005 and 2004, we capitalized interest of $110,000, $0 and $0, respectively.
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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 long-term debt are capitalized and amortized to interest expense using the effective interest method. For each of the years ended December 31, 2006, 2005 and 2004, amortization of debt issue costs totaled $1.1 million, and is included in interest expense on the accompanying consolidated statements of income.
Slot Club Liability
We offer a program 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.
Long-Term Debt
The fair value of our long-term 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.
Sales, Advertising and Promotion
Sales, advertising and promotion costs are expensed as incurred and were approximately $13.8 million, $10.4 million and $9.3 million for the years ended December 31, 2006, 2005 and 2004, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of income.
Income Taxes
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 provides for payments of tax liabilities to AEP, calculated as if we filed a consolidated income tax return separate from AEP. Additionally, the agreement provides 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.
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, 2006, 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.
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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 issued FASB Interpretation 48, Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109. Interpretation 48, which clarifies Statement 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 the Company’s financial statements. On initial application, Interpretation 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. The cumulative effect of applying Interpretation 48 will be reported as an adjustment to retained earnings at the beginning of the period in which it is adopted.
Interpretation 48 is effective for fiscal years beginning after December 15, 2006, and will be adopted by the Company on January 1, 2007. The Company has not been able to complete its evaluation of the impact of adopting Interpretation 48 and as a result, is not able to estimate the effect the adoption will have on its financial position and results of operations, including its ability to comply with current debt covenants.
In September 2006, the SEC issued Staff Accounting Bulletin, or SAB No. 108, which provides guidance on the process of quantifying financial statement misstatements. In SAB No. 108, the SEC staff establishes an approach that requires quantification of financial statement errors, under both the iron-curtain and the roll-over methods, based on the effects of the error on each of our financial statements and the related financial statement disclosures. SAB No. 108 is generally effective for annual financial statements in the first fiscal year ending after November 15, 2006. The transition provisions of SAB No. 108 permits existing public companies to record the cumulative effect in the first year ending after November 15, 2006 by recording correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. The adoption of SAB No. 108 did not have a material impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 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 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We believe that the adoption of SFAS 157 will not have a material impact on our consolidated financial statements.
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Note 2. Accounts Receivable
Accounts receivable consists of the following:
December 31, | ||||||||
2006 | 2005 | |||||||
(in thousands) | ||||||||
Hotel and related | $ | 3,282 | $ | 2,584 | ||||
Gaming | 1,181 | 562 | ||||||
Other | 2,608 | 1,156 | ||||||
7,071 | 4,302 | |||||||
Less allowance for doubtful accounts | (319 | ) | (135 | ) | ||||
$ | 6,752 | $ | 4,167 | |||||
The Company recorded bad debt expense and allowance for doubtful accounts for the years ended December 31, 2006, 2005 and 2004 as follows:
December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
(in thousands) | ||||||||||||
Balance at beginning of period | $ | 135 | $ | 240 | $ | 473 | ||||||
Bad debt expense | 359 | 85 | 418 | |||||||||
Deductions and write-offs | (175 | ) | (190 | ) | (651 | ) | ||||||
Balance at end of period | $ | 319 | $ | 135 | $ | 240 | ||||||
Note 3. Other Current Assets
Other current assets consist of the following:
December 31, | ||||||||
2006 | 2005 | |||||||
(in thousands) | ||||||||
Inventories | $ | 2,944 | $ | 2,394 | ||||
Prepaid expenses | 11,487 | 7,660 | ||||||
Other | 2,342 | 2,038 | ||||||
$ | 16,773 | $ | 12,092 | |||||
Note 4. Property and Equipment, Net
Property and equipment consist of the following:
December 31, | ||||||||
2006 | 2005 | |||||||
(in thousands) | ||||||||
Land and improvements | $ | 75,100 | $ | 61,493 | ||||
Building and improvements | 336,449 | 236,946 | ||||||
Furniture, fixtures and equipment | 174,463 | 136,643 | ||||||
Construction in progress | 2,082 | 1,935 | ||||||
588,094 | 437,017 | |||||||
Less accumulated depreciation and amortization | 142,306 | 117,512 | ||||||
$ | 445,788 | $ | 319,505 | |||||
Assets recorded under capital leases were approximately $4.0 million and $4.0 million at December 31, 2006 and 2005, respectively. Accumulated depreciation and amortization at December 31, 2006 and 2005 includes amounts recorded for capital leases of $1.1 million and $0.7 million, respectively.
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Note 5. Accrued Expenses
Accrued expenses consist of the following:
December 31, | ||||||||
2006 | 2005 | |||||||
(in thousands) | ||||||||
Accrued interest | $ | 7,089 | $ | 7,033 | ||||
Accrued liabilities | 10,657 | 5,071 | ||||||
Accrued taxes | 3,123 | 2,038 | ||||||
Vacation packages | 969 | 1,698 | ||||||
Accrued gaming liability | 5,666 | 2,718 | ||||||
Other | 5,664 | 4,829 | ||||||
$ | 33,168 | $ | 23,387 | |||||
Note 6. Leases
The future minimum lease payments to be received under non-cancelable operating leases for years subsequent to December 31, 2006 are as follows:
Years ending December 31, | (in thousands) | |||
2007 | $ | 5,991 | ||
2008 | 5,593 | |||
2009 | 4,295 | |||
2010 | 3,286 | |||
2011 | 2,578 | |||
Thereafter | 4,906 | |||
Total | $ | 26,649 | ||
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, 2006, 2005 and 2004, we recorded rental revenue of $7.8 million, $7.3 million and $6.3 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, 2006:
Years ending December 31, | (in thousands) | |||
2007 | $ | 660 | ||
2008 | 660 | |||
2009 | 963 | |||
2010 | 85 | |||
2011 | 85 | |||
Thereafter | 7,233 | |||
Total minimum lease payments | 9,686 | |||
Less: amount representing interest ranging from 5% to 10% | 6,861 | |||
Present value of net minimum lease payments | 2,825 | |||
Less: current portion | 496 | |||
Long-term capital lease obligation | $ | 2,329 | ||
The Company had no operating leases as of December 31, 2006, 2005 and 2004.
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Note 7. Income Taxes
The income tax provision (benefit) attributable to income from operations for the fiscal years ended December 31, 2006, 2005 and 2004 is comprised of the following:
December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
(in thousands) | ||||||||||||
Current | $ | 12,441 | $ | 7,144 | $ | 2,669 | ||||||
Deferred | 317 | 9,645 | 7,431 | |||||||||
$ | 12,758 | $ | 16,789 | $ | 10,100 | |||||||
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, 2006 and 2005:
December 31, | ||||||||
2006 | 2005 | |||||||
(in thousands) | ||||||||
Deferred Tax Assets | ||||||||
Property, plant and equipment | $ | 35,492 | $ | 36,358 | ||||
Accrued vacation and employee related | 2,111 | 1,643 | ||||||
Gaming related | 1,866 | 1,049 | ||||||
Other | (309 | ) | 427 | |||||
Total net deferred tax assets | 39,160 | 39,477 | ||||||
Less: Current portion | (2,948 | ) | (2,305 | ) | ||||
Net long term deferred tax assets | $ | 36,212 | $ | 37,172 | ||||
In May 2004, the Company acquired the membership interests in Arizona Charlie’s, LLC and Fresca, LLC. For income tax purposes the tax basis of the assets acquired were adjusted to the purchase price. The Company completed an analysis of the fair value of the entities and allocated the purchase price accordingly. As a result, the Company recognized an additional deferred tax asset of approximately $2.5 million from the transaction. Pursuant to SFAS No. 109, the benefit of the deferred tax asset from this transaction is credited directly to equity.
The provision for income taxes differs from the amount computed at the federal statutory rate as a result of the following:
December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
Other | -0.9 | % | 0.0 | % | 5.0 | % | ||||||
Permanent differences | 0.3 | % | 0.3 | % | 0.4 | % | ||||||
Federal income tax credits | -1.2 | % | -0.9 | % | -0.7 | % | ||||||
Valuation allowance | 0.0 | % | 0.0 | % | -6.0 | % | ||||||
Amount not subject to tax expense/benefit | 0.0 | % | 0.0 | % | -1.1 | % | ||||||
33.2 | % | 34.4 | % | 32.6 | % | |||||||
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Note 8. Long-Term 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 have been 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 have a fixed annual interest rate of 7.85%, which is payable every six months on February 1 and August 1, commencing August 1, 2004. The fair value of our long-term 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 long-term debt outstanding is approximately $222.3 million as of December 31, 2006.
The payment obligations under the $215.0 million 7.85% Senior Secured Notes due 2012 issued by ACEP are fully and unconditionally guaranteed by all of our significant operating subsidiaries. The notes are subject to compliance with certain covenants. At December 31, 2006, 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 is not required as the parent and co-issuer have no independent assets or operations, the guarantees are full and unconditional and joint and several, and the total assets, stockholders’ equity, revenues, income from operations before income taxes and cash flows from operating activities of the non-guarantor subsidiaries is less than 3% of ACEP’s consolidated amounts.
A syndicate of lenders has provided a non-amortizing $60.0 million revolving credit facility. The commitments are 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 are available to provide working capital and for other general corporate purposes. The outstanding principal balance accrues interest at a fixed rate which is equal to one month LIBOR plus 1.5% per annum, which totaled 6.85% at December 31, 2006. We had availability under our credit facility of $20.0 million at December 31, 2006, subject to continuing compliance with certain covenants. As of December 31, 2006, we are in compliance with the debt covenants. At December 31, 2006 there was $40.0 million outstanding on the revolving credit facility.
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 AREP. 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 2006, 2005 and 2004, we billed Atlantic Cost Entertainment Holdings, Inc. and its affiliates approximately $360,000, $708,000 and $387,500, respectively.
During 2006, 2005 and 2004, 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 $213,300, $191,200 and $167,000, respectively. The amounts paid for the provided services approximated their fair value.
As of December 31, 2006 and 2005, we have accrued a $513,000 and $350,000, respectively, income tax receivable from AEP pursuant to the provision of the tax allocation agreement. As of December 31, 2006 we accrued a related party payable of $89,000 to New Seabury for an income tax overpayment.
As of December 31, 2006 and 2005, in connection with the transactions described above, the Company was owed approximately $472,000 and $971,000, respectively, from related parties.
On November 20, 1998, Starfire Holding Corporation, an affiliate of Mr. Icahn, entered into an undertaking pursuant to which Starfire Holding Corporation agreed to indemnify AREP and its subsidiaries for losses resulting from the imposition by the Pension Benefit Guaranty Corporation, or PBGC, of termination or minimum funding pension liabilities on AREP or its subsidiaries. These liabilities could be imposed as a result of AREP or its subsidiaries being members of the controlled group of entities of which Mr. Icahn has a direct or indirect ownership interest of at least 80%. Applicable pension and tax laws make each member of a “controlled group” jointly and severally liable for certain pension plan obligations of any member of the controlled group. The undertaking provides, among other things, that Starfire Holding Corporation will not make any distribution to its stockholders that would reduce its net worth to below $250.0 million.
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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 $8.7 million, $8.6 million and $8.1 million for the years ended December 31, 2006, 2005 and 2004, 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 $0.7 million, $0.4 million and $0.5 million, for matching contributions for the years ended December 31, 2006, 2005 and 2004, respectively.
During 2005, we implemented a management incentive plan 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. Participants in the plan shall be entitled to a financial award if we achieve financial goals, approved by our board of directors, and individual performance goals. A financial award under the plan includes a cash award and a deferred bonus award. The deferred bonus award is paid out over four years and is dependent on the participant being employed by us at each such payment date. The deferred award is expensed pro-ratably over the four years. We expensed deferred bonuses of $169,000 in the year ended December 31, 2006.
Note 11. Commitments & Contingencies
The Chief Financial Officer (CFO,) has entered into an employment agreement with the Company. The agreement with the CFO expires on March 31, 2007. The agreement includes 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.
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.
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Note 12. Acquisitions
As described in Note 1, 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):
Land | $ | 13,000 | ||
Building | 92,615 | |||
Equipment | 2,685 | |||
Customer list | 2,939 | |||
Deposits | 18 | |||
Accrued vacation expense | (1,809 | ) | ||
Total Purchase Price | 109,448 | |||
Cash | 6,028 | |||
Accounts receivable | 5 | |||
Other current assets | 1,121 | |||
Equipment | 36 | |||
Accrued liabilities | (2,598 | ) | ||
Total Working Capital | 4,592 | |||
Total Amount Paid | $ | 114,040 | ||
The customer list will be 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.
Year Ended | ||||||||
December 31, | ||||||||
(in thousands) | ||||||||
2006 | 2005 | |||||||
Net revenues | $ | 429,580 | $ | 438,384 | ||||
Net income | $ | 29,128 | $ | 38,463 |
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.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2006, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
During the quarter ended December 31, 2006, there were no changes in our internal controls over financial reporting that materially affected, or are likely to affect, our internal control over financial reporting.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Officers
The following table sets forth certain information as of December 31, 2006, concerning the executive officers and directors of our parent, American Entertainment Properties Corp.:
NAME | AGE | POSITION | ||||
Jack G. Wasserman | 70 | Director | ||||
William A. Leidesdorf | 61 | Director | ||||
James L. Nelson | 57 | Director | ||||
Keith A. Meister | 33 | Director | ||||
Richard P. Brown | 59 | President, Chief Executive Officer and Director | ||||
Denise Barton | 49 | Senior Vice President, Chief Financial Officer, Treasurer and Secretary |
The following table sets forth certain information as of December 31, 2006, concerning certain key employees:
NAME | AGE | POSITION | ||||
Ronald P. Lurie | 65 | Executive Vice President, General Manager — Arizona Charlie’s Decatur | ||||
Mark Majetich | 56 | Senior Vice President, General Manager — Arizona Charlie’s Boulder | ||||
John Lind | 53 | Senior Vice President, General Manager – Aquarius Casino Resort |
Jack G. Wassermanhas served as a Director of AEP, American Casino & Entertainment Properties Finance Corp. and American Real Estate Finance Corp. since December 2003 and a director of American Property Investors, Inc., or API, the general partner of AREP, since December 3, 1993. Since May 2005, Mr. Wasserman has served as a director of Atlantic Coast Entertainment Holdings, Inc., or Atlantic Coast, an entity controlled by Mr. Icahn. Mr. Wasserman is an attorney and a member of the Bars of New York, Florida and the District of Columbia. From 1966 until 2001, he was a senior partner of Wasserman, Schneider, Babb & Reed, a New York-based law firm, and its predecessors. Since September 2001, Mr. Wasserman has been engaged in the practice of law as a sole practitioner. Mr. Wasserman has been licensed by the Nevada State Gaming Control Commission and is an independent member and Chairman of the compliance committee for all of our casinos. Since December 1998, Mr. Wasserman has been a director of National Energy Group, Inc., or NEGI, a publicly traded company engaged in the business of managing the exploration, production and operations of natural gas and oil properties. Mr. Wasserman is also a director of Cadus Corporation, a biotechnology company. Since March 2004, Mr. Wasserman has been a director of Triarc Companies, Inc., a publicly traded diversified holding company. Mr. Wasserman serves on the audit and compensation committees of Triarc.
William A. Leidesdorfhas served as a Director of AEP, American Casino & Entertainment Properties Finance Corp. and American Real Estate Finance Corp. since inception and as a Director of API since March 26, 1991. Since May 2005, Mr. Leidesdorf has served as a director of Atlantic Coast. Mr. Leidesdorf was also a director of Renco Steel Group, Inc. and its subsidiary, WCI Steel, Inc., a steel producer which filed for Chapter 11 bankruptcy protection in September 2003. Since June 1997, Mr. Leidesdorf has been an owner and a managing director of Renaissance Housing, LLC, a company primarily engaged in acquiring multifamily residential properties. From April 1995 through December 1997, Mr. Leidesdorf acted as an independent real estate investment banker. Mr. Leidesdorf has been licensed by the Nevada State Gaming Control Commission.
James L. Nelsonhas served as a Director of AEP, American Casino & Entertainment Properties Finance Corp. and American Real Estate Finance Corp. since inception and a Director of API since June 2001. Since May 2005, Mr.
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Nelson has been a director of Atlantic Coast. From 1986 until the present, Mr. Nelson has been Chairman and Chief Executive Officer of Eaglescliff Corporation, a specialty investment banking, consulting and wealth management company. From March 1998 through 2003, Mr. Nelson was Chairman and Chief Executive Officer of Orbit Aviation, Inc. a company engaged in the acquisition and completion of Boeing Business Jets for private and corporate clients. From August 1995 until July 1999, he was Chief Executive Officer and Co-Chairman of Orbitex Management, Inc., a financial services company. From August 1995 until March 2001, he was on the Board of Orbitex Financial Services Group, a financial services company in the mutual fund sector. Mr. Nelson currently serves as a Director and Chairman of the Audit Committee of Viskase Companies, Inc., a supplier to the meat industry, in which affiliates of Mr. Icahn have a significant interest. Mr. Nelson has been licensed by the Nevada State Gaming Control Commission.
Keith A. Meisterhas served as a Director of AEP, American Casino & Entertainment Properties Finance Corp. and American Real Estate Finance Corp. since inception. Mr. Meister has served as Principal Executive Officer and Vice Chairman of the Board of API since March 2006. He served as Chief Executive Officer of API from August 2003 until March 2006 and as President of API from August 2003 until April 2005. Mr. Meister also serves as a director and/or officer of various direct and indirect subsidiaries of AREP. Mr. Meister is also a Managing Director of Icahn Partners LP, Icahn Partners Master Fund LP and Icahn Partners Master Fund II LP, which are private investment funds controlled by Mr. Icahn. From March 2000 through 2001, Mr. Meister served as co-president of J Net Ventures, a venture capital fund that he co-founded, focused on investments in information technology and enterprise software businesses. From 1997 through 1999, Mr. Meister served as an investment professional at Northstar Capital Partners, an opportunistic real estate investment partnership. Prior to Northstar, Mr. Meister served as an investment analyst in the investment banking group at Lazard Freres. He also serves on the Boards of Directors of the following companies: XO Holdings, Inc., a telecommunications company that is majority-owned by various entities controlled by Mr. Icahn; American Railcar Industries, Inc., a publicly traded company that is primarily engaged in the business of manufacturing covered hopper and tank railcars of which Mr. Icahn is the principal stockholder; and BKF Capital Group, Inc., an investment management firm in which Mr. Icahn is a stockholder.
Richard P. Brownhas 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. Mr. Brown has been licensed by the Nevada State Gaming Control Commission.
Denise Bartonhas 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. Ms. Barton has been licensed by the Nevada State Gaming Control Commission.
Ronald P. Luriehas served as our Executive Vice President and General Manager — 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.
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Mark Majetichhas served as our Senior Vice President and General Manager — Arizona Charlie’s Boulder since January 2001 and Vice President — 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.
No family relationships exist between any directors or executive officers of ACEP.
Audit Committee
The Board of Directors of AEP has established an audit committee consisting of Mr. Leidesdorf, Mr. Nelson and Mr. Wasserman.
The audit committee meets formally at least once every quarter, and more often if necessary. The audit committee reviews potential conflicts of interest which may arise between us and our affiliates.
The Board of Directors of AEP has determined that AEP does not have an ‘audit committee financial expert,’ within the meaning of Item 401(h) of Regulation S-K, serving on the Audit Committee. AEP believes that each member of the audit committee is 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 has a professional background in accounting or ‘preparing, auditing, analyzing or evaluating financial statements’. If the audit committee determines that it requires additional financial expertise, it will either engage 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.
Jack G. Wasserman has been chosen to preside and currently presides 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 2006 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 2006 audited financial statements be included in this annual report on Form 10-K.
This report is provided by the following independent directors, who constitute the audit committee:
William A. Leidesdorf
James L. Nelson
Jack G. Wasserman
James L. Nelson
Jack G. Wasserman
Code of Ethics
Our parent, AREP, has adopted a code of ethics that applies to our chief executive officer and senior financial officers, a copy of which was filed as an exhibit to AREP’s annual report on Form 10-K for the year ended December 31, 2004 and which exhibit has been incorporated by reference as an exhibit in Item 15.
Corporate Governance Guidelines
On October 25, 2004, API’s board of directors adopted Corporate Governance Guidelines for AREP and its subsidiaries, including us. A copy of the Corporate Governance Guidelines is available on AREP’s website at www.arep.com/files/pdf/corporate_governance.pdf and may be obtained without charge by writing to American Real Estate Partners, L.P., 767 Fifth Avenue, Suite 4700, New York, NY 10153, attention: Investor Relations.
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Section 16(a) Beneficial Ownership Reporting Compliance
Not applicable.
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:
Richard P. Brown
William A. Leidesdorf
Keith A. Meister
James L. Nelson
Jack G. Wasserman
Richard P. Brown
William A. Leidesdorf
Keith A. Meister
James L. Nelson
Jack G. Wasserman
Compensation Committee Interlocks and Insider Participation
During 2006, our entire board of directors participated in deliberations concerning executive compensation, except with respect to deliberations concerning Mr. Brown’s compensation, from which Mr. Brown abstained. During 2006, 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, except with respect to deliberations concerning Mr. Brown’s compensation, from which Mr. Brown abstains. The chairman of the board of directors of API, the general partner of our parent, AREP, annually reviews the performance, salary and bonus of the chief executive and chief financial officers. Our chief executive officer reviews the performance, salary and bonus of the other executive officers. The conclusions reached and the recommendations based on these reviews, including with respect to salary adjustments and annual bonus awards, if any, are then presented to the board 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 in consultation with the human resources personnel of our parent, AREP.
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 chairman of API, the general partner of our parent, and our board of directors evaluate our overall performance and the executive’s performance and contributions during the prior year.
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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.
For the year ended December 31, 2006, Mr. Brown received a salary of $588,942. As described below, Ms. Barton has an employment agreement pursuant to which she receives an annual base salary of $350,000, subject to review on an annual basis for increase under our normal performance review process, which occurs in March of each year. Ms. Barton’s employment agreement expires March 31, 2007.
Base salary is the only element of compensation that is used in determining the amount of contributions permitted under our 401(k) Plan.
Management Incentive Bonus Plan
Effective January 1, 2005, we established a management incentive plan 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 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 management incentive plan 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.
No awards were made under the Management Incentive Bonus Plan in 2006.
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 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 $0.7 million, $0.4 million and $0.5 million for matching contributions for the years ended December 31, 2006, 2005 and 2004, respectively.
Perquisites
The total value of all perquisites provided to each of our executive officers is less than $10,000.
Executive Compensation
The following table sets forth the compensation earned during the year ended December 31, 2006 by our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers and key employees for services rendered in all capacities for the year.
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Summary of Compensation Table
ANNUAL COMPENSATION (1) | ||||||||||||||||||||||||
Non-Equity | ||||||||||||||||||||||||
Incentive Plan | All Other | |||||||||||||||||||||||
Compensation | Compensation | |||||||||||||||||||||||
Name and Principal Position | Year | Salary ($) | Bonus ($) | ($) (2) | ($) (3) | Total | ||||||||||||||||||
Richard P. Brown | 2006 | 588,942 | — | — | 18,443 | 607,385 | ||||||||||||||||||
Denise Barton | 2006 | 357,471 | — | 14,624 | 11,615 | 383,710 | ||||||||||||||||||
Steven Overly (4) | 2006 | 259,354 | — | — | 55,437 | 314,791 | ||||||||||||||||||
Ronald Lurie | 2006 | 231,354 | — | 12,630 | 16,234 | 260,218 | ||||||||||||||||||
Mark Majetich | 2006 | 192,367 | — | 16,008 | 9,330 | 217,705 |
(1) | Pursuant to applicable regulations, certain columns of the Summary Compensation Table and each of the remaining tables required by applicable SEC regulations have been omitted, as there has been no compensation awarded to, or earned by or paid to any of the named executive officers by us. | |
Other annual compensation was less than $50,000 or 10% of the total annual salary and bonus reported for each of the named executive officers above. | ||
(2) | Represents the portion of the bonus awarded in 2005 under the Management Incentive Bonus Plan that vested in 2006 and was paid in 2007, plus interest on the amounts of the awards paid which accrues at the rate of approximately 4% per annum. Under the Management Incentive Bonus Plan, awards vest over a four year period. In 2005, Ms Barton, Mr. Lurie and Mr. Majetich were awarded $56,000, $48,364 and $61,298, respectively, under the Management Incentive Bonus Plan. | |
(3) | Includes contributions by ACEP to 401(k) plans, dollar value of insurance premiums and other compensation related to health insurance payments. It also includes relocation reimbursement of $40,945 for Mr. Overly and auto allowances for Mr. Overly and Mr. Brown during 2006. | |
(4) | Mr. Overly terminated his employment with the Company on January 19, 2007. |
Potential Payments Upon Termination Or Change In Control
Currently, we do not have any agreements with any of our named executive officers relating to potential payments upon termination or a change in control.
Stock Award, Option and Non-Equity Incentive Plans
We do not have any stock award, option or non-equity incentive plans.
Option Grants in Last Fiscal Year
We have not implemented a stock option or other similar plan.
Employment Agreements
We have an employment agreement with Denise Barton, our Senior Vice President and Chief Financial Officer. Under the terms of the employment agreement, Ms. Barton will receive an annual base salary of $350,000, subject to review on an annual basis for increase under our normal performance review process, which occurs in March of each year. Furthermore, she will be eligible to participate in the Management Incentive Bonus Plan on a basis proportionate to her compensation level and level of activity which contribute to our success, as determined by the board of directors of AEP. The employment agreement will terminate on the first of the following events to occur: (1) March 31, 2007; (2) death or disability; (3) discharge with or without cause (as defined in the employment agreement); or (4) resignation.
If the employment of Ms. Barton is terminated by us without cause or by either for good reason , as defined, within six months following a change of control, as defined, then in lieu of any other payments of any kind, she or he shall
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be entitled to receive within 30 days of the termination date: (1) any amounts of base salary and previously earned bonus compensation due and unpaid as of the termination date and (2) a lump-sum payment equal to one year’s base salary. Bonus compensation will be deemed earned and due with respect to any year on the last business day of February of the year following the year with respect to which the applicable performance targets are computed, provided that Ms. Barton is employed by us on the last business day of February. Payment of these amounts is conditioned upon the execution of a settlement and release agreement in form acceptable to us.
Compensation of Directors
The following table provides compensation information for our directors in 2006, except for Mr. Brown. Compensation received by Mr. Brown is included in the Summary Compensation Table.
All Other | ||||||||||||
Fees Earned or | Compensation | |||||||||||
Name | Paid in Cash ($) | ($) | Total ($) | |||||||||
Keith A. Meister | — | — | — | |||||||||
William A. Leidesdorf | 15,000 | — | 15,000 | |||||||||
James L. Nelson | 15,000 | — | 15,000 | |||||||||
Jack G. Wasserman | 15,000 | 4,500 | 19,500 |
Jack G. Wasserman, William A Leidesdorf and James L Nelson each received compensation for their service as members of the board of directors in the amount of $15,000. They are 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 $4,500 for his service as chair of our Compliance Committee. Messrs Brown and Meister do not receive any compensation for their service as members of the board of directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
AEP owns all of the membership interests of ACEP. The principal executive offices of AEP are located at 2000 Las Vegas Boulevard South, Las Vegas, Nevada 89104.
AEP is wholly-owned by AREH. AREP owns a 99% limited partner interest in AREH. Mr. Icahn, through certain affiliates, currently owns 100% of AREP’s and AREH’s general partner and approximately 90% of the outstanding depositary units and approximately 86.5% of the outstanding preferred units of AREP.
Neither our officers nor the officers and directors of our parent own any of our equity interests or the equity interests of our parent or subsidiaries.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDANCE
As of December 31, 2006, affiliates of Mr. Icahn owned approximately 90% of the outstanding depositary units and approximately 86.5% of the outstanding preferred units of AREP. AREP’s general partner is API, which is a wholly-owned subsidiary of Beckton Corp. All of the capital stock of Beckton is owned by Mr. Icahn. AREP’s business is conducted through a subsidiary limited partnership, AREH, in which AREP owns a 99% limited partnership interest. API has a 1% general partnership interest in each of AREP and AREH. AREH owns 100% of American Entertainment Properties Corp., which is our direct parent.
Related Party Transaction Policy
Our parent, AREP, has adopted a related party transaction policy which applies to AREP and its subsidiaries, including us. A related person transaction is any transaction or any series of similar transactions in which AREP 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
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a director or executive officer of API, AREP’s general partner, a person known by AREP to the beneficial owner of more than 5% of any class of our or AREP’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.
We and AREP recognize that related person transactions can present potential or actual conflicts of interest. Accordingly, pursuant to AREP’s related party transaction policy, we have followed and continue to follow certain procedures for reviewing related person transactions. These procedures are designed to ensure that transactions with related persons are fair to us and in our best interests. If a proposed transaction appears to or does involve a related person, the transaction is presented to our audit committee for review. The audit committee is authorized to retain and pay such independent advisors as it deems necessary to properly evaluate the proposed transaction, including, without limitation, outside legal counsel and financial advisors to determine the fair value of the transaction.
In addition, the indenture governing our 7.85% notes due 2012 restricts us from entering into transactions with affiliates involving aggregate consideration in excess of $2.0 million unless the transaction has been 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.
All related person transactions that have been approved or ratified by the audit committee are disclosed to the full board of directors. All related person transactions are 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 parent, AEP. The tax allocation agreement provides 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 provides 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, 2006, we have accrued a $513,000 income tax receivable from AEP and an $89,000 income tax payable to New Seabury, pursuant to the provision of the tax allocation agreement. As of December 31, 2006, we were owed approximately $471,000 from AEP, primarily related to the tax allocation agreement.
Other 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 AREP. 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 2006, we billed Atlantic Coast and its affiliates approximately $360,000. As December 31, 2006, we were owed $1,000 related to the intercompany services arrangement.
During 2006, 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 $213,300. The amounts paid for the provided services approximated their fair value.
Starfire Holding Corporation, which is 100% owned by Mr. Icahn, has undertaken to indemnify us and our subsidiaries from losses resulting from any imposition of certain pension funding or termination liabilities that may be imposed on us and our subsidiaries or our assets as a result of being a member of the Icahn controlled group. The Starfire indemnity (which does not extend to pension liabilities of AREP and its subsidiaries, including us, that would be imposed on us as a result of our or AREP’s interests in these subsidiaries and not as a result of Mr. Icahn and his affiliates more than 80% ownership interest in us) provides, among other things, that so long as such contingent liabilities exist and could be imposed on us, Starfire will not make any distributions to its stockholders that would reduce its net worth to below $250.0 million. Nonetheless, Starfire may not be able to fund its indemnification obligations to us.
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Director Independence
We believe that Messrs Leidesdorf, Nelson and Wasserman are “independent” as defined in the currently applicable listing standards of the New York Stock Exchange. Messrs Leidesdorf, Nelson and Wasserman serve as our audit committee.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the approximate aggregate fees billed by our principal accountants for 2006 and 2005 services:
Grant Thornton | Grant Thornton | |||||||
2006 | 2005 | |||||||
Audit fees (1) | $ | 564,000 | $ | 421,000 | ||||
Other (2) | 16,000 | — | ||||||
Total fees | $ | 580,000 | $ | 421,000 | ||||
Grant Thornton did not provide any services related to financial information systems design and implementation during 2006 or 2005.
(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 2006 and 2005 all such engagements and fees were pre-approved.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. and 2. Financial Statements and Schedules
Page | ||||
Report of Independent Registered Public Accounting Firm | 31 | |||
Consolidated Balance Sheets as of December 31, 2006 and 2005 | 32 | |||
Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004 | 33 | |||
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 | 34 | |||
Consolidated Statements of Member’s/Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004 | 35 | |||
Notes to Consolidated Financial Statements | 36 |
3. List of Exhibits
EXHIBITS INDEX
EXHIBIT NO. | DESCRIPTION | |
3.1 | Second Amended and Restated Certificate of Formation of American Casino & Entertainment Properties LLC (“ACEP”) (incorporated by reference to Exhibit 3.1 to ACEP’s Form S-4 (SEC File No. 333-118149), filed on August 12, 2004). | |
3.2 | Limited Liability Company Agreement of ACEP (incorporated by reference to Exhibit 3.2 to ACEP’s Form S-4 (SEC File No. 333-118149), filed on August 12, 2004). | |
3.3 | Amended and Restated Certificate of Incorporation of American Casino & Entertainment Properties Finance Corp. (incorporated by reference to Exhibit 3.3 to ACEP’s Form S-4 (SEC File No. 333-118149), filed on August 12, 2004). | |
3.4 | By-Laws of American Casino & Entertainment Properties Finance Corp. (incorporated by reference to Exhibit 3.4 to ACEP’s Form S-4 (SEC File No. 333-118149), filed on August 12, 2004). | |
4.1 | Indenture, dated as of January 29, 2004, among ACEP, American Casino & Entertainment Properties Finance Corp., the guarantors from time to time party thereto and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to ACEP’s Form S-4 (SEC File No. 333-118149), filed on August 12, 2004). | |
4.2 | Supplemental Indenture, dated as of May 26, 2004, among ACEP, American Casino & Entertainment Properties Finance Corp., certain subsidiaries of ACEP and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.2 to ACEP’s Form S-4 (SEC File No. 333-118149), filed on August 12, 2004). | |
4.3 | Form of 7.85% Senior Secured Note due 2012 (incorporated by reference to Exhibit 4.1 to ACEP’s Form S-4 (SEC File No. 333-118149), filed on August 12, 2004). | |
10.1 | Amended and Restated Credit Agreement, dated as of May 9, 2006, among ACEP, as the Borrower, Certain Subsidiaries of the Borrower from time to time party thereto, as Guarantors, the Several Lenders from time to time parties thereto, Wells Fargo Bank N.A., as Syndication Agent, CIT Lending Services Corporation, U.S. Bank, NA and Comerica West Incorporated, as Co-Documentation Agents, Bear Stearns Corporate Lending Inc., as Administrative Agent, and Bear Stearns & Co. Inc., as Sole Lead Arranger and Sole Bookrunner (incorporated by reference to Exhibit 10.1 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on May 17, 2006). | |
10.2 | Pledge and Security Agreement, dated as of May 26, 2004, among ACEP, American Casino & |
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EXHIBIT NO. | DESCRIPTION | |
Entertainment Properties Finance Corp., certain subsidiaries of ACEP and Bear Stearns Corporate Lending Inc. (incorporated by reference to Exhibit 10.2 to ACEP’s Form S-4 (SEC File No. 333-118149), filed on August 12, 2004). | ||
10.3 | Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing, dated as of May 26, 2004, made by Stratosphere Corporation, as Trustor, to Lawyers Title of Nevada, as Trustee, for the benefit of Wilmington Trust Company, in its capacity as Indenture Trustee, for the benefit of the Secured Parties, as Beneficiary (incorporated by reference to Exhibit 10.7 to ACEP’s Amendment No. 1 to Form S-4 (SEC File No. 333-118149), filed on October 12, 2004). | |
10.4 | First Modification to Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing made by Stratosphere Corporation, as Trustor, to Lawyers Title of Nevada, as Trustee, for the benefit of Wilmington Trust Company, in its capacity as Indenture Trustee, for the benefit of the Secured Parties, as Beneficiary, dated as of May 9, 2006 (incorporated by reference to Exhibit 10.3 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on May 17, 2006). | |
10.5 | First Modification to Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing made by Stratosphere Corporation, as Trustor, to Lawyers Title of Nevada, as Trustee, for the benefit of Bear Stearns Corporate Lending Inc., in its capacity as Administrative Agent, for the benefit of the Secured Parties, as Beneficiary, dated as of May 9, 2006 (incorporated by reference to Exhibit 10.4 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on May 17, 2006). | |
10.6 | Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing, dated as of May 26, 2004, made by Stratosphere Land Corporation, as Trustor, to Lawyers Title of Nevada, as Trustee, for the benefit of Wilmington Trust Company, in its capacity as Indenture Trustee, for the benefit of the Secured Parties, as Beneficiary (incorporated by reference to Exhibit 10.3 to ACEP’s Form S-4 (SEC File No. 333-118149), filed on August 12, 2004). | |
10.7 | First Modification to Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing made by Stratosphere Land Corporation, as Trustor, to Lawyers Title of Nevada, as Trustee, for the benefit of Bear Stearns Corporate Lending Inc., in its capacity as Administrative Agent, for the benefit of the Secured Parties, as Beneficiary, dated as of May 9, 2006 (incorporated by reference to Exhibit 10.5 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on May 17, 2006). | |
10.8 | Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing, dated as of May 26, 2004, made by Arizona Charlie’s, LLC, as Trustor, to Lawyers Title of Nevada, as Trustee, for the benefit of Wilmington Trust Company, in its capacity as Indenture Trustee, for the benefit of the Secured Parties, as Beneficiary (incorporated by reference to Exhibit 10.8 to ACEP’s Amendment No. 1 to Form S-4 (SEC File No. 333-118149), filed on October 12, 2004). | |
10.9 | First Modification to Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing made by Arizona Charlie’s, LLC, as Trustor, to Lawyers Title of Nevada, as Trustee, for the benefit of Bear Stearns Corporate Lending Inc., in its capacity as Administrative Agent, for the benefit of the Secured Parties, as Beneficiary, dated as of May 9, 2006 (incorporated by reference to Exhibit 10.7 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on May 17, 2006). | |
10.10 | Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing, dated as of May 26, 2004, made by Fresca, LLC, as Trustor, to Lawyers Title of Nevada, as Trustee, for the benefit of Wilmington Trust Company, in its capacity as Indenture Trustee, for the benefit of the Secured Parties, as Beneficiary (incorporated by reference to Exhibit 10.9 to ACEP’s Amendment No. 1 to Form S-4 (SEC File No. 333-118149), filed on October 12, 2004). | |
10.11 | First Modification to Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing made by Fresca, LLC, as Trustor, to Lawyers Title of Nevada, as Trustee, for the benefit of Bear Stearns Corporate Lending Inc., in its capacity as Administrative Agent, for the benefit of the Secured Parties, as Beneficiary, dated as of May 9, 2006 (incorporated by reference to Exhibit 10.6 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on May 17, 2006). |
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EXHIBIT NO. | DESCRIPTION | |
10.12 | Reaffirmation Agreement, dated as of May 9, 2006, among the Grantors thereto with Bear Sterns Corporate Lending Inc., as Administrative Agent (incorporated by reference to Exhibit 10.2 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on May 17, 2006). | |
10.13 | Service Mark License Agreement, by and between Becker Gaming, Inc. and Arizona Charlie’s, Inc., dated as of August 1, 2000 (incorporated by reference to Exhibit 10.10 to ACEP’s Form 10-K (SEC File No. 333-118149), filed on March 16, 2006). | |
10.14 | Asset Purchase Agreement, dated as of November 28, 2005, by and among Harrah’s Operating Company, Inc., Flamingo-Laughlin, Inc., Boardwalk Regency Corporation, Martial Development Corporation, AREP Boardwalk LLC and AREP Laughlin Corporation (incorporated by reference to Exhibit 10.1 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on May 25, 2006). | |
10.15 | Employment Agreement, dated as of January 16, 2006, between ACEP and Denise Barton (incorporated by reference to Exhibit 10.11 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on January 20, 2006). | |
10.16 | Employment Agreement, dated as of February 21, 2006, between Stratosphere Gaming Corp. and Bobby Ray Harris (incorporated by reference to Exhibit 10.13 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on February 23, 2006). | |
10.17 | Employment Agreement, effective as of April 1, 2004, by and between ACEP and Richard P. Brown (incorporated by reference to Exhibit 10.4 to ACEP’s Form S-4 (SEC File No. 333-118149), filed on August 12, 2004). | |
10.18 | Management Incentive Plan, effective January 1, 2005, of ACEP and Atlantic Coast Entertainment Holdings, Inc. (incorporated by reference to Exhibit 10.12 to ACEP’s Form 8-K (SEC File No. 333-118149), filed on January 20, 2006). | |
14.1 | Code of Business Conduct and Ethics (incorporated by reference to Exhibit 99.2 to AREP’s Form 10-Q (SEC File No. 1-9516), filed on November 9, 2004). | |
21.1 | Subsidiaries | |
31.1 | Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Principal Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC | ||||
By: | /s/ Richard P. Brown | |||
Richard P. Brown | ||||
President and Chief Executive Officer | ||||
Date: | March 6, 2007 |
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 Entertainment Properties Corp., the sole member of American Casino & Entertainment Properties LLC, on behalf of the Registrant in the capacities and on the dates indicated:
/s/ Richard P. Brown | ||||
President, Chief Executive Officer and Director (Principal Executive Officer) | March 6, 2007 | |||
/s/ Denise Barton | ||||
Senior Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) | March 6, 2007 | |||
/s/ Jack G. Wasserman | ||||
Director | March 6, 2007 | |||
/s/ William A. Leidesdorf | ||||
Director | March 6, 2007 | |||
/s/ James L. Nelson | ||||
Director | March 6, 2007 | |||
/s/ Keith A. Meister | ||||
Director | March 6, 2007 |
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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, 2006. 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.
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