Exhibit 99.2
[KPMG LOGO]
INDEPENDENT AUDITORS' REPORT
The Members
American Casino & Entertainment Properties LLC:
We have audited the accompanying combined balance sheets of America Casino &
Entertainment Properties LLC (the "Company") as of December 31, 2002 and 2003,
and the related combined statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2003.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of American
Casino & Entertainment Properties LLC as of December 31, 2002 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Los Angeles, California
March 5, 2004
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
COMBINED BALANCE SHEETS
DECEMBER 31,
(In thousands) 2002 2003
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 59,343 $ 77,258
Cash and cash equivalents-restricted 1,926 -
Marketable securities 4,200 4,200
Investments-restricted 2,683 2,973
Accounts receivable, net (note 2) 4,298 4,051
Related party receivables 32 233
Deferred income taxes (note 8) 372 2,982
Other current assets (note 3) 7,993 9,213
-------- --------
Total Current Assets 80,847 100,910
-------- --------
Property and Equipment, Net (note 4) 313,210 324,548
-------- --------
Other Assets:
Debt issuance and deferred financing costs, net 610 272
Lessee incentive 767 567
Other receivable 2,401 84
Deferred income taxes (note 8) - 54,357
-------- --------
Total Other Assets 3,778 55,280
-------- --------
TOTAL ASSETS $397,835 $480,738
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 3,674 $ 5,048
Accounts payable-construction 805 805
Accrued expenses (note 5) 17,338 17,801
Accrued payroll and related expenses 10,267 12,395
Current portion of capital lease obligation (note 6) 55 436
Current portion of notes payable to related party (note 9) 15,421 14,796
-------- --------
Total Current Liabilities 47,560 51,281
-------- --------
Long-Term Liabilities:
Notes payable to related party (note 9) 85,230 86,456
Accrued lessee incentive 818 568
Capital lease obligations, less current portion (note 6) 949 3,555
Deferred income taxes (note 8) 3,325 5,134
Other - 3,399
-------- --------
Total Long-Term Liabilities 90,322 99,112
-------- --------
TOTAL LIABILITIES 137,882 150,393
-------- --------
Commitments and Contingencies (notes 11 and 12)
Stockholders' Equity (note 7):
Common stock 10 10
Additional paid-in-capital 243,750 293,460
Retained earnings 16,193 36,875
-------- --------
Total Stockholders' Equity 259,953 330,345
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $397,835 $480,738
======== ========
See Notes to Combined financial Statements.
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AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
(In thousands) 2001 2002 2003
--------- --------- ---------
REVENUES:
Casino $ 142,919 $ 143,057 $ 147,888
Hotel 38,326 44,263 47,259
Food and beverage 55,453 56,349 59,583
Tower, retail and other income 29,512 28,247 30,336
--------- --------- ---------
Gross Revenues 266,210 271,916 285,066
Less promotional allowances 23,737 21,893 22,255
--------- --------- ---------
NET REVENUES 242,473 250,023 262,811
--------- --------- ---------
COSTS AND EXPENSES:
Casino 60,026 59,879 61,284
Hotel 17,190 20,142 22,074
Food and beverage 42,806 43,393 44,990
Other operating expenses 15,640 14,934 14,008
Selling, general and administrative 78,692 80,019 74,985
Depreciation and amortization 17,209 20,209 20,222
--------- --------- ---------
Total Costs and Expenses 231,563 238,576 237,563
--------- --------- ---------
INCOME FROM OPERATIONS 10,910 11,447 25,248
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 1,640 667 426
Interest expense (5,971) (5,990) (5,389)
Gain (Loss) on sale of assets 23 (354) (1,401)
--------- --------- ---------
Total Other Expense, net (4,308) (5,677) (6,364)
--------- --------- ---------
INCOME BEFORE INCOME TAXES 6,602 5,770 18,884
Provision for Income Taxes (note 8) 4,908 4,907 (1,798)
--------- --------- ---------
NET INCOME $ 1,694 $ 863 $ 20,682
========= ========= =========
See Notes to Combined financial Statements.
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AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(In thousands) 2001 2002 2003
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,694 $ 863 $ 20,682
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 17,209 20,209 20,222
(Gain) Loss on sale or disposal of assets (23) 354 1,401
Provision for deferred income taxes 1,237 1,804 (5,448)
Changes in operating assets and liabilities:
Restricted Cash - - 1,926
Accounts receivable, net (1,119) (108) 247
Other current assets 1,613 1,750 1,653
Accounts payable - trade (277) (403) 1,374
Accrued expenses 783 5,766 2,341
Other - - 3,399
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,117 30,235 47,797
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investments - restricted 161 (1,623) (290)
Purchase of marketable securities 259 - -
Acquisition of property and equipment (50,631) (22,085) (30,423)
Payments for CIP (5,345) (793) -
Related party receivables (411) 373 (201)
Cash proceeds from sale of property and equipment - 1 521
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (55,967) (24,127) (30,393)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issuance and deferred financing costs - (855) (90)
Proceeds from related part note payable 45,750 17,220 7,780
Member contribution 5,150 598 -
Proceeds from capital lease obligations 1,004 - -
Payments of related party notes payable (10,696) (9,277) (7,179)
Payments of long term debt (3,369) (38) -
Payments on capital lease obligation (2,759) (3,280) -
Cash acquired from subsidiary contributed by parent - 280 -
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 35,080 4,648 511
-------- -------- --------
Net increase in cash and cash equivalents 230 10,756 17,915
Cash and cash equivalents - beginning of period 48,357 48,587 59,343
-------- -------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 48,587 $ 59,343 $ 77,258
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 5,058 $ 5,790 $ 5,422
======== ======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capitalized lease obligation incurred in the acquisition of property
and equipment $ - $ - $ 3,042
Net assets contributed by parent $ - $ 233 $ -
Change in deferred tax asset valuation allowance related
to book-tax differences existing at time of bankruptcy $ 628 $ 2,412 $ 49,710
Cancellation of common stock shares pursuant to the plan of merger $ - $ 20 $ -
======== ======== ========
See Notes to Combined financial Statements.
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AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON ADDITIONAL RETAINED TOTAL
STOCK PAID-IN-CAPITAL EARNINGS EQUITY
-------- --------------- -------- --------
BALANCES AT DECEMBER 31, 2000 $ 30 $234,709 $ 13,636 $248,375
CHANGE IN DEFERRED TAX ASSET VALUATION ALLOWANCE
RELATED TO BOOK-TAX DIFFERENCES EXISTING AT TIME
BANKRUPTCY - 628 - 628
MEMBER CONTRIBUTIONS - 5,150 - 5,150
NET INCOME - - 1,694 1,694
-------- -------- -------- --------
BALANCES AT DECEMBER 31, 2001 $ 30 $240,487 $ 15,330 $255,847
CHANGE IN DEFERRED TAX ASSET VALUATION ALLOWANCE
RELATED TO BOOK-TAX DIFFERENCES EXISTING AT TIME
BANKRUPTCY - 2,412 - 2,412
NET ASSETS CONTRIBUTED BY PARENT - 233 - 233
MEMBER CONTRIBUTIONS - 598 - 598
CANCELLATION OF COMMON SHARES (20) 20 - -
NET INCOME - - 863 863
-------- -------- -------- --------
BALANCES AT DECEMBER 31, 2002 $ 10 $243,750 $ 16,193 $259,953
CHANGE IN DEFERRED TAX ASSET VALUATION ALLOWANCE
RELATED TO BOOK-TAX DIFFERENCES EXISTING AT TIME
BANKRUPTCY - 49,710 - 49,710
NET INCOME - - 20,682 20,682
-------- -------- -------- --------
BALANCES AT DECEMBER 31, 2003 $ 10 $293,460 $ 36,875 $330,345
======== ======== ======== ========
See Notes to Combined financial Statements
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AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2002 AND 2003
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The accompanying combined financial statements present the financial position,
results of operations and cash flows of American Casino & Entertainment
Properties LLC which is comprised of American Casino & Entertainment Properties
LLC, Stratosphere Corporation and its wholly-owned subsidiaries, Stratosphere
Gaming Corporation., Stratosphere Land Corporation, Stratosphere Advertising
Agency, Stratosphere Leasing, LLC, 2000 Las Vegas Boulevard Retail Corporation
and Stratosphere Development, LLC, an entity controlled by Stratosphere
Corporation; Arizona Charlie's, Inc., and its wholly owned subsidiary Jetset
Tours, LLC; and Fresca, LLC (collectively the "Company"). Stratosphere
Corporation, Arizona Charlie's, Inc. and Fresca, LLC are under the common
control of Carl C. Icahn. As discussed in note 13, American Casino &
Entertainment Properties LLC is awaiting approval of the Nevada State Gaming
Control Board to complete the acquisition of the casinos. The Company operates
integrated casinos, hotels, retail and entertainment facility and a 1,149 foot,
free-standing observation tower located in Las Vegas, Nevada. All significant
intercompany balances and transactions have been eliminated in combination.
CASINO REVENUES AND PROMOTIONAL ALLOWANCES
During the first quarter, 2001, the Emerging Issues Task Force reached a
consensus on the portion of Issue 00-22, "Accounting for `Points' and Certain
Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free
Products or Services to be Delivered in the Future," which addressed the income
statement classification of the value of the points redeemable for cash awarded
under point programs similar to the Company's Player's Club and Guaranteed
Refund programs. The consensus states the cost of these programs should be
reported as a contra-revenue, rather than an expense and is retroactive to
January 1, 2001, with prior year restatement required. The Company has adopted
the current consensus recommendations on Issue 00-22. Prior to the release of
the new consensus, the Company historically reported the costs of such points as
an expense. In accordance with the consensus, the Company recorded these costs
of $6.7 million, $5.0 million and $12.8 million for the fiscal years ended
December 31, 2001, 2002 and 2003 respectively as a reduction of casino revenues
in the combined Statements of Income.
The Company recognizes revenues in accordance with industry practice. Casino
revenue is 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. Revenues include the retail
value of rooms, food and beverage and other items that are provided to customers
on a complimentary basis. A corresponding amount is deducted as promotional
allowances. The cost of such complimentaries included as casino expenses is as
follows (in thousands):
December 31,
--------------------------------
2001 2002 2003
---- ---- ----
Food and Beverage $7,367 $6,858 $7,035
Rooms 229 104 84
Other 66 53 31
------ ------ ------
$7,662 $7,015 $7,150
====== ====== ======
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. Cash and cash equivalents-restricted at December
31, 2002 consist primarily of funds reserved for final settlement of unsecured
claims pursuant to the Restated Second Amended Plan of Bankruptcy. In 2003, the
unsecured claims were settled and the funds were disbursed.
MARKETABLE SECURITIES
The Company's marketable securities represent investments in Moody's AA2 rated
Portland, Oregon and Moody's and Standard and Poor's AAA rated New York City
bonds. These securities are currently reported at cost, which approximates fair
market value, and are considered available-for-sale. The changes in fair values
of these securities have historically been immaterial to the combined financial
statements.
INVESTMENTS RESTRICTED
Investments-restricted consist primarily of funds pledged for Nevada sales and
use tax, unpaid sports book tickets and workers' compensation benefits.
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INVENTORIES
Inventories, consisting primarily of food and beverage, retail merchandise and
operating supplies, are stated at the lower of cost or market and included in
other current assets. Cost is determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment purchased are stated at cost. Capitalized lease assets
are stated at the lower of the present value of the future minimum lease
payments or fair value at the inception of the lease (see Notes 4 and 6).
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's policy is to capitalize 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. The Company
capitalized interest of $1,857,200 for 2001. There was no capitalized interest
during fiscal year 2002 and 2003.
RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS
The Company adopted SFAS No. 144 on January 1, 2002. SFAS No. 144 requires the
Company to review its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset or a
group of assets may not be recoverable. Assets are grouped and evaluated for
impairment at the lowest level for which there are identifiable cash flows that
are largely independent of the cash flows of other groups of assets. The Company
deems an asset to be impaired if a forecast of undiscounted future operating
cash flows directly related to the asset, including disposal value if any, is
less than its carrying amount. If an asset is determined to be impaired, the
loss is measured as the amount by which the carrying amount of the asset exceeds
fair value. The Company generally estimates fair value by discounting estimated
cash flows. Considerable management judgment is necessary to estimate discounted
future cash flows. Accordingly, actual results could vary significantly from
such estimates. Prior to January 1, 2002, the Company utilized SFAS No. 121 to
assess impairment of long-lived assets.
SALES, ADVERTISING AND PROMOTION
Sales, advertising and promotion costs are expensed as incurred and totaled
$20.4 million, $18.1 million and $22.9 million for the years ended December 31,
2001, 2002 and 2003, respectively, and are included in selling, general and
administrative expenses in the accompanying combined statements of income.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles 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 in the circumstances; however, actual
results may differ from these estimates under different future conditions.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the
Company to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development, and/or normal use of the assets. The Company also
records a corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the
obligation is to be adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the obligation.
The Company was required to adopt SFAS No. 143 on January 21, 2003. The adoption
of SFAS No. 143 did not have a material effect on the Company's financial
statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 amends existing guidance on reporting gains and losses on the
extinguishment of debt to prohibit classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain least modifications that have
economic effects similar to sale-leaseback transactions. The provision of the
Statement related to the rescission of Statement No. 4 is applied in fiscal
years beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the Statement related to Statement No. 13
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were effective for transactions occurring after May 15, 2002, with early
application encouraged. The adoption of SFAS No. 145 did not have a material
effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity. The
provisions of this Statement were effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
adoption of SFAS No. 146 did not have a material effect on the Company's
financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation were
applicable to guarantees issued or modified after December 31, 2002 and did not
have a material effect on the Company's financial statements. The disclosure
requirements were effective for financial statements of interim and annual
periods ending after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation to provide alternative methods of transition for a voluntary change
to the fair value method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement No. 123
to require prominent disclosures of the effect of the fair value method in both
annual and interim financial statements. The Company adopted the disclosure
provisions of this Statement on January 1, 2003 and included the disclosure
modifications in these combined financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51, which was then
revised in December 2003. This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies immediately to variable interests in
variable interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003. For
nonpublic enterprises, such as the Company, with a variable interest in a
variable interest entity created before February 1, 2003, the Interpretation is
applied to the enterprise no later than the end of the first annual reporting
period beginning after June 15, 2003. The application of this Interpretation is
not expected to have a material effect on the Company's financial statements.
The Interpretation requires certain disclosures in financial statements issued
after January 31, 2003 if it is reasonably possible that the Company will
consolidate or disclose information about variable interest entities when the
Interpretation becomes effective. The Company does not believe it has any
variable interest entities.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that companies classify a financial instrument that is within its scope
as a liability (or an asset in some circumstance). Many of those instruments
were previously classified as equity. The provisions of this Statement are
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise are effective at the beginning of the first interim period
beginning after June 15, 2003. The impact of this Statement did not have a
significant effect on the Company's financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years combined financial
statements to conform to the current fiscal year presentation.
(2) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
December 31,
-------------------
2002 2003
---- ----
Hotel and related $2,535 $3,030
Gaming 575 523
Income taxes 0 0
Other 2,018 971
------ ------
5,128 4,524
Less allowance for doubtful accounts 830 473
------ ------
$4,298 $4,051
====== ======
The Company recorded bad debt expense of $134, $524 and $395 for the years ended
December 31, 2001, 2002 and 2003 respectively.
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(3) OTHER CURRENT ASSETS
Other current assets consist of the following as of December 31, 2002 and 2003
(in thousands):
December 31,
-----------------------
2002 2003
---- ----
Inventories $2,397 $2,683
Prepaid expenses 4,989 4,435
Other 607 2,095
------ ------
$7,993 $9,213
====== ======
(4) PROPERTY AND EQUIPMENT - NET
Property and equipment consist of the following as of December 31, 2002 and 2003
(in thousands):
December 31,
--------------------------
2002 2003
---- ----
Land and improvements, including land held
for development $ 50,239 $ 50,299
Building and improvements 230,459 235,538
Furniture, fixtures and equipment 93,846 105,415
Construction in progress 361 7,724
-------- --------
374,905 398,976
Less accumulated deprecation and amortization 61,695 74,428
-------- --------
$313,210 $324,548
======== ========
At December 31, 2002 and 2003, assets recorded under capital leases were $1.0
million and $4.0 million, respectively. Accumulated depreciation and
amortization at December 31, 2002 and 2003 includes amounts recorded for capital
leases of $0.1 million.
In mid-1996, Stratosphere Corporation suspended construction of the 1,000-room
hotel tower (the "Hotel Expansion"), which had reached a height of approximately
14 stories. In April 2000, construction was resumed to complete the unfinished
hotel tower with a total construction budget of $65.0 million. In June 2001, the
Company completed construction of the new hotel tower that includes 1,000 new
guestrooms and amenities including a 67,000-square foot pool and recreation area
with a new snack and cocktail bar, private cabanas and a large spa. "Lucky's
Cafe" a 350-seat coffee shop, a new porte-cochere and valet parking entrance,
gift shop and new tour bus entrance and lobby have also been completed. The
Company refurbished and expanded the "Stratosphere Courtyard Buffet" as well as
remodeled "Montana's Steak House" and converted it into the "Crazy Armadillo"
featuring Tex-Mex cuisine and an oysterbar.
(5) OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following as of December 31, 2002 and 2003
(in thousands):
December 31,
------------------------
2002 2003
---- ----
Vacation packages $ 2,634 $ 2,478
Accrued liabilities 6,743 9,137
Accrued restructuring costs 341 -
Cash reserve for unpaid bankruptcy claims 1,926 -
Accrued taxes 1,411 1,885
Accrued/unclaimed sports tickets/prizes 820 981
Other 3,463 3,320
------- -------
$17,338 $17,801
======= =======
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(6) LEASES, INCOME AND CAPITAL LEASE OBLIGATIONS
In connection with the purchase of the Master Lease from Strato-Retail, the
Company assumed lessor responsibilities for various non-cancelable operating
leases for certain retail space. The future minimum lease payments to be
received under these leases for years subsequent to December 31, 2003 are as
follows (in thousands):
Years ending December 31,
-------------------------
2004 $ 3,138
2005 2,644
2006 1,853
2007 1,488
2008 708
Thereafter 1,616
--------
Total Payments $ 11,447
========
The Company is reimbursed by lessees for certain operating expenses.
Future minimum lease payments under capital leases with initial or remaining
terms of one year or more consist of the following at December 31, 2003 (in
thousands):
Years ending December 31,
-------------------------
2004 $ 665
2005 665
2006 665
2007 665
2008 1,288
Thereafter 7,488
-------
Total minimum lease payments 11,436
Less: amount representing interest
ranging from 5% to 10% 7,445
-------
Present value of net minimum lease payments 3,991
Less: current portion 436
-------
Long-term capital lease obligation $ 3,555
=======
The Company had no operating leases as of December 31, 2001, 2002 and 2003,
respectively.
(7) STOCKHOLDERS' EQUITY
Common stock includes the capital stock issued and outstanding for Stratosphere
Corporation and Arizona Charlie's, Inc. and is summarized as follows:
Amount Amount Issued and
Par Value Authorized Outstanding
--------- ---------- -----------
Stratosphere Corporation
December 31, 2002 $0.01 100 100
December 31, 2003 0.01 100 100
Arizona Charlie's, Inc
December 31, 2002 $0.01 5,000,000 1,000,000
December 31, 2003 0.01 5,000,000 1,000,000
Included in additional paid-in capital at December 31, 2002 and 2003 is $64,677
in members' equity related to Fresca, LLC.
Fresca, LLC is a Nevada limited liability company that was formed on January 26,
2000. It was formed for the purpose of acquiring and operating certain property
in Las Vegas, Nevada, including a casino, hotel, and recreational vehicle rental
park, referred to as Arizona Charlie's Boulder. Hotel operations commenced on
February 5, 2000 (date of inception) and gaming operations commenced on May 23,
2000. The members of Fresca, LLC are Mr. lcahn and Starfire Holding Corporation
(a company controlled by Mr. Icahn). Earnings and losses are distributed based
on the original capital contribution amounts. Members of an LLC are not
personally liable for debts, obligations or liabilities of the Company beyond
the amount of the member's capital contributions. The latest date on which
Fresca, LLC is to dissolve is December 31, 2099.
On October 4, 1999, American Real Estate Holdings Limited Partnership, or
("AREH"), a common-ownership related party purchased 985,286 shares of the
Stratosphere's common stock from entities owned or controlled by Mr. Icahn. On
March 24, 2000, AREH purchased 50,000 shares of the Stratosphere's common stock
from NYBOR, a company owned by Mr. Icahn. Upon completion of the transaction,
Mr.
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Icahn controlled approximately 89.6% of the Company's Common Stock. AREH is the
subsidiary limited partnership of American Real Estate Partners, L.P. ("AREP") a
master limited partnership whose units are traded on the New York Stock
Exchange. Mr. Icahn currently owns over 86% of AREP's outstanding depository
units and preferred units.
On February 1, 2002, the Stratosphere announced that it entered into a merger
agreement under which AREP, through an affiliate, will acquire the remaining
shares of Stratosphere that AREP does not currently own. AREP owned
approximately 51% of Stratosphere and Mr. Icahn owned approximately 38.6%. The
initial determination to engage in the transaction at the prices set forth below
was previously announced by AREP in September 2000.
On December 19, 2002, the stockholders of Stratosphere Corporation approved the
plan of merger dated February 1, 2002. Under the Merger Plan, AREP acquired the
remaining 49% interest in the Company. Under the agreement, the stockholders who
were unaffiliated with AREP and Mr. Icahn received a cash price of $45.32 per
share, and the Icahn-related stockholders (other than AREP) received a cash
price of $44.33 per share. AREP paid an aggregate of approximately $44.3 million
for the 49% of the shares of Stratosphere that it did not already own.
Subsequent to the merger, all but 100 shares of Stratosphere were cancelled, and
the par value of the cancelled shares transferred to additional paid in capital.
The Company has not implemented a stock option plan.
(8) INCOME TAXES
The income tax provision attributable to income from operations for the fiscal
years ended December 31, 2002 and 2003 (in thousands):
December 31,
-------------------------------------
2001 2002 2003
---- ---- ----
Current $3,176 $ 311 $ 3,650
Deferred 1,732 4,596 (5,448)
------ ------ --------
$4,908 $4,907 ($ 1,798)
====== ====== ========
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, 2001, 2002 and 2003 (in
thousands):
December 31,
----------------------
2002 2003
---- ----
TEMPORARY DIFFERENCES
Current:
Allowance for doubtful accounts $ 270 $ 126
Gaming related 567 661
Accrued vacation and employee related 2,326 2,005
Outstanding chip and token liability 112 112
Deferred income 55 46
Other 228 10
-------- --------
3,558 2,960
Long-term:
Excess of tax over book basis of assets
due primarily to write down of assets 62,834 39,859
-------- --------
TOTAL TEMPORARY DIFFERENCES 66,392 42,819
-------- --------
Carryforwards:
Net Operating Loss (including
Section 382 limitation) 12,942 9,984
Alternative minimum tax credit 450 521
Other credits 1,048 739
-------- --------
Total Carryforwards 14,440 11,244
-------- --------
Total temporary differences and
carryforwards 80,832 54,063
Valuation allowance (83,785) (1,858)
-------- --------
Total deferred tax assets (liabilities) ($ 2,953) $ 52,205
======== ========
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At December 31, 2003, the company had net operating loss carryforwards available
for federal income tax purposes of approximately $28.5 million which begin
expiring in 2019.
SFAS 109 requires a "more likely than not" criterion be applied when evaluating
the realizability of a deferred tax asset. As of December 31, 2002, given the
Company's history of losses for income tax purposes, the volatility of the
industry within which the Company operates, and certain other factors, the
Company has established a valuation allowance principally for the deductible
temporary differences, including the excess of the tax basis of the Company's
assets over the basis of such assets for financial purposes. However, at
December 31, 2003, based on various factors including the current earnings trend
and future taxable income projections, the Company determined that it was more
likely than not that some of the deferred tax assets will be realized.
Accordingly, the valuation allowance for these assets was reversed.
In accordance with SFAS 109, the tax benefit of any deferred tax asset that
existed on the effective date of a reorganization should be reported as a direct
addition to contributed capital. The Company has deferred tax assets relating to
both before and after the Company emerged from bankruptcy in September of 1998.
The net decrease in the valuation allowance was $81,927,000, of which $49,710,
000 was credited directly to additional paid-in-capital in accordance with SFAS
109 and the requirements for recording tax benefits associated with emergence
from bankruptcy.
The provision for income taxes differs from the amount computed at the federal
statutory rate as a result of the following:
December 31,
-------------------------
2001 2002 2003
---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0%
Other -0.4% 5.4% 1.8%
Permanent differences 1.6% 0.7% 0.5%
Federal income tax credits -3.9% -3.5% -1.4%
Tax deduction not given book benefit 0.0% 0.0% 18.0%
Valuation allowance 2.1% -7.4% -74.3%
Income (loss) not subject to taxation 40.0% 54.8% 10.9%
---- ---- -----
74.4% 85.0% -9.5%
==== ==== =====
SECTION 382 LIMITATION
As of December 31, 2003 and 2002, the Company had a tax basis in its assets in
excess of its basis for financial reporting purposes that will generate
substantial tax deductions in future periods. As a result of a "change in
ownership" under Internal Revenue Code Section 382, the Company's ability to
utilize depreciation and other tax attributes was limited to approximately
$6,400,000 per year commencing fiscal year 1998 and for the five subsequent
years. This limitation is applied to all built-in losses which exist on the
"change of ownership" date, including all items giving rise to a deferred tax
asset.
For the year ended December 31, 2001, a portion of the Company's depreciation
and other tax attributes in the amounts of $1.6 million that existed on the
"change of ownership" date was limited under Section 382. Pursuant to Section
382, the limited depreciation and other tax attributes are treated as a net
operating loss, which the Company may utilize in subsequent years.
(9) RELATED PARTY TRANSACTIONS
Long term debt consists of the following as of December 31, 2002 and 2003 (in
thousands):
December 31,
---------------------
2002 2003
---- ----
Construction loan note payable (A) $ 68,757 $ 65,106
Lease purchase note payable (B) 11,770 11,146
Arnos loan note payable (C ) 2,904 0
Starfire loan note payable (D) 17,220 25,000
-------- --------
100,651 101,252
Less current portion 15,421 14,796
-------- --------
Long-term debt-less current portion $ 85,230 $ 86,456
======== ========
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(A) On May 1, 2001, the Company delivered a $73.0 million promissory note
for a construction loan to American Real Estate Holdings ("AREH"), a
common-ownership related party, in order to finance the construction of
the 1,000-room hotel tower, Lucky's Cafe and new pool area (the "Hotel
Expansion"). The promissory note is secured by a deed of trust on
certain real property. Demand notes bearing interest at 9.5% and
totaling $48.0 million, as of April 18, 2001, were replaced by this
note. During 2001 AREH provided additional advances of $25.0 million
against the $73.0 million note. In November 2001 the Company began
making principal payments on the loan in equal monthly installments
based on a twenty (20) year amortization schedule, with the remaining
balance due and payable June 2002. Interest accrues at a variable rate
per annum equal to the sum of (i) three hundred (300) basis points plus
(ii) the 90 day London Interbank Offered Rate ("LIBOR"). This interest
rate at December 31, 2002 was 4.66%. On July 3, 2002, the Company paid
AREH one point or $730,000 to obtain a twenty-four (24) month extension
of the loan term. The extension fee is being amortized over the
remaining term of the loan. On September 1, 2003 the term was extended
to September 6, 2005.
(B) On May 1, 2001, the Company delivered a $12.5 million promissory note
to AREH to replace the $12.5 million demand note used to acquire the
property under the Master Lease from Strato-Retail, LLC. The promissory
note is secured by a deed of trust on certain real property. In
November 2001 the Company began making principal payments on the loan
in equal installments based on a twenty (20) year amortization schedule
with the remaining balance due and payable July 2002. Interest accrues
at a variable rate per annum equal to the sum of (i) three hundred
fifty (350) basis points plus (ii) the 90 day LIBOR. This interest rate
at December 31, 2002 was 5.16%. On July 4, 2002 the Company paid AREH
one point or $125,000 to obtain a twelve (12) month extension of the
loan term. The loan extension fee is being amortized over the remaining
term of the loan. The term was extended to August 31, 2004.
(C) On September 24. 2001., Arizona Charlie's, Inc., refinanced the
remaining principal balance of $7,904,000 on a prior note payable to
Amos Corp., a company related through common ownership. The note bears
interest at the prime rate plus 1.50% (5.75% at December 31, 2002),
with a maturity of June 2004, and was collateralized by all assets of
the Arizona Charlie's, Inc. The note was repaid during November 2003.
(D) During fiscal year 2002, Fresca, LLC, entered into an unsecured line of
credit in the amount of $25,000,000 with Starfire Holding Corporation
(Starfire), a common-ownership related party. The outstanding balance,
including accrued interest, shall be due and payable on January 2,
2007. At December 31, 2003, Fresca, LLC, had $25,000,000 outstanding.
The note bears interest on the unpaid principal balance from January 2,
2002 until maturity at the rate per annum equal to the prime rate, as
established by Fleet Bank, from time to time, plus 2.75%. Interest is
payable semi-annually in arrears on the first day of January and July,
and at maturity. The note is guaranteed by Mr. Icahn.
The future aggregate annual maturities of notes payable to related party at
December 31, 2003 are as follows (in thousands):
Years ending
------------
December 31,
------------
2004 $ 14,796
2005 61,456
2006 -
2007 25,000
--------
Total $101,252
========
(10) EMPLOYEE BENEFIT PLAN
Employees of the Company who are members of various unions are covered by
union-sponsored, collectively bargained, multi-employer health and welfare and
defined benefit pension plans. The Company recorded expenses for such plans of
$4,921,851 and $6,517,487 and $7,619,495 for the years ended December 31, 2001,
2002 and 2003, respectively. Sufficient information is not available from the
plans' sponsors to permit the Company to determine the adequacy of the plans'
funding status.
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 15% 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 4% of their
individual earnings. The Company recorded $813,000, $815,000 and $559,000 for
matching contributions for the years ended December 31, 2001, 2002 and 2003,
respectively.
(11) COMMITMENTS
The Company and Mr. Richard Brown, President and Chief Executive Officer of
Stratosphere Corporation entered into a two-year employment agreement effective
April 1, 2002 (the "Brown Agreement"). The Brown Agreement provides that Mr.
Brown will be paid a base annual compensation of $300,000. The agreement also
provides Mr. Brown receive an annual bonus of $20,000. The Brown Agreement
further provides that if Mr. Brown is terminated without "Cause" (as defined in
the Brown Agreement) or there is a "Change of
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Control" (as defined in the Brown Agreement), then Mr. Brown will receive an
immediate severance payment in the amount equal to the then current Base Salary.
Mr. Brown was paid a $20,000 bonus in 2003 for the year ended December 31, 2002.
(12) CONTINGENCIES
The Company filed a complaint for the avoidance of preferential transfers made
to Grand Casinos, Inc. ("Grand"). Included in the complaint are approximately
$5.9 million of payments made to Grand prior to the Company beginning bankruptcy
proceedings. On December 31, 2002, the Bankruptcy Court entered its Memorandum
of Decision; Findings of Facts and Conclusions of Law; and Judgment awarding the
Stratosphere approximately $2.3 million. This amount was collected during May
2003.
On January 31, 2001, the Company was named in an action styled Disabled Rights
Action Committee v. Stratosphere Gaming Corp., Case No A430070, in the Eighth
Judicial District Court of the State of Nevada. The complaint alleges a number
of violations of the Americans with Disabilities Act ("ADA"), including
inadequate room selection, door widths and other similar items. Simultaneously
with the complaint, plaintiffs filed a Motion for Preliminary Injunction,
seeking to have construction halted on the new hotel tower until the property
fully complies with the ADA. The Company removed the action to the United States
District Court in Nevada, and it is now styled Disabled Rights Action Committee
v. Stratosphere Gaming Corp., Case No. CV-S-01-0162-RLH (PAL). The federal
district court held a hearing on plaintiffs' Motion for Preliminary Injunction
and denied the motion, focusing upon what the Court believed to be the
plaintiffs' lack of irreparable injury. The federal district court also granted
the Company's Motion to Dismiss the plaintiffs' state law claims, leaving in
place only the ADA claims. The Company and the Plaintiffs then filed Motions for
Summary Judgment. The District Court granted and denied in part each of the
parties' respective motions. The Court ordered that the Company must make
certain renovations to 532 rooms that were opened in 1996. The renovations were
completed by July, 2002 and cost $765,000.
Tiffiny Decorating Company ("Tiffiny"), a subcontractor to Great Western Drywall
("Great Western"), filed a legal action against Stratosphere Corporation,
Stratosphere Development, LLC, American Real Estate Holdings Limited Partnership
(Stratosphere Corporation, Stratosphere Development, LLC and American Real
Estate Holdings Limited Partnership are herein collectively referred to as the
"Stratosphere Parties"), Great Western, Nevada Title and Safeco Insurance, Case
No. A443926 in the Eighth Judicial District Court of the State of Nevada. The
legal action asserts claims that include breach of contract, unjust enrichment
and foreclosure of lien. The Stratosphere Parties have filed a cross-claim
against Great Western in that action. Additionally, Great Western has filed a
separate legal action against the Stratosphere Parties setting forth the same
disputed issues. That separate action, Case No. A448299 in the Eighth Judicial
Court of the State of Nevada has been consolidated with the case brought by
Tiffiny.
The initial complaint brought by Tiffiny asserts that Tiffiny performed certain
services on construction at the Stratosphere and was not fully paid for those
services. Tiffiny claims the sum of $521,562 against Great Western, the
Stratosphere Parties, and the other defendants, which the Stratosphere Parties
contend have been paid to Great Western for payment to Tiffiny.
Great Western is alleging that it is owed payment from the Stratosphere Parties
for work performed and for delay and disruption damages. Great Western is
claiming damages in the sum of $3,935,438 plus interest, costs and legal fees
from the Stratosphere Parties. This amount apparently includes the Tiffiny
claim.
The Stratosphere Parties have evaluated the project and have determined that the
amount of $1,004,059, of which $195,953 and $371,973 were disbursed on October
29, 2002 to Tiffiny and Great Western, respectively, is properly due and payable
to satisfy all claims for the work performed, including the claim by Tiffiny.
The remaining amount has been segregated in a separate interest bearing account
and is classified in Accounts Payable - Construction on the Consolidated Balance
Sheet. As a result, the Great Western base claim has been reduced to $3,213,579,
the Tiffiny base claim has been reduced to $327,434 and the escrow balance has
been reduced to $443,579.
The Early Case Conference in the Tiffiny case has already been concluded and
initial documents and witnesses have been exchanged which has been the discovery
to date, however, it is not possible to give an opinion as to probably outcome
of the action. The case will proceed with discovery from this point forward
until such time as a resolution is reached or the matter is brought to trial.
The matter was preliminarily set for trial on April 14, 2003 but has been
continued to June 21, 2004. The Stratosphere Parties intend to vigorously defend
the action for claims in excess of $1,004,059.
On May 3, 2001, the Company was named in an action brought by Harrah's
Entertainment, Inc. and Harrah's Operating Company, Inc. (collectively
"Harrah's") alleging infringement of a purported patent covering a business
method allegedly developed by Harrah's. The use of an allegedly similar business
method by the Company in its advertising and promotions is said by plaintiff to
infringe upon its patent rights.
In January 2002, the parties entered into a sealed Consent Judgment resolving
the dispute, which was the subject matter of this action. In December 2001, the
Company paid Harrah's the settlement for this action.
In addition, in the ordinary course of business, the Company is party to various
legal actions. In management's opinion, the ultimate outcome of such legal
actions will not have a material effect on the results of operations or the
financial position of the Company.
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(13) SUBSEQUENT EVENTS
On December 29, 2003, American Casino & Entertainment Properties LLC (ACEP) was
formed in Delaware. The holding company will own and operate three gaming and
entertainment properties in Las Vegas, Stratosphere, Arizona Charlie's Decatur
and Arizona Charlie's Boulder. ACEP entered into a membership interest purchase
agreement with Starfire Holding Corporation, 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 will own Arizona Charlie's Decatur and
Arizona Charlie's Boulder. The closing of this acquisition is subject to
necessary approvals by the Nevada Gaming Commission upon the recommendation of
the Nevada State Gaming Control Board and the other terms and conditions of the
agreement. The purchase price is $125.9M, subject to reduction based on a
post-closing working capital adjustment. Additionally, ACEP has entered into a
contribution agreement with their direct parent, American Entertainment
Properties Corp., and our indirect parent, American Real Estate Holdings Limited
Partnership, or AREH, in which AREH agreed to contribute to us 100% of the
outstanding capital stock of Stratosphere Corporation, subject to necessary
approvals by the Nevada Gaming Commission upon the recommendation of the Nevada
State Gaming Control Board and the closing of the transaction contemplated by
the membership interest purchase agreement.
The Company has offered $215,000,000 in aggregate principal amount of 7.85%
Senior Secured Notes due 2012. The net proceeds from the sale of the notes will
be used in connection with the acquisition of three Las Vegas, Nevada gaming and
entertainment properties from affiliated parties. The notes will have a fixed
annual interest rate of 7.85%, which will be paid every six months on February 1
and August 1, commencing August 1, 2004. The transaction closed on January 29,
2004 and the proceeds will remain in an escrow account until the Nevada Gaming
Authorities have approved the transaction.
-15-