EXHIBIT 99.1
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
QUARTERLY REPORT
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2004
PAGE NO.
--------
FINANCIAL INFORMATION
FINANCIAL STATEMENTS
Consolidated Balance Sheets
June 30, 2004 (unaudited) and December 31, 2003 ............................................... 1
Consolidated Statements of Income
Six Months Ended June 30, 2004 and 2003 (unaudited) ........................................... 2
Consolidated Statements of Income
Three Months Ended June 30, 2004 and 2003 (unaudited) ......................................... 3
Consolidated Statements of Cash Flows Six Months Ended June 30, 2004 and 2003 (unaudited) ..... 4
Consolidated Statements of Changes In Stockholders' Equity
Six Months Ended June 30, 2004 (unaudited) .................................................... 5
Notes to Consolidated Financial Statements .................................................... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ......... 9
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2004 2003
------------ ------------
(In thousands) (UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 49,231 $ 77,258
Cash and cash equivalents-restricted 447 -
Marketable securities - 4,200
Investments-restricted 2,921 2,973
Accounts receivable, net 4,549 4,051
Related party receivables 189 233
Deferred income taxes 3,232 2,982
Other current assets 10,677 9,213
------------ ------------
Total Current Assets 71,246 100,910
------------ ------------
Property and Equipment, Net 321,989 324,548
------------ ------------
Other Assets:
Debt issuance and deferred financing
costs, net 7,532 272
Lessee incentive 467 567
Other receivable - 84
Deferred income taxes 60,738 54,357
------------ ------------
Total Other Assets 68,737 55,280
------------ ------------
TOTAL ASSETS $ 461,972 $ 480,738
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 2,166 $ 5,048
Accounts payable-construction 805 805
Accrued expenses 22,482 17,801
Accrued payroll and related expenses 10,185 12,395
Current portion of capital lease
obligation 439 436
Current portion of notes payable to
related party - 14,796
------------ ------------
Total Current Liabilities 36,077 51,281
------------ ------------
Long-Term Liabilities:
Notes payable to related party - 86,456
Notes payable 215,000 -
Accrued lessee incentive 568 568
Capital lease obligations, less current
portion 3,527 3,555
Deferred income taxes - 5,134
Other 5,257 3,399
------------ ------------
Total Long-Term Liabilities 224,352 99,112
------------ ------------
TOTAL LIABILITIES 260,429 150,393
------------ ------------
Commitments and Contingencies (note 3)
Stockholders' Equity:
Common stock - 10
Additional paid-in-capital 171,396 293,460
Retained earnings 30,147 36,875
------------ ------------
Total Stockholders' Equity 201,543 330,345
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 461,972 $ 480,738
============ ============
See notes to consolidated financial statements.
-1-
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
2004 2003
---------- ----------
(In thousands) (UNAUDITED)
REVENUES:
Casino $ 82,391 $ 73,998
Hotel 27,723 23,572
Food and beverage 33,420 29,847
Tower, retail and other income 16,580 14,540
---------- ----------
Gross Revenues 160,114 141,957
Less promotional allowances 11,745 11,404
---------- ----------
NET REVENUES 148,369 130,553
---------- ----------
COSTS AND EXPENSES:
Casino 31,182 30,620
Hotel 11,536 10,565
Food and beverage 23,664 22,133
Other operating expenses 6,566 7,291
Selling, general and administrative 37,327 37,787
Depreciation and amortization 12,314 10,272
---------- ----------
Total Costs and Expenses 122,589 118,668
---------- ----------
INCOME FROM OPERATIONS 25,780 11,885
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 955 270
Interest expense (9,747) (2,755)
Gain (Loss) on sale of assets 144 85
---------- ----------
Total Other Expense, net (8,648) (2,400)
---------- ----------
INCOME BEFORE INCOME TAXES 17,132 9,485
Provision for Income Taxes 5,944 4,394
---------- ----------
NET INCOME $ 11,188 $ 5,091
========== ==========
See notes to consolidated financial statements.
-2-
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
2004 2003
-------- --------
(In thousands) (UNAUDITED)
REVENUES:
Casino $ 39,799 $ 36,145
Hotel 13,835 11,622
Food and beverage 16,719 14,745
Tower, retail and other income 8,604 7,862
-------- --------
Gross Revenues 78,957 70,374
Less promotional allowances 5,597 5,551
-------- --------
NET REVENUES 73,360 64,823
-------- --------
COSTS AND EXPENSES:
Casino 15,486 15,233
Hotel 5,940 5,368
Food and beverage 12,044 11,453
Other operating expenses 3,415 3,766
Selling, general and administrative 19,147 19,130
Depreciation and amortization 6,431 5,005
-------- --------
Total Costs and Expenses 62,463 59,955
-------- --------
INCOME FROM OPERATIONS 10,897 4,868
-------- --------
OTHER INCOME (EXPENSE):
Interest income 691 189
Interest expense (5,376) (1,450)
Gain (Loss) on sale of assets 148 85
-------- --------
Total Other Expense, net (4,537) (1,176)
-------- --------
INCOME BEFORE INCOME TAXES 6,360 3,692
Provision for Income Taxes 1,390 1,993
-------- --------
NET INCOME $ 4,970 $ 1,699
======== ========
See notes to consolidated financial statements.
-3-
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
2004 2003
---------- ----------
(In thousands) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,188 $ 5,091
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,314 10,272
(Gain) Loss on sale or disposal of assets (144) (85)
Provision for deferred income taxes 2,830 -
Changes in operating assets and liabilities:
Restricted Cash (447) 173
Accounts receivable, net (498) 415
Other current assets (678) 1,218
Accounts payable - trade (2,882) (494)
Accrued expenses 2,455 5,613
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,138 22,203
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investments - restricted 52 (1,000)
Proceeds from sale of marketable securities 4,200 -
Acquisition of property and equipment (9,925) (3,837)
Related party receivables 44 (45)
Cash proceeds from sale of property and equipment 398 85
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (5,231) (4,797)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issuance and deferred financing costs (1,060) -
Proceeds from notes payable 215,000 -
Member contribution 28,219 -
Capital distribution (187,816) -
Payments of related party notes payable (101,252) (2,138)
Payments on capital lease obligation (25) -
---------- ----------
NET CASH (PROVIDED BY) USED IN FINANCING ACTIVITIES (46,934) (2,138)
---------- ----------
Net increase in cash and cash equivalents (28,027) 15,268
Cash and cash equivalents - beginning of period 77,258 59,343
---------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 49,231 $ 74,611
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 2,342 $ 3,295
========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Net assets contributed by parent $ 6,886 $ -
========== ==========
Change in tax asset related to acquisition $ 12,721 $ -
========== ==========
See notes to consolidated financial statements.
-4-
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON ADDITIONAL RETAINED TOTAL
STOCK PAID-IN-CAPITAL EARNINGS EQUITY
------------ --------------- ------------ ------------
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
============ ============ ============ ============
CANCELLATION OF COMMON SHARES (10) 10 - -
CHANGE IN DEFERRED TAX ASSET
RELATED TO ACQUISITION - 12,721 - 12,721
CONTRIBUTIONS - 35,105 - 35,105
DISTRIBUTIONS - (169,900) (17,916) (187,816)
NET INCOME - - 11,188 11,188
------------ ------------ ------------ ------------
BALANCES AT JUNE 30, 2004 (UNAUDITED) $ - $ 171,396 $ 30,147 $ 201,543
============ ============ ============ ============
See notes to consolidated financial statements.
-5-
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COMPANY
American Casino & Entertainment Properties LLC (ACEP) was formed in Delaware on
December 29, 2003. ACEP is comprised of American Casino & Entertainment
Properties LLC, American Casino & Entertainment Properties Finance Corp.,
Stratosphere Corporation and its wholly-owned subsidiaries, Stratosphere Gaming
Corporation., Stratosphere Land Corporation, Stratosphere Advertising Agency,
Stratosphere Leasing, LLC, and Stratosphere Development, LLC, an entity
controlled by Stratosphere Corporation; Arizona Charlie's, LLC,the entity which
owns and operates Arizona Charlie Decatur, and its wholly owned subsidiary
Jetset Tours, LLC; and Fresca, LLC, the entity which owns and operates Arizona
Charlie's Boulder (collectively the "Company"). The Company operates integrated
casinos, hotels, a 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 consolidation.
ACEP owns and operates three gaming and entertainment properties in Las Vegas,
Stratosphere, Arizona Charlie's Decatur and Arizona Charlie's Boulder. Pursuant
to a membership interest purchase agreement with Mr. Icahn and Starfire Holding
Corporation, an entity wholly-owned by Mr. Icahn, ACEP purchased 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, pursuant to
a contribution agreement with ACEP's direct parent, American Entertainment
Properties Corp., and ACEP's indirect parent, American Real Estate Holdings
Limited Partnership, or AREH, in which AREH contributed 100% of the outstanding
capital stock of Stratosphere Corporation to ACEP. This contribution was
approved by the Nevada Gaming Commission upon the recommendation of the Nevada
State Gaming Control Board. These transactions represent a merger of entities
under the common control of Carl C. Icahn. Accordingly, the historical cost
basis of the underlying net assets was retained in the combination for all
dates prior to May 26, 2004. These statements were presented on a combined
basis. As a result of obtaining the formal approval from the gaming commission,
the legal presentation now requires consolidation. Accordingly, the financial
statements are referred to as consolidated.
On January 29, 2004, the Company issued $215,000,000 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 three Las Vegas,
Nevada gaming and entertainment properties from affiliated parties described
above, to repay intercompany debt and for distributions. The notes 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. Pending consummation of the
acquisitions, the perfection of security interests in the assets of the
properties acquired, the receipt of all necessary approvals of the Nevada Gaming
Commission upon the recommendation of the Nevada State Gaming Control Board and
certain other events, the net proceeds of the offering, together with an
additional amount sufficient to fund a special redemption obligation, were held
in escrow in a note proceeds account. On May 26, 2004, upon closing of the
acquisitions, perfection of such security interests, receipt of necessary
approvals of the Nevada Gaming Commission upon the recommendation of the Nevada
State Gaming Control Board and certain other events, the funds held in escrow in
the note proceeds account and additional cash on hand were used in connection
with the acquisitions, to repay intercompany indebtedness, to fund distributions
to ACEP's parent company and to pay related fees and expenses.
BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared in accordance
with the accounting policies described in the Company's 2003 audited combined
financial statements. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, the Company suggests
these condensed consolidated financial statements be read in conjunction with
the notes to the 2003 audited combined financial statements which appear in that
report.
In the opinion of management, the accompanying condensed consolidated financial
statements include all adjustments (consisting only of a normal recurring
nature) which are necessary for a fair presentation of the
6
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
results for the interim periods presented. Certain information and footnote
disclosures normally included in financial statements have been condensed or
omitted pursuant to such rules and regulations of the Securities and Exchange
Commission. Interim results are not necessarily indicative of results to be
expected for any future interim period or for the entire fiscal year. All
significant intercompany accounts and transactions have been eliminated in
combination.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years consolidated
financial statements to conform to the current presentation.
(2) INCOME TAXES
The tax effect of significant temporary differences representing deferred tax
assets for the Company principally consist of the excess of tax over book basis
of assets due to the write down of assets for book purposes.
(3) CONTINGENCIES
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 combined 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 Combined 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 $446,379.
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 probable 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 February 25, 2005. The Stratosphere Parties intend to vigorously
defend the action for claims in excess of $1,004,059.
7
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We own and operate three gaming and entertainment properties in the Las
Vegas metropolitan area. The three properties are the Stratosphere, Arizona
Charlie's Decatur and Arizona Charlie's Boulder. Each of our properties offers
customers a value-oriented experience by providing competitive odds in our
casinos, high-quality rooms in our hotels, award-winning dining facilities and,
at the Stratosphere, an offering of entertainment attractions found nowhere else
in Las Vegas.
A majority of our revenues are generated by our casino operations. Two of
our key drivers of gaming revenues are average win per slot machine per day and
average win per table game per day. In order to increase these amounts and
therefore, our casino revenues, we seek to increase customer traffic to our
properties.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Gross revenues for the six months ended June 30, 2004 were $160.1 million,
an increase of $18.2 million, or 12.8% over the six months ended June 30, 2003.
Gross revenues at the Stratosphere Casino Hotel & Tower for the six months ended
June 30, 2004 were $97.7 million, or 61.0% of gross revenues, an increase of
$9.5 million, or 10.7% over the six months ended June 30, 2003. Promotional
allowances at the Stratosphere decreased 8.5% resulting in an increase in net
revenues of $10.0 million or 12.3%. Gross revenues at Arizona Charlie's Decatur
for the six months ended June 30, 2004 were $40.9 million, or 25.5% of gross
revenues, an increase of $4.0 million, or 10.9%, as compared to the prior year
period. This increase was primarily due to an increase in casino revenues for
the six months ended June 30, 2004 compared to the six months ended June 30,
2003. Gross revenues at Arizona Charlie's Boulder for the six months ended June
30, 2004 were $21.6 million, or 13.5% of gross revenues, an increase of $4.6
million, or 27.5% over the prior year period. This increase was primarily due to
an increase in slot revenues.
CASINO REVENUES
Casino revenues during the six months ended June 30, 2004 totaled $82.4
million, or 51.5% of total revenues. This is an increase of $8.4 million, or
11.3%, as compared to the six months ended June 30, 2003. Slot machine revenues
were $66.3 million, or 80.5% of total casino revenues, and table game revenues
were $12.8 million, or 15.5% of casino revenues for the six months ended June
30, 2004 as compared to slot machine revenues of $59.9 million and table games
revenues of $11.8 million for the six months ended June 30, 2003.
Casino revenues at the Stratosphere for the six months ended June 30, 2004
were $36.0 million, an increase of $2.3 million, or 6.9%, over the six months
ended June 30, 2003, of which slot machine revenues were $24.9 million, or 69.2%
of its casino revenues, and table game revenues were $10.1 million, or 27.9% of
its casino revenues. For the six months ended June 30, 2003, Stratosphere had
slot machine revenues of $23.7 million and table games revenues of $9.3 million.
Average win per slot machine per day at Stratosphere for the six months ended
June 30, 2004 was $102.32 as compared to $89.17 for the six months ended June
30, 2003. This was due to a 4.5% decrease in the number of units compared to the
prior year period combined with an increase in floor traffic.
Casino revenues at Arizona Charlie's Decatur were $31.5 million for the
six months ended June 30, 2004 as compared to $29.0 million for the six months
ended June 30, 2003. For the six months ended June 30, 2004, slot machine
revenue was $28.2 million, or 89.6% of its casino revenues, and table game
revenues were $1.6 million, or 5.1% of casino revenues. For the six months ended
June 30, 2003, at Arizona Charlie's Decatur slot machine revenue was 90.7% of
casino revenues and table game revenues
9
were 5.0% of casino revenues. Average win per slot machine per day at Arizona
Charlie's Decatur increased from $104.52 for the six months ended June 30, 2003
to $123.76 for the six months ended June 30, 2004 due to a 3.3% decrease in the
number of units compared to the prior year period combined with an increase in
floor traffic.
Casino revenues at Arizona Charlie's Boulder for the six months ended June
30, 2004 were $14.8 million, an increase of $3.6 million as compared to $11.3
million for the six months ended June 30, 2003. Slot revenues were $13.2
million, or 88.6% of its casino revenues and table game revenues were
$1.1million or 7.5% of its casino revenues for the six months ended June 30,
2004 as compared to $10.0 million and $1.1 million, respectively, for the six
months ended June 30, 2003. Average win per slot machine per day for the six
months ended June 30, 2004 was $106.22, as compared to $76.95 for the prior year
period due to an increase in floor traffic.
NON-CASINO REVENUES
Hotel revenues for the six months ended June 30, 2004 were $27.7 million
or 17.3% of total revenues. This represented an increase of $4.2 million, or
17.6% from hotel revenues for the six months ended June 30, 2003. Hotel revenues
at the Stratosphere totaled $23.4 million for the six months ended June 30, 2004
as compared to $20.2 million for the six months ended June 30, 2003, an increase
of 16.1%. Stratosphere hotel occupancy during the period was 92.4%, as compared
to 88.1% for the six months ended June 30, 2003. Average daily room rate, or
ADR, for the Stratosphere, increased from $51.78 for the six months ended June
30, 2003 to $57.03 for the six months ended June 30, 2004 due to an increase in
room demand. Hotel revenues at Arizona Charlie's Decatur totaled $2.1 million
for the six months ended June 30, 2004, an increase of $0.4 million, or 23.6%,
from hotel revenues for the six months ended June 30, 2003. Occupancy increased
from 85.0% for the six months ended June 30, 2003 to 90.8% for the six months
ended June 30, 2004. Average daily rate for Arizona Charlie's Decatur increased
for the six months ended June 30, 2004 by 15.2% to $49.55. Hotel revenues at
Arizona Charlie's Boulder increased $0.5 million, or 29.2% to $2.2 million for
the six months ended June 30, 2004. Occupancy increased from 51.8% for the six
months ended June 30, 2003 to 62.8% for the six months ended June 30, 2004.
Average daily rate at Arizona Charlie's Boulder increased for the six months
ended June 30, 2004 by 14.7% to $48.44.
Food and beverage revenues for the six months ended June 30, 2004 totaled
$33.4 million, or 20.9% of total revenues, as compared to $29.8 million and
21.0% of total revenues for the six months ended June 30, 2003 . Food and
beverage revenues at the Stratosphere increased 10.4% from $21.1 million for the
six months ended June 30, 2003 to $23.3 million for the six months ended June
30, 2004. This was due to a 4.7% increase in food covers and price increases at
several venues at the Stratosphere. Food and beverage revenues at Arizona
Charlie's Decatur increased 18.0% to $6.1 million for the six months ended June
30, 2004. This increase was due to a 7.7% increase in covers and increased
prices. Food and beverage revenues at Arizona Charlie's Boulder increased $0.4
million, or 12.5% to $4.0 million for the six months ended June 30, 2004.
Tower, retail and other revenues increased $2.0 million, or 14.0% for the
six months ended June 30, 2004. Tower, retail and other revenues at Stratosphere
increased 13.0%, from $13.2 million in the six months ended June 30, 2003 to
$14.9 million for the six months ended June 30, 2004. Tower revenue increased
$1.8 million, primarily due to the opening of our new thrill ride. Other
operations decreased by $0.1 million due to less entertainment revenue. Retail
and other revenues at Arizona Charlie's Decatur increased $0.2 million to $1.2
million and retail and other revenues at Arizona Charlie's Boulder increased
$0.1 million to $0.5 million for the six months ended June 30, 2004.
PROMOTIONAL ALLOWANCES
Promotional allowances represent the retail value of rooms, food and
beverage, and other items that are provided to customers on a complimentary
basis. Promotional allowances for the six months ended June 30, 2004 totaled
$11.7 million, or 7.3% of gross revenues, as compared to $11.4 million, or 8.0%
of gross revenues for the six months ended June 30, 2003. Promotional allowances
at the Stratosphere were
10
$6.0 million, or 6.2% of its gross revenues, for the six months ended June 30,
2004, a decrease of 8.5% from $6.6 million, or 7.5% of its gross revenues for
the six months ended June 30, 2003. This decrease was due primarily to less
aggressive promotional policies. Promotional policies at Arizona Charlie's
Decatur were more aggressive for the six months ended June 30, 2004 with an
increase of $0.5 million to $3.6 million in allowances, or 8.8% of its gross
revenues as compared to 8.3% of its gross revenues for the six months ended June
30, 2003. Promotional allowances for the six months ended June 30, 2004 at
Arizona Charlie's Boulder were $2.1 million, or 9.9% of gross revenues, as
compared to 10.4% for the six months ended June 30, 2003.
OPERATING EXPENSES
Casino expense for the six months ended June 30, 2004 totaled $31.2
million or 37.8% of total casino revenues as compared to $30.6 million, or 41.4%
of total casino revenues, for the six months ended June 30, 2003. Casino
operating expenses were primarily comprised of salaries, wages and benefits, and
operating expenses of the casinos. Casino operating expenses at the Stratosphere
were $15.0 million, or 41.5% of its casino revenues, for the six months ended
June 30, 2004 as compared to $14.8 million, or 43.7% of its casino revenues, for
the six months ended June 30, 2003. This increase of $0.2 million, or 1.4%, in
casino operating expenses is due primarily to increased revenue taxes relating
to higher gaming revenues. Casino expenses at Arizona Charlie's Decatur
decreased $0.1 million, or 1.7% of its casino revenues for the six months ended
June 30, 2004. Casino expenses at Arizona Charlie's Boulder increased $0.5
million, or 7.9%, but were only 42.0% of its casino revenues for the six months
ended June 30, 2004 as compared to 51.3% of casino revenues for the six months
ended June 30, 2003. This is primarily due to a reduction in the cost of
employee benefits.
Selling, general and administrative expenses decreased $0.5 million or
1.2% for the six months ended June 30, 2004. Selling, general and administrative
expenses at the Stratosphere were $22.7 million, or 23.3% of its gross revenues,
for the six months ended June 30, 2004 as compared to $22.3 million, or 25.3% of
its gross revenues, for the six months ended June 30, 2003. This decrease of
$0.4 million, or 1.8%, in selling, general and administrative expenses was due
primarily to a decrease in complimentaries. Selling, general and administrative
expenses at Arizona Charlie's Decatur were $9.1 million, or 22.3% of its gross
revenues for the six months ended June 30, 2004 as compared to $9.4 million, or
25.4% of its gross revenues for the six months ended June 30, 2003. Selling,
general and administrative expenses at Arizona Charlie's Boulder totaled $5.5
million, or 25.4% of gross revenues for the six months ended June 30, 2004 as
compared to $6.1 million or 35.9% of gross revenues, for the six months ended
June 30, 2003.
INCOME FROM OPERATIONS
Income from operations for the six months ended June 30, 2004 was $25.8
million, an increase of $13.9 million, or 116.9% from the six months ended June
30, 2003. Income from operations at the Stratosphere for the six months ended
June 30, 2004 was $15.6 million as compared to $8.0 million for the six months
ended June 30, 2003. This increase of $7.6 million, or 94.4%, was due to
increased revenues and cost containment programs. Income from operations at
Arizona Charlie's Decatur for the six months ended June 30, 2004 was $8.5
million as compared to $6.8 million for the six months ended June 30, 2003. This
increase of $1.7 million, or 24.8%, was due to increased slot revenues. Income
from operations at Arizona Charlie's Boulder for the six months ended June 30,
2004 was $1.7 million as compared to a loss of $2.9 million for the six months
ended June 30, 2003. This increase was primarily due to increased slot revenues
and reduced selling, general, and administrative expenses.
QUARTER ENDED JUNE 30, 2004 COMPARED TO QUARTER ENDED JUNE 30, 2003
Gross revenues for the quarter ended June 30, 2004 were $78.9 million, an
increase of $8.6 million, or 12.2% over the quarter ended June 30, 2003. Gross
revenues at the Stratosphere for the quarter ended June 30, 2004 were $48.6
million, or 61.6% of gross revenues, an increase of $4.4 million as compared to
revenues for the quarter ended June 30, 2003. Promotional allowances decreased
16.4% resulting in an increase in net revenues of $5.0 million or 12.1%. Gross
revenues at Arizona Charlie's Decatur for the quarter ended June 30, 2004 were
$19.9 million, or 25.2% of gross revenues, an increase of
11
$1.9 million, or 10.6%, as compared to the prior year period. This increase was
primarily due to an increase in casino revenues for the quarter ended June 30,
2004 compared to the quarter ended June 30, 2003. Gross revenues at Arizona
Charlie's Boulder were $10.4 million, or 13.2% of revenues, an increase of $2.2
million, or 27.1% over the prior year period. This increase was primarily due to
an increase in slot revenues.
CASINO REVENUES
Casino revenues during the quarter ended June 30, 2004 totaled $39.8
million, or 50.4% of total revenues. This in an increase of $3.7 million, or
10.1%, as compared to the quarter ending June 30, 2003. Slot machine revenues
were $32.7 million, or 82.2% of total casino revenues, and table game revenues
were $5.9 million, or 14.8% of casino revenues for the quarter ended June 30,
2004 as compared to slot machine revenues of $29.9 million and table game
revenues of $5.4 million for the quarter ended June 30, 2003.
Casino revenues at the Stratosphere for the quarter ended June 30, 2004
were $17.3 million, an increase of $1.0 million, or 5.8%, over the quarter ended
June 30, 2003, of which slot machine revenues were $12.3 million, or 71.3% of
its casino revenues, and table game revenues were $4.7 million, or 27.1% of its
casino revenues. For the quarter ended June 30, 2003, Stratosphere had slot
machine revenues of $11.7 million and table game revenues of $4.3 million.
Average win per slot machine per day at Stratosphere for the quarter ended June
30, 2004 was $99.38 as compared to $89.98 for the quarter ended June 30, 2003.
This was due to an increase in floor traffic.
Casino revenues at Arizona Charlie's Decatur were $15.3 million for the
quarter ended June 30, 2004 as compared to $14.2 million for the quarter ended
June 30, 2003. For the quarter ended June 30, 2004, slot machine revenue was
$13.8 million, or 90.5% of its casino revenues, and table game revenues were $.7
million, or 4.5% of casino revenues. For the quarter ended June 30, 2003, at
Arizona Charlie's Decatur slot machine revenue was 92.0% of casino revenues and
table game revenues were 4.6% of casino revenues. Average win per slot machine
per day at Arizona Charlie's Decatur increased from $103.76 for the quarter
ended June 30, 2003 to $121.56 for the quarter ended June 30, 2004.
Casino revenues at Arizona Charlie's Boulder for the quarter ended June
30, 2004 were $7.2 million, an increase of $1.6 million as compared to $5.5
million the quarter ended June 30, 2003. Slot revenues were $6.5 million, or
90.9% of its casino revenues and table game revenues were $.5 million or 6.9% of
its casino revenues for the quarter ended June 30, 2004 as compared to $5.1
million and $.5 million, respectively, for the quarter ended June 30, 2003.
Average win per slot machine per day for the quarter ended June 30, 2004 was
$107.02, as compared to $75.84 the prior year due to an increase in floor
traffic.
NON-CASINO REVENUES
Hotel revenues for the quarter ended June 30, 2004 were $13.8 million or
17.5% of total revenues. This represented an increase of $2.2 million, or 19.0%,
from hotel revenues for the quarter ended June 30, 2003. Hotel revenues at the
Stratosphere totaled $11.8 million for the quarter ended June 30, 2004 as
compared to $10.0 million for the quarter ended June 30, 2003, an increase of
17.4%. Stratosphere hotel occupancy during the period was 94.7%, as compared to
87.3% for the quarter ended June 30, 2003. Average daily room rate, or ADR,
increased from $51.66 for the quarter ended June 30, 2003 to $55.92 for the
quarter ended June 30, 2004 due to an increase in room demand. Hotel revenues at
Arizona Charlie's Decatur totaled $1.0 million for the quarter ended June 30,
2004, an increase of $.2 million or 24.8% from hotel revenues for the quarter
ended June 30, 2003. Occupancy increased from 81.5% for the quarter ended June
30, 2003 to 88.9% for the quarter ended June 30, 2004. Average daily rate
increased for the quarter ended June 30, 2004 by 14.5% to $50.19. Hotel revenues
at Arizona Charlie's Boulder increased $.3 million, or 34.6% to $1.0 million for
the quarter ended June 30, 2004. Occupancy increased from 46.7% for the quarter
ended June 30, 2003 to 57.7% for the quarter ended June 30, 2004. Average daily
rate increased for the quarter ended June 30, 2004 by 20.0% to $50.47.
12
Food and beverage revenues for the quarter ended June 30, 2004 totaled
$16.7 million or 21.2% of total revenues, as compared to $14.7 million and 21.0%
for the quarter ended June 30, 2003. Food and beverage revenues at the
Stratosphere increased 10.3% from $10.6 million for the quarter ended June 30,
2003 to $11.7 million for the quarter ended June 30, 2004. This was due to a
7.8% increase in food covers and price increases at several venues. Food and
beverage revenues at Arizona Charlie's Decatur increased 24.8% to $3.0 million
for the quarter ended June 30, 2004. This increase was due to a 12.5% increase
in covers and increased prices. Food and beverage revenues at Arizona Charlie's
Boulder increased $.3 million, or 16.5% to $1.9 million for the quarter ended
June 30, 2004.
Tower, retail and other revenues increased $.7 million, or 9.4% for the
quarter ended June 30, 2004. Tower, retail and other revenues at Stratosphere
increased 9.0%, from $7.1 million in the quarter ended June 30, 2003 to $7.8
million for the quarter ended June 30, 2004. Tower revenue increased $1.0
million, primarily due to the opening of our new thrill ride. Other operations
decreased by $0.3 million due to less entertainment revenue. Retail and other
revenues at Arizona Charlie's Decatur remained flat at $.5 million and retail
and other revenues at Arizona Charlie's Boulder remained flat at $.3 million for
the quarter ended June 30, 2004.
PROMOTIONAL ALLOWANCES
Promotional allowances represent the retail value of rooms, food and
beverage, and other items that are provided to customers on a complimentary
basis. Promotional allowances for the quarter ended June 30, 2004 totaled $5.6
million or 7.1% of gross revenues as compared to $5.6 million, or 7.9% for the
quarter ended June 30, 2003. Promotional allowances at the Stratosphere were
$2.7 million, or 5.5% of its gross revenues, for the quarter ended June 30,
2004, a decrease of 16.4% from $3.2 million, or 7.3% of its gross revenues for
the quarter ended June 30, 2003. This decrease was due primarily to less
aggressive promotional policies. Promotional policies at Arizona Charlie's
Decatur were more aggressive for the quarter ended June 30, 2004 with an
increase of $.3 million to $1.8 million in allowances, 9.2% of its gross
revenues as compared to 8.4% for the quarter ended June 30, 2003. Promotional
allowances for the quarter ended June 30, 2004 at Arizona Charlie's Boulder were
$1.1 million, or 10.2% of gross revenues as compared to 10.1% for the quarter
ended June 30, 2003.
OPERATING EXPENSES
Casino expense for the quarter ended June 30, 2004 totaled $15.5 million,
or 38.9% of total casino revenues as compared to $15.2 million, or 42.1% of
revenues, for the quarter ended June 30, 2003. Casino operating expenses were
primarily comprised of salaries, wages and benefits, and operating expenses of
the casinos. Casino operating expenses at the Stratosphere were $7.3 million, or
42.1% of its casino revenues, for the quarter ended June 30, 2004 as compared to
$7.2 million, or 43.9% of its casino revenues, for the quarter ended June 30,
2003. This increase of $.1 million or 1.6% in casino operating expenses is due
primarily to increased revenue taxes relating to higher gaming revenues. Casino
expenses at Arizona Charlie's Decatur decreased $.2 million, or 3.2% for the
quarter ended June 30, 2004. Casino expenses at Arizona Charlie's Boulder
increased $.3 million or 10.3% but were only 44.7% of its casino revenues for
the quarter ended June 30, 2004 as compared to 52.6% for the quarter ended June
30, 2003. This is primarily due to a reduction in the cost of employee benefits.
Selling, general and administrative expenses remained flat at $19.1
million for the quarter ended June 30, 2004. Selling, general and administrative
expenses at the Stratosphere were $11.7 million, or 24.1% of its gross revenues,
for the quarter ended June 30, 2004 as compared to $11.8 million, or 26.8% of
its gross revenues, for the quarter ended June 30, 2003. This decrease of $.1
million or 1.1% in operating expenses was due primarily to a decrease in
complimentaries. Selling, general and administrative expenses at Arizona
Charlie's Decatur were $4.7 million, or 23.5% of its gross revenues for the
quarter ended June 30, 2004 as compared to $4.5 million, or 25.1% of its gross
revenues for the quarter ended June 30, 2003. Selling, general and
administrative expenses at Arizona Charlie's Boulder totaled $2.8 million, or
26.5% of gross revenues for the quarter ended June 30, 2004 as compared to $2.8
million or 34.1% of gross revenues, for the quarter ended June 30, 2003.
13
INCOME FROM OPERATIONS
Income from operations for the quarter ended June 30, 2004 was $10.9
million, an increase of $6.0 million, or 123.9% from the quarter ended June 30,
2003. Income from operations at the Stratosphere for the quarter ended June 30,
2004 was $7.3 million as compared to $3.4 million for the quarter ended June 30,
2003. This increase of $3.8 million or 111.5% was due to increased revenues and
cost containment programs. Income from operations at Arizona Charlie's Decatur
for the quarter ended June 30, 2004 was $3.3 million as compared to $3.1 million
for the quarter ended June 30, 2003. This increase of $0.2 million or 5.2% was
due to increased slot revenues. Income from operations at Arizona Charlie's
Boulder for the quarter ended June 30, 2004 was $0.3 million as compared to a
loss of $1.7 million the quarter ended June 30, 2003. This increase was
primarily due to increased slot revenues and reduced selling, general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
We completed the acquisitions of three Las Vegas, Nevada gaming and
entertainment properties from affiliated parties on May 26, 2004. We applied the
net proceeds from the offering of our $215 million principal amount of 7.85%
senior secured notes due 2012 to pay the acquisition price for two of the
properties, repay indebtedness owed to our parent, to make a distribution to our
parent and to pay fees and expenses of the offering.
Pending consummation of the acquisitions, the perfection of security
interests in the assets of the properties acquired, the receipt of all necessary
approvals of the Nevada Gaming Commission upon the recommendation of the Nevada
State Gaming Control Board and certain other events, the net proceeds of the
offering, were held in escrow in a note proceeds account, together with an
additional amount sufficient to fund a special redemption obligation if, among
other things, the acquisitions were not completed by August 31, 2004. Upon
closing of the acquisitions, perfection of such security interests, receipt of
necessary approvals of the Nevada Gaming Commission upon the recommendation of
the Nevada State Gaming Control Board and such other events, the funds held in
escrow in the note proceeds account and additional cash on hand were used in
connection with the acquisitions, to repay intercompany indebtedness, to fund
distribution to our parent company and to pay related fees and expenses.
At June 30, 2004, we had cash and cash equivalents of $49.2 million. Upon
the release of funds from the escrow account, we retained an amount equal to
accrued interest through the date of release, May 26, 2004, plus an amount equal
to estimated unpaid fees and expenses related to the notes offering. Our capital
expenditures for 2003 were $33.5 million. We currently anticipate capital
expenditures for 2004 and 2005 to be approximately $15.0 million for each year.
We expect to fund our operating and capital needs, as currently
contemplated, with operating cash flows and, if necessary, borrowings under our
senior secured revolving credit facility entered into by American Casino &
Entertainment Properties LLC, as borrower, and certain of its subsidiaries, as
guarantors. The senior secured revolving credit facility allows for borrowings
of up to $20.0 million, subject to us complying with financial and other
covenants, until January 29, 2008.
We met our capital requirements in 2003 through net cash from operating
activities. For the six months ended June 30, 2004, net cash provided by
operating activities totaled approximately $24.1 million and cash used for
investing activities totaled $5.2 million, compared to approximately $22.2
million provided by operating activities and $4.8 million used in investing
activities for the six months ended June 30, 2003.
Management believes borrowings available under the senior secured
revolving credit facility and operating cash flows will be adequate to meet our
anticipated future requirements for working capital, capital expenditures and
scheduled interest payments on the notes and under the senior secured revolving
credit facility, lease payments and other permitted indebtedness at least
through the next twelve months. Although no additional financing is currently
contemplated, we will seek, if necessary and to the extent permitted under the
indenture governing the notes and the terms of the senior secured revolving
credit
14
facility, additional financing through bank borrowings or debt or equity
financings. 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 developments or other unforeseen events may occur, resulting in the
need to raise additional funds.
The following table summarizes contractual obligations and commitments to
make future payments under certain contracts, including long-term debt
obligations, and operating leases at June 30, 2004.
PAYMENTS DUE BY PERIOD
----------------------------------------------------
LESS THAN AFTER
CONTRACTUAL OBLIGATIONS AND COMMITMENTS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
- --------------------------------------- -------- --------- --------- --------- --------
(IN THOUSANDS)
Long-term debt ........................ $215,000 $ -- $ -- $ -- $215,000
Capital leases ........................ 11,358 665 1,995 1,288 7,362
-------- -------- -------- -------- --------
Total cash obligations ................ $226,358 $ 665 $ 1,995 $ 1,337 $222,362
======== ======== ======== ======== ========
QUALITATIVE AND QUANTITATIVE INFORMATION ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates and
commodity prices. Our primary exposure to market risk is interest rate risk
associated with our long-term debt.
As of March 31, 2004, Stratosphere had an intercompany note payable to
AREH of $76.3 million, which bore interest at a rate of 90-day LIBOR plus a
spread of 3.0%. Upon the closing of the acquisitions, we repaid this note. All
of our debt is at a fixed rate of interest. We can borrow, from time to time, up
to $20.0 million under the senior secured revolving credit facility for working
capital purposes. At March 31, 2004, we could not borrow under the facility,
pending completion of the acquisitions. At June 30, 2004, there was not any
amount 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. Based on the borrowing rates
currently available to us for debt with similar terms and average maturities,
the estimated fair value of long-term debt outstanding is approximately $219
million as of June 30, 2004.
We do not invest in derivative financial instruments, interest rate swaps
or other investments that alter interest rate exposure.
FORWARD-LOOKING STATEMENTS
We are including the following cautionary statement in this report to make
applicable and to take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements made
by, or on behalf of us. With the exception of historical matters, the matters
discussed in this report are forward looking statements. Forward-looking
statements may relate to, among other things, future performance generally,
business development activities, future capital expenditures, financing sources
and availability and the effects of regulation and competition. When we use the
words "believe," "intend," "expect," "may," "will," "should," "anticipate,"
"could," "estimate," "plan," "predict," "project," or their negatives, or other
similar expressions, the statements which include those words are usually
forward-looking statements. When we describe strategy that involves risks or
uncertainties, we are making forward-looking statements.
We warn you that forward-looking statements are only predictions. Actual
events or results may differ as a result of risks that we face, including those
set forth in the section of American Casino & Entertainment Properties LLC and
American Casino & Entertainment Properties Finance Corp.'s Form S-4 filed with
the Securities and Exchange Commission on August 12, 2004, and any pre-effective
and post-
15
effective amendments filed, thereto. These risks, uncertainties and
contingencies include, but are not limited to, the following:
- We face substantial competition in the hotel and casino industry.
- We compete with the continued growth of gaming on Native American
tribal lands, particularly in California.
- The existence of legalized gambling in other jurisdictions may
reduce the number of visitors to Las Vegas.
- The gaming industry is highly regulated and the Nevada gaming
authorities and state and municipal licensing authorities have
significant control over our operations.
- Potential changes in the tax or regulatory environment could
increase our expenses and reduce our 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 properties rely exclusively on the Las Vegas economic market,
and changes adversely impacting that market could reduce our revenue
and cash flow.
- Our properties use significant amounts of electricity, natural gas
and other forms of energy, and energy price increases may reduce our
working capital.
- Our properties use significant amounts of water and a water shortage
may adversely affect our operations.
- 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.
- The opening of the Las Vegas Monorail may divert customers from our
properties to other competitors whose properties are more
conveniently accessed by the monorail system.
- An increase in the cost of health care benefits could have a
negative impact on our profitability.
- We may incur higher costs or work slow-downs or stoppages due to
union activities in Las Vegas.
- Our stockholder and its control person could exercise its influence
over us to your detriment.
- We are heavily dependent on the Stratosphere for a large percentage
of our operating cash flow and Arizona Charlie's Boulder has a
history of negative operating cash flow.
- Our reliance on slot machine revenues and the concentration of
manufacturing of slot machines in certain companies could impose
additional costs on us.
- We may be subject to the pension liabilities of our affiliates.
16
- Our insurance coverage may not be adequate to cover all possible
losses that the Stratosphere, Arizona Charlie's Decatur and Arizona
Charlie's Boulder could suffer. In addition, our insurance costs may
increase and we may not be able to obtain the same insurance
coverage in the future.
- Our substantial indebtedness could reduce our cash flow and prevent
us from fulfilling our obligations under the notes.
- Despite current indebtedness levels, we and our subsidiaries may
still be able to incur substantially more debt. This could further
exacerbate the risks associated with our substantial leverage.
- The terms of the senior secured revolving credit facility and other
agreements we may enter into may restrict our current and future
operations, particularly our ability to respond to changes or to
take some actions.
- Our failure to comply with the covenants contained in the senior
secured revolving credit facility, the indenture governing the notes
or any other agreement governing our first-priority lien debt,
including our failure as a result of events beyond our control,
could result in an event of default, which would materially and
adversely affect our financial condition.
- To service our indebtedness, we will require a significant amount of
cash. Our ability to generate cash depends on many factors beyond
our control.
- We may not have the ability to raise the funds necessary to finance
the change of control offer required by the indenture.
Forward-looking statements speak only as of the date they were made and we
undertake no obligation to update them.
17