10-Q 1 acep0630201610q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark one)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016
OR

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________to ____________

Commission File Number: 000-52975

American Casino & Entertainment Properties LLC
(Exact name of registrant as specified in its charter)

 
Delaware
 
20-0573058
 
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
 
incorporation or organization)
 
Identification No.)
 
 
 
 
 
 
 
2000 Las Vegas Boulevard South
 
 
 
 
Las Vegas, NV
 
89104
 
 
(Address of principal executive offices)
 
(Zip code)
 

(702) 380-7777
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer q
Accelerated filer q
Non-accelerated filer x (Do not check if a smaller reporting company)
Smaller reporting company q
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý






TABLE OF CONTENTS
 
 
 
 
Page
Part I
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
Part II
 
 
 
 
 
 
Item 6.


i



PART I-FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements.

AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
 
As of
June 30, 2016
 
As of
December 31, 2015
 
(Unaudited)
 
 
 
(In thousands)
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
62,674

 
$
71,763

Investments - restricted
189

 
189

Accounts receivable, net
5,207

 
5,205

Other current assets
13,998

 
13,022

Total Current Assets
82,068

 
90,179

Property and equipment, net
1,053,942

 
1,053,810

Intangible and other assets
15,597

 
15,637

Total Assets
$
1,151,607

 
$
1,159,626

 
 
 
 
Liabilities and Members' Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
6,700

 
$
5,933

Accrued expenses
17,641

 
16,556

Accounts payable and accrued expenses - related party
19

 
8

Accrued payroll and related expenses
12,837

 
13,329

Current portion of long-term debt
2,950

 
2,950

Total Current Liabilities
40,147

 
38,776

 
 
 
 
Long-Term Liabilities:
 
 
 
Long-term debt, net of unamortized discount and issuance costs
246,607

 
280,887

Long-term debt - related party, net of unamortized discount and issuance costs

 
517

Capital lease obligations, less current portion
948

 
948

Total Long-Term Liabilities
247,555

 
282,352

 
 
 
 
Total Liabilities
287,702

 
321,128

 
 
 
 
Commitments and Contingencies


 


 
 
 
 
Members' Equity:
 
 
 
Members' Equity
863,905

 
838,498

Total Members' Equity
863,905

 
838,498

Total Liabilities and Members' Equity
$
1,151,607

 
$
1,159,626

See notes to condensed consolidated financial statements.

1



AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three months ended June 30,
 
2016
 
2015
 
(Unaudited)
(In thousands)
Revenues:
 
 
 
Casino
$
52,417

 
$
51,580

Hotel
23,007

 
21,998

Food and beverage
21,133

 
20,100

Tower, retail, entertainment and other
8,556

 
8,926

Gross revenues
105,113

 
102,604

Less promotional allowances
7,168

 
6,876

Net revenues
97,945

 
95,728

 
 
 
 
Costs And Expenses:
 
 
 
Casino
16,495

 
15,757

Hotel
9,685

 
9,530

Food and beverage
15,534

 
14,874

Other operating expenses
2,524

 
2,799

Selling, general and administrative
31,274

 
30,772

Depreciation and amortization
6,747

 
7,376

Gain on disposal of assets

 
(32
)
Total costs and expenses
82,259

 
81,076

 
 
 
 
Income From Operations
15,686

 
14,652

 
 
 
 
Other Expense:
 
 
 
Loss on debt redemption

 
(1,128
)
Interest expense
(3,336
)
 
(6,088
)
Interest expense - related party
(12
)
 
(1
)
Total other expense
(3,348
)
 
(7,217
)
 
 
 
 
Net Income
$
12,338

 
$
7,435


See notes to condensed consolidated financial statements.



2



AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Six months ended June 30,
 
2016
 
2015
 
(Unaudited)
(In thousands)
Revenues:
 
 
 
Casino
$
108,026

 
$
106,658

Hotel
44,629

 
41,385

Food and beverage
41,043

 
39,082

Tower, retail, entertainment and other
16,603

 
17,121

Gross revenues
210,301

 
204,246

Less promotional allowances
14,341

 
14,148

Net revenues
195,960

 
190,098

 
 
 
 
Costs And Expenses:
 
 
 
Casino
33,455

 
32,186

Hotel
18,835

 
18,254

Food and beverage
30,103

 
28,819

Other operating expenses
5,080

 
5,623

Selling, general and administrative
62,037

 
61,499

Depreciation and amortization
13,366

 
14,719

Gain on disposal of assets

 
(68
)
Total costs and expenses
162,876

 
161,032

 
 
 
 
Income From Operations
33,084

 
29,066

 
 
 
 
Other Expense:
 
 
 
Loss on debt redemption
(1,053
)
 
(1,128
)
Interest expense
(7,160
)
 
(12,380
)
Interest expense - related party
(23
)
 
(141
)
Total other expense
(8,236
)
 
(13,649
)
 
 
 
 
Net Income
$
24,848

 
$
15,417


See notes to condensed consolidated financial statements.


3



AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six months ended June 30,
 
2016
 
2015
 
(Unaudited)
(In thousands)
Cash Flows From Operating Activities:
 
 
 
Net income
$
24,848

 
$
15,417

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
13,366

 
14,719

Amortization of debt issuance and debt discount costs
625

 
1,207

Loss on debt redemption
1,053

 
1,128

Gain on disposal of assets

 
(68
)
Share-based compensation expense
559

 
601

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(2
)
 
(798
)
Other assets
(936
)
 
349

Accounts payable and accrued expenses
2,324

 
1,666

Related party activity, net
11

 

Net Cash Provided by Operating Activities
41,848

 
34,221

 
 
 
 
Cash Flows From Investing Activities:
 
 
 
Acquisition of property and equipment
(14,509
)
 
(7,391
)
Proceeds from sale of property and equipment
47

 
71

Net Cash Used in Investing Activities
(14,462
)
 
(7,320
)
 
 
 
 
Cash Flows From Financing Activities:
 
 
 
Payments on notes payable
(36,475
)
 
(31,075
)
Net Cash Used in Financing Activities
(36,475
)
 
(31,075
)
 
 
 
 
Net decrease in cash and cash equivalents
(9,089
)
 
(4,174
)
Cash and cash equivalents - beginning of period
71,763

 
76,953

Cash and cash equivalents - end of period
$
62,674

 
$
72,779

 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
 
 
 
Cash paid during the period for interest, net of amounts capitalized
$
6,561

 
$
11,302

 
 
 
 
Supplemental Disclosures of Non-Cash Items:
 
 
 
 
 
 
 
Accrued capital expenditures
$
365

 
$
588


See notes to condensed consolidated financial statements.

4



AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
CONDENSED CONSOLIDATED STATEMENT OF MEMBERS’ EQUITY
(Unaudited)
(In thousands)
 
Class A
Equity
 
Class B
Equity
 
Total Equity
Balance at December 31, 2015
$

 
$
838,498

 
$
838,498

Net income

 
24,848

 
24,848

Share-based compensation

 
559

 
559

Balance at June 30, 2016
$

 
$
863,905

 
$
863,905


See notes to condensed consolidated financial statements.

5



AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. The Company

American Casino & Entertainment Properties LLC, or ACEP, was formed in Delaware on December 29, 2003. As used in this Quarterly Report on Form 10-Q, the terms “ACEP”, “company”, “we”, “our”, “ours”, and “us” refer to American Casino & Entertainment Properties LLC and its subsidiaries, unless the context suggests otherwise. ACEP owns and operates the Stratosphere Casino Hotel & Tower, or the Stratosphere, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder in Las Vegas, Nevada, and the Aquarius Casino Resort, or the Aquarius, in Laughlin, Nevada.

On April 22, 2007, American Entertainment Properties Corp., or AEP, our former direct parent, entered into a Membership Interest Purchase Agreement, or the Agreement, with W2007/ACEP Holdings, LLC, or Holdings, an affiliate of Whitehall Street Real Estate Funds, or Whitehall, a series of real estate investment funds affiliated with Goldman, Sachs & Co., to sell all of our issued and outstanding membership interests to Holdings, for approximately $1.3 billion. Pursuant to the Assignment and Assumption Agreement, dated December 4, 2007, between Holdings and W2007/ACEP Managers Voteco, LLC, or Voteco, Holdings assigned all of its rights, obligations and interests under the Agreement to Voteco. Voteco’s acquisition of ACEP, or the Acquisition, closed at a purchase price of $1.2 billion on February 20, 2008.

Note 2. Basis of Presentation

The accompanying condensed consolidated financial statements included herein have been prepared by ACEP, without audit, in accordance with the accounting policies described in our 2015 audited consolidated financial statements and pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such rules and regulations. We believe that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments (consisting only of those of a normal recurring nature), which are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results to be expected for any future interim period or for the entire fiscal year.

These condensed consolidated financial statements should be read in conjunction with the notes to the 2015 consolidated audited financial statements presented in our annual report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 23, 2016 (SEC File No. 000-52975). Our reports are available electronically by visiting the SEC website at http://www.sec.gov. You may also visit the investor relations section of the American Casino & Entertainment Properties LLC website at http://www.acepllc.com.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of ACEP and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers, which is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2017. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue arising from contracts with customers is recognized. Additionally, the new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. In April 2016, FASB issued ASU No. 2016-10, Revenue from Contracts with Customers. This update provides clarification on two topics contained in ASU No. 2014-09 - identifying performance obligations and the licensing implementation guidance. The effective date for the amendments in this update is the same as ASU No. 2014-09. The Company is currently assessing the impact the adoption of this new accounting guidance will have on its consolidated financial statements and footnote disclosures.

In July 2015, FASB issued ASU No. 2015-11, Inventory. This amendment requires that inventory be measured at the lower of cost or net realizable value. This amendment applies to inventory measured using first-in, first-out or average cost methods but

6



does not apply to inventory measured using last-in, first-out or the retail inventory method. The amendments in the update will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the impact the adoption of this new accounting guidance will have on its consolidated financial statements.

In February 2016, FASB issued ASU No. 2016-02, Leases. It amends current guidance with the purpose of increasing transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact the adoption of this new accounting guidance will have on its consolidated financial statements.



Note 3. Related Party Transactions

During the three months ended June 30, 2016, we paid Goldman Sachs approximately $12,000 in interest, compared to approximately $1,000 during the three months ended June 30, 2015. During the six months ended June 30, 2016, we paid Goldman Sachs approximately $23,000 in interest, compared to approximately $141,000 during the six months ended June 30, 2015. As of June 30, 2016, Goldman Sachs owned $0 of the 2015 Term Loans and committed to provide up to $7.5 million of the 2015 Revolving Facility. As of December 31, 2015, Goldman Sachs owned approximately $517,000 of the 2015 Term Loans and committed to provide up to $7.5 million of the 2015 Revolving Credit Facility. As of June 30, 2016 and December 31, 2015, there was no accrued interest due to Goldman Sachs.

The Realty Management Division of Goldman Sachs, or Goldman Sachs RMD, provides various services to us such as environmental services and insurance brokerage. We expensed Goldman Sachs RMD fees of approximately $375,000 during the three months ended June 30, 2016, compared to $376,000 for the three months ended June 30, 2015. We expensed Goldman Sachs RMD fees of approximately $410,000 during the six months ended June 30, 2016, compared to $376,000 for the six months ended June 30, 2015. As of June 30, 2016 and December 31, 2015, we owed Goldman Sachs RMD $0.

On February 24, 2015, we entered into an agreement with Travel Tripper LLC, or TTL, to utilize their technology for online hotel reservations. TTL is owned by an affiliate of Highgate (23%) and an employee of Highgate (40%). We expensed fees of approximately $53,000 during the three months ended June 30, 2016 compared to $0 for the three months ended June 30, 2015. We expensed fees of approximately $99,000 during the six months ended June 30, 2016 compared to $0 for the six months ended June 30, 2015. As of June 30, 2016 and December 31, 2015, we owed TTL approximately $18,000 and $1,000, respectively.

On October 3, 2008, we entered into a participation agreement with Nor1, Inc., or Nor1, to utilize their technology to help sell perishable suite and room inventories. Nor1 gives the guest who books on-line the opportunity to book a non-guaranteed suite or upgraded rooms at a discounted rate if such is available at check-in. If the suite or upgraded room is awarded, Nor1 is paid 25% of the upgrade fee. Goldman Sachs owns less than 5% of Nor1. We expensed fees of approximately $5,000 during the three months ended June 30, 2016 compared to $3,000 for the three months ended June 30, 2015. We expensed fees of approximately $11,000 during the six months ended June 30, 2016 compared to $6,000 for the six months ended June 30, 2015. As of June 30, 2016 and December 31, 2015, we owed Nor1 approximately $1,000 and $7,000, respectively.

If a proposed transaction appears to or does involve a related person, the transaction is presented to our management for review. If management determines such transaction involves a related party or is unable to determine if a transaction is with a related party it will be presented to our audit committee for review. The audit committee is authorized to retain and pay such independent advisors as it deems necessary to properly evaluate the proposed transaction, including, without limitation, outside legal counsel and financial advisors to determine the fair value of the transaction.



7



Note 4. Intangible Assets

Pursuant to authoritative guidance, indefinite-lived intangible assets are subject to an annual assessment for impairment during the fourth quarter, or more frequently if there are indications of possible impairment, by applying a fair-value-based test.

Our indefinite-lived intangible assets consist of trade names. Intangible assets are recorded at cost or at fair value on the date of acquisition.

As of June 30, 2016 and December 31, 2015, we had the following indefinite-lived intangible assets.

 
 
 
June 30, 2016
 
December 31, 2015
 
Carrying
Amount
 
Carrying
Amount
 
(in thousands)
Non-amortizing intangible assets:
 
 
 
Trade Name
$
15,507

 
$
15,507

 
$
15,507

 
$
15,507


Note 5. Debt

As of the dates set forth below, long-term debt and capital lease obligations consisted of the following:
 
As of
June 30, 2016
 
As of
December 31, 2015
 
(In thousands)
2015 Term Loans due July 7, 2022, interest at a 3.75% margin above reserve-adjusted eurodollar rate, with a 1.00% floor
$
257,050

 
$
293,525

2015 Revolving Facility

 

Unamortized discount and debt issuance costs
(7,493
)
 
(9,171
)
Capital lease obligations
948

 
948

Total long-term debt and capital lease obligations
250,505

 
285,302

Current portion of long-term debt and capital lease obligations
(2,950
)
 
(2,950
)
Total long-term debt and capital lease obligations, net
$
247,555

 
$
282,352



2015 Term Loans and Revolving Facility

On July 7, 2015, the Company and certain of its subsidiaries, or the Guarantors, entered into a Credit and Guaranty Agreement, or the Credit Agreement, with the lenders party thereto from time to time, or the Lenders, Deutsche Bank AG New York Branch, or DBNY, as administrative agent and collateral agent, Goldman Sachs Lending Partners LLC or Goldman Sachs LP, and Deutsche Bank Securities Inc. or DBSI, as joint lead arrangers, joint bookrunners and co-syndication agents, and DBSI as documentation agent. The Guarantors pledged as collateral all of the real, personal and mixed property, including equity interests, in which liens are purported to be granted pursuant to the collateral documents. Pursuant to the terms of the Credit Agreement, the Lenders provided the Company with senior secured loan facilities in an aggregate principal amount of $310 million, consisting of $295 million of senior secured term loans, or the 2015 Term Loans, and a $15 million revolving credit facility, or the 2015 Revolving Facility. The maturity date of the 2015 Term Loans is the earlier to occur of (i) July 7, 2022 and (ii) the acceleration of the Term Loans, and the maturity date of the 2015 Revolving Facility is the earlier to occur of (i) July 7, 2020 and (ii) the acceleration of the 2015 Revolving Facility. The proceeds of the 2015 Term Loans were used, together with cash on hand, to repay in full the Company’s existing debt under the 2013 Credit Agreements.

The 2015 Term Loans bear interest either at a base rate plus 2.75% per annum or at the reserve-adjusted eurodollar rate plus 3.75% per annum. In the case of eurodollar rate loans, interest is computed on the basis of a 360-day year and the actual number of days between interest periods, with interest payable on the last day of each interest period of one month, two

8



months, or three months, or, in the case of interest periods longer than three months, every three months. As of June 30, 2016, all outstanding 2015 Term Loans are eurodollar loans. The 2015 Term Loans are subject to scheduled principal payments on the last day of each calendar quarter ending on and after December 31, 2015 in an amount equal to 0.25% of the original principal balance. The 2015 Term Loans are also subject to annual principal payments based on excess cash flow for the period of August 1, 2015 through December 31, 2015, and for all fiscal years ending on and after December 31, 2016 through the maturity date of the 2015 Term Loans. The percentage of excess cash flow required to be prepaid will vary based on the ratio of total indebtedness (net of unrestricted cash) to trailing four quarter adjusted EBITDA. In addition, we are entitled to, at any time, make voluntary principal prepayments to the 2015 Term Loans in amounts of $1 million or greater.

On March 31, 2016 we made a voluntary principal payment of $35.0 million to the 2015 Term Loans. We also recognized a $1.1 million loss on debt redemption in connection with this principal payment.

The 2015 Revolving Facilities bear interest at a base rate plus an applicable margin that is 1.25%1.75% or 2.25% per annum (depending on the Company’s First Lien Leverage Ratio) or the reserve-adjusted Eurodollar rate plus an applicable margin that is 2.25%2.75% or 3.25% per annum (depending on the Company’s First Lien Net Leverage Ratio). In the case of eurodollar rate revolving facilities, interest is computed on the basis of a 360-day year and the actual number of days between interest periods, with interest payable on the last day of each interest period of one month, two months, or three months, or, in the case of interest periods longer than three months, every three months. We will also pay a commitment fee equal to the applicable revolving commitment fee percentage times the average daily difference between the revolving commitments and the aggregate principal amount of any outstanding revolving loans. The applicable revolving commitment fee percentage is either 0.250% or 0.375% per annum (depending on the Company’s First Lien Net Leverage Ratio). We may at the expiration of any interest period convert all or a portion of the Revolving Facility to base rate loans or Eurodollar loans. We may at any time request voluntary commitment reductions to the Revolving Facility in amounts of $1 million or greater.

As of June 30, 2016 and December 31, 2015 there were no borrowings outstanding under the 2015 Revolving Facility.

The Credit Agreement includes a number of covenants that place restrictions on how we may operate our business, including, among others (i) restrictions on incurring other indebtedness and liens; (ii) a springing financial maintenance covenant; and (iii) restrictions on distributions, investments, acquisitions, significant asset disposals or making fundamental changes to our business. As of June 30, 2016 we were in compliance with the covenants of the Credit Agreement.

On March 31, 2015, in respect of the First Lien Term Loans, we made an "excess cash flow" principal payment for the 2014 fiscal year of approximately $9.4 million and a voluntary principal payment of $20.6 million. We also recognized a $1.1 million loss on debt redemption in connection with this principal payment.

Note 6. Legal Proceedings
 
We are, from time to time, a party to various legal proceedings arising out of our businesses. We believe, however, there are no proceedings pending or threatened against us, which, if determined adversely, would have a material adverse effect upon our financial condition, results of operations or liquidity.

Note 7. Share-Based Compensation

The Company accounts for share-based compensation under ASC 718, Compensation-Stock Compensation. We recognized share-based compensation expenses of approximately $279,000 for the three months ended June 30, 2016, compared to $150,000 for the three months ended June 30, 2015. We recognized share-based compensation expenses of approximately $559,000 for the six months ended June 30, 2016, compared to $601,000 for the six months ended June 30, 2015. These amounts are included in selling, general and administrative expenses in our Condensed Consolidated Statements of Operations.
There are 16,500,000 stock options and 2,500,000 restricted stock units, or RSUs, available for issuance under the W2007/ACEP Holdings, LLC 2013 Management Incentive Plan, or 2013 Plan, that was approved on March 26, 2014. On March 26, 2014, our Board of Directors approved the grant of 2,500,000 RSUs under the 2013 Plan to executive officers, effective April 1, 2014. RSUs only vest upon a qualifying event (generally an initial public offering, the sale or disposition of Holdings’ membership interests in the Company, or sale or other disposition of Holdings). Additionally on March 26, 2014, our Board of Directors approved the grant of 13,035,000 stock options to be measured and valued over the next three years in accordance with ASC 718, effective April 1, 2014. In 2014, the Company measured and expensed 6,517,500 stock options granted under the 2013 Plan that have already vested. In 2015, the Company measured and expensed 3,258,750 stock options granted under the 2013 Plan that have already vested. The remaining stock options will be measured and expensed ratably over the next six

9



months based on the establishment of performance and service conditions and will vest upon the achievement of such performance and service conditions. The stock options expire 10 years from the grant date.

As of June 30, 2016, we have approximately $560,000 of unrecognized incentive expense related to non-vested stock options that is expected to be recognized over a weighted-average period of approximately six months.

A summary of stock option activity for the six months ended June 30, 2016 is as follows:
 
Options
 
Exercise Price
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Life
 
 
 
 
 
 
 
(in years)
Outstanding at December 31, 2015
13,035,000

 
$
1.00

 
$
1.00

 
8.25

Granted

 

 

 

Exercised

 

 

 

Expired

 

 

 

Forfeited

 

 

 

Outstanding at June 30, 2016
13,035,000

 
$
1.00

 
$
1.00

 
7.75

Vested at June 30, 2016
9,776,250

 
$
1.00

 
$
1.00

 
7.75

Exercisable at June 30, 2016
9,776,250

 
$
1.00

 
$
1.00

 
7.75


The fair value of each stock option granted under the 2013 Plan is estimated on the date of the grant using the Black-Scholes-Merton option-pricing model.

A summary of RSU activity for the six months ended June 30, 2016 is as follows:
 
RSUs
 
Grant Date Fair Value per RSU
 
 
 
 
Outstanding at December 31, 2015
2,500,000

 
$
0.96

Granted

 

Exercised

 

Canceled

 

Vested

 

Outstanding at June 30, 2016
2,500,000

 
$
0.96


As of June 30, 2016, there was $2.4 million of total unrecognized compensation cost related to all unvested restricted stock awards. As of June 30, 2016 no shares were exercisable as the shares only vest upon the occurrence of a qualifying event. Compensation costs will be recognized when a qualifying event becomes probable.


10



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

With the exception of historical facts, the matters discussed in this quarterly report on Form 10-Q are forward looking statements. Forward-looking statements may relate to, among other things, future actions, future performance generally, business development activities, future capital expenditures, strategies, the outcome of contingencies such as legal proceedings, future financial results, financing sources and availability and the effects of regulation and competition. When we use the words “believe”, “intend”, “expect”, “may”, “will”, “should”, “anticipate”, “could”, “estimate”, “plan”, “predict”, “project”, or their negatives, or other similar expressions, the statements which include those words are usually forward-looking statements. When we describe strategy that involves risks or uncertainties, we are making forward-looking statements.

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

You should also read, among other things, the risks and uncertainties described in the section entitled Risk Factors in Item 1A of our annual report on Form 10-K, filed with the SEC on March 23, 2016 (SEC File No. 000-52975).

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

The following discussion contains management’s discussion and analysis of financial condition and results of operations. Management’s discussion and analysis should be read in conjunction with “Item 1. Financial Statements” of this quarterly report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations presented in our annual report on Form 10-K for the year ended December 31, 2015.

11



Overview

We own and operate four gaming and entertainment properties in Clark County, Nevada. These properties are the Stratosphere Casino Hotel & Tower, or the Stratosphere, which is located on the Las Vegas Strip and caters to visitors to Las Vegas, two off-Strip casinos, Arizona Charlie's Decatur and Arizona Charlie's Boulder, which cater primarily to residents of Las Vegas and the surrounding communities, and the Aquarius Casino Resort, in Laughlin, Nevada, or the Aquarius, which caters to visitors to and residents of Laughlin and Northwest Arizona. The Stratosphere is one of the most recognized landmarks in Las Vegas, our two Arizona Charlie’s properties are well-known casinos in their respective marketplaces and the Aquarius is the largest hotel in Laughlin. Each of our properties offers customers a value-oriented experience by providing competitive odds in our casinos, quality rooms in our hotels, award-winning dining facilities and, at the Stratosphere and Aquarius, an offering of competitive value-oriented entertainment attractions. We believe the value we offer our customers, together with a strong focus on customer service, will enable us to continue to attract customers to our properties.

Our operating results are greatly dependent on the volume of customers at our properties, which in turn affects the price we can charge for our non-gaming amenities. A substantial portion of our operating income is generated from our gaming operations; especially slot play (including video poker). Approximately 49.9% of our gross revenue for the three months ended June 30, 2016 was generated from our gaming operations. Hotel and food and beverage sales generated similar percentages of our gross revenue during the three months ended June 30, 2016, with hotel sales representing 21.9% and food and beverage sales representing 20.1%. The majority of our revenue is cash based through customers wagering with cash or paying for non-gaming amenities with cash or credit card. Because our business is capital intensive, we rely heavily on the ability of our properties to generate operating cash flow to repay debt financing, fund maintenance capital expenditures and provide excess cash for future development.

Las Vegas is one of the largest entertainment markets in the country. Las Vegas hotel occupancy rates are among the highest of any major market in the United States. We believe that the Las Vegas gaming market has two distinct sub-segments: the tourist market, which tends to be concentrated on the Las Vegas Strip and Downtown Las Vegas, and the local market, which includes the surrounding Las Vegas area.

We use certain key measurements to evaluate operating revenue. Casino revenue measurements include “table games drop”, “slot coin-in" and “bingo write,” which are measures of the total amounts wagered by patrons. “Win” or “hold percentage” represents the percentage of table games drop, slot coin-in or bingo write that is retained by the casino and recorded as casino revenue. Hotel revenue measurements include hotel occupancy rate, which is the average percentage of available hotel rooms occupied during a period, and average daily room rate, which is the average price of occupied rooms per day. Food and beverage revenue measurements include number of covers, which is the number of guests served, and the average check amount per guest.


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Results of Operations

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

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

 
Three months ended June 30,
 
2016
 
2015
 
(in millions)
Income Statement Data:
 
 
 
Revenues:
 
 
 
Casino
$
52.4

 
$
51.6

Hotel
23.0

 
22.0

Food and beverage
21.1

 
20.1

Tower, retail, entertainment and other
8.6

 
8.9

Gross revenues
105.1

 
102.6

Less promotional allowances
7.2

 
6.9

Net revenues
97.9

 
95.7

 
 
 
 
Costs and expenses:
 
 
 
Casino
16.5

 
15.8

Hotel
9.7

 
9.5

Food and beverage
15.5

 
14.9

Other operating expenses
2.5

 
2.8

Selling, general and administrative
31.3

 
30.7

Depreciation and amortization
6.7

 
7.4

Total costs and expenses
82.2

 
81.1

Income from operations
$
15.7

 
$
14.6

 
 
 
 
EBITDA Reconciliation:
 
 
 
Net income
$
12.3

 
$
7.4

Interest expense
3.3

 
6.1

Depreciation and amortization
6.7

 
7.4

EBITDA
$
22.3

 
$
20.9


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

Our consolidated gross revenues increased 2.4% to $105.1 million for the three months ended June 30, 2016 from $102.6 million for the three months ended June 30, 2015. Our consolidated income from operations and EBITDA increased 7.5% and 6.7% to $15.7 million and $22.3 million for the three months ended June 30, 2016 compared to $14.6 million and $20.9 million for the three months ended June 30, 2015, respectively. The increase in our gross revenues is due primarily to higher casino, hotel and food and beverage revenues caused by higher slot coin-in and hold for the casino, occupancy and average daily room rates for the hotel and higher average revenue per covers for food and beverage.


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For the three months ended June 30, 2016 and 2015, certain expenses had an impact on income from operations and EBITDA. EBITDA for the three months ended June 30, 2015 was negatively impacted by a non-cash $1.1 million loss on debt redemption related to our $30.0 million principal payment on the First Lien Term Loans. For the three months ended June 30, 2016 our Selling, General and Administrative expense included a $279,000 non-cash expense for share-based compensation compared to $150,000 for the three months ended June 30, 2015.

Casino

Casino revenues consist of revenues from slot machines, table games, poker, race and sports book, bingo and keno. Casino revenues increased 1.6% to $52.4 million for the three months ended June 30, 2016, compared to $51.6 million for the three months ended June 30, 2015. Our slot revenues increased 3.9% and table revenues decreased 7.9%. Slot revenues increased due to a 2.3% increase in coin-in and a 0.1 percentage point increase in hold while table revenues decreased due to a 2.2 percentage point decrease in drop compared to the three months ended June 30, 2015. For the three months ended June 30, 2016, slot machine revenues were 86.6% of casino revenues, and table game revenues were 11.1% of casino revenues, compared to 84.7% and 12.2% of casino revenues, respectively, for the three months ended June 30, 2015. Other casino revenues, consisting of race and sports book, poker, bingo and keno, decreased 25.0% for the three months ended June 30, 2016 compared to the three months ended June 30, 2015. Bingo revenues decreased 8.8% compared to the three months ended June 30, 2015, due to a 0.4 percentage point decrease in hold percentage and a 8.3% decrease in patrons. Race and sports book revenues decreased 21.3% compared to the three months ended June 30, 2015 due to a 3.5 percentage point decrease in hold percentage. Poker revenues decreased 12.1% compared to the three months ended June 30, 2015. Keno revenues decreased 0.5% compared to the three months ended June 30, 2015 due to a 2.5 percentage point decrease in hold percentage. Casino operating expenses increased 4.4% to $16.5 million for the three months ended June 30, 2016, compared to $15.8 million for the three months ended June 30, 2015. The increase was due primarily to higher labor costs and slot participation expenses. Our casino operating margin decreased to 68.5% for the three months ended June 30, 2016, compared to 69.4% for the three months ended June 30, 2015.

Hotel

Hotel revenues increased 4.5% to $23.0 million for the three months ended June 30, 2016 from $22.0 million for the three months ended June 30, 2015. Average daily room rates increased for all properties. Occupancy increased for Arizona Charlie's Boulder and the Aquarius, was unchanged for Arizona Charlie's Decatur, and declined slightly for the Stratosphere. Overall room occupancy increased to 76.6% for the three months ended June 30, 2016 compared to 75.3% for the three months ended June 30, 2015. Our hotel expenses increased 2.1% to $9.7 million for the three months ended June 30, 2016, compared to $9.5 million for the three months ended June 30, 2015 due primarily to higher labor costs. Due to the increase in average daily room rates, our hotel operating margin increased to 57.8% for the three months ended June 30, 2016 as compared to 56.8% for the three months ended June 30, 2015.

Food & Beverage

Food and beverage revenues increased 5.0% to $21.1 million for the three months ended June 30, 2016, compared to $20.1 million for the three months ended June 30, 2015. Food and beverage revenues increased at Stratosphere and the Aquarius and slightly declined at the Arizona Charlie's properties. Overall, food covers and beverage covers increased 0.1% and 1.1%, respectively, for the three months ended June 30, 2016, compared to the three months ended June 30, 2015. Average revenue per cover for the three months ended June 30, 2016 increased 5.1% compared to the three months ended June 30, 2015. Our food and beverage expenses increased 4.0% to $15.5 million for the three months ended June 30, 2016 compared to $14.9 million for the three months ended June 30, 2015 due to higher labor costs, entertainer fees, cost of goods and supplies. Our food and beverage operating margin increased to 26.5% for the three months ended June 30, 2016 compared to 25.9% for the three months ended June 30, 2015.

Tower, Retail, Entertainment and Other

Tower, retail, entertainment and other revenues decreased 3.4% to $8.6 million for the three months ended June 30, 2016, compared to $8.9 million for the three months ended June 30, 2015. Tower revenues decreased 10.3% for the three months ended June 30, 2016, compared to the three months ended June 30, 2015. Tower guests decreased 5.3% and revenue per guest decreased 8.5% for the three months ended June 30, 2016, compared to the three months ended June 30, 2015. Tower guests and revenue decreased due in part to a 14.3% increase in weather and ride related downtime compared to the three months ended June 30, 2015. Entertainment revenue increased 5.3% for the three months ended June 30, 2016, compared to the three months ended June 30, 2015 due primarily to more increased revenue for the MJ Live show at the Stratosphere. Retail revenue increased 10.1% for the three months ended June 30, 2016 compared to the three months ended June 30, 2015. Other operating

14



revenues decreased 0.5% for the three months ended June 30, 2016 compared to the three months ended June 30, 2015. Other operating expenses decreased 10.7% to $2.5 million for the three months ended June 30, 2016 compared to $2.8 million for the three months ended June 30, 2015 due primarily to decreased entertainer fees.

Promotional Allowances

Promotional allowances are comprised of the retail value of goods and services provided to casino patrons under various marketing programs. As a percentage of casino revenues, promotional allowances increased to 13.7% for the three months ended June 30, 2016 from 13.4% for the three months ended June 30, 2015. The increase in promotional allowances was due primarily to increased room, beverage and retail promotions.

Selling, General and Administrative

Selling, general and administrative expenses are primarily comprised of payroll, marketing, advertising, utilities and other administrative expenses. These expenses increased 2.0% to $31.3 million, or 29.8% of gross revenues, for the three months ended June 30, 2016, compared to $30.7 million, or 29.9% of gross revenues for the three months ended June 30, 2015. Non-cash share-based compensation expenses were $279,000 for the three months ended June 30, 2016 compared to $150,000 and for the three months ended June 30, 2015. During the three months ended June 30, 2016, labor costs, other tax and licenses and advertising and marketing related expenses increased by $294,000, $594,000, and $433,000, respectively, compared to the three months ended June 30, 2015. These increases were partially offset as utilities expenses and guest loss and damage expenses decreased $508,000 and $426,000, respectively, compared to the three months ended June 30, 2015.

Interest Expense

Interest expense decreased 45.9% to $3.3 million for the three months ended June 30, 2016, compared to $6.1 million for the three months ended June 30, 2015. The decrease was due to the issuance of the 2015 Term Loans to prepay in full the Company's existing debt under the 2013 Credit Agreements on July 7, 2015 and a $35.0 million principal payment on the 2015 Term Loans on March 31, 2016.


Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

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


15



 
Six months ended June 30,
 
2016
 
2015
 
(in millions)
Income Statement Data:
 
 
 
Revenues:
 
 
 
Casino
$
108.0

 
$
106.7

Hotel
44.6

 
41.4

Food and beverage
41.0

 
39.1

Tower, retail, entertainment and other
16.6

 
17.1

Gross revenues
210.2

 
204.3

Less promotional allowances
14.3

 
14.2

Net revenues
195.9

 
190.1

 
 
 
 
Costs and expenses:
 
 
 
Casino
33.5

 
32.2

Hotel
18.8

 
18.3

Food and beverage
30.1

 
28.8

Other operating expenses
5.1

 
5.6

Selling, general and administrative
62.0

 
61.4

Depreciation and amortization
13.4

 
14.7

Total costs and expenses
162.9

 
161.0

Income from operations
$
33.0

 
$
29.1

 
 
 
 
EBITDA Reconciliation:
 
 
 
Net income
$
24.8

 
$
15.4

Interest expense
7.2

 
12.5

Depreciation and amortization
13.4

 
14.7

EBITDA
$
45.4

 
$
42.6


Our consolidated gross revenues increased 2.9% to $210.2 million for the six months ended June 30, 2016 from $204.3 million and for the six months ended June 30, 2015. Our consolidated income from operations and EBITDA increased 13.4% and 6.6% to $33.0 million and $45.4 million for the six months ended June 30, 2016 compared to $29.1 million and $42.6 million for the six months ended June 30, 2015, respectively. The increase in our gross revenues and income from operations is due primarily to higher casino, hotel and food and beverage revenues caused by increased slot coin-in for the casino, higher occupancy and average daily room rates for the hotel and higher average revenue per cover for food and beverage.


16



For the six months ended June 30, 2016 and 2015, certain expenses had an impact on income from operations and EBITDA. For the six months ended June 30, 2016 our Selling, General and Administrative ("SG&A") expense included a $559,000 non-cash expense for share-based compensation compared to $601,000 for the six months ended June 30, 2015. EBITDA for the six months ended June 30, 2016 was negatively impacted by a non-cash $1.1 million loss on debt redemption related to the voluntary $35.0 million principal payment on the 2015 Term Loans on March 31, 2016. During the six months ended June 30, 2015, we recognized a non-cash loss on debt redemption of approximately $1.1 million related to our $30.0 million principal payment on the First Lien Term Loans.

Casino

Casino revenues consist of revenues from slot machines, table games, poker, race and sports book, bingo and keno. Casino revenues increased 1.2% to $108.0 million for the six months ended June 30, 2016, compared to $106.7 million for the six months ended June 30, 2015. Our slot revenues increased 2.5% while table revenues decreased 3.2%. Slot revenues increased due to a 1.3% increase in coin-in and table games revenues decreased due to the combination of a 1.8% increase in drop and a 1.1 percentage point decrease in hold compared to the six months ended June 30, 2015. For the six months ended June 30, 2016, slot machine revenues were 86.1% of casino revenues, and table game revenues were 11.1% of casino revenues, compared to 85.0% and 11.6% of casino revenues, respectively, for the six months ended June 30, 2015. Other casino revenues, consisting of race and sports book, poker, bingo and keno, decreased 16.7% for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. Bingo revenues decreased 19.6% due to a 1.4 percentage point decrease in hold percentage and a 8.9% decrease in patrons. Race and sports book revenues decreased 13.4% compared to the six months ended June 30, 2015 due to a combination of a 8.7% increase in handle and a 2.7 percentage point decrease in hold percentage. Poker revenues decreased 10.8% for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. Casino operating expenses increased 4.0% to $33.5 million for the six months ended June 30, 2016, compared to $32.2 million for the six months ended June 30, 2015. The increase was due primarily to higher slot participation expenses and labor costs. Our casino operating margin declined to 69.0% for the six months ended June 30, 2016, compared to 69.8% for the six months ended June 30, 2015.

Hotel

Hotel revenues increased 7.7% to $44.6 million for the six months ended June 30, 2016 from $41.4 million for the six months ended June 30, 2015. Average daily room rates increased for all properties and occupancy increased for all properties except the Aquarius. Overall room occupancy increased to 73.8% for the six months ended June 30, 2016 compared to 73.3% for the six months ended June 30, 2015. Our hotel expenses increased 2.7% to $18.8 million for the six months ended June 30, 2016, compared to $18.3 million for the six months ended June 30, 2015 due primarily to higher labor costs and commissions and brokers fees. The increased costs were primarily related to higher occupancy during the first six months of 2016 compared to the first six months of 2015. Due to the increase in average daily room rates, our hotel operating margin increased to 57.8% for the six months ended June 30, 2016 as compared to 55.8% for the six months ended June 30, 2015.

Food & Beverage

Food and beverage revenues increased 4.9% to $41.0 million for the six months ended June 30, 2016, compared to $39.1 million for the six months ended June 30, 2015.  Food and beverage revenues increased at Stratosphere and the Aquarius and declined at the Arizona Charlie's properties. Overall, food covers and beverage covers decreased 1.8% and increased 0.1%, respectively, for the six months ended June 30, 2016, compared to the six months ended June 30, 2015.  Average revenue per cover for the six months ended June 30, 2016 increased 6.9% compared to the six months ended June 30, 2015. Our food and beverage expenses increased 4.5% to $30.1 million for the six months ended June 30, 2016 compared to $28.8 million for the six months ended June 30, 2015 due to higher labor costs, food and beverage cost of goods and entertainer fees. Our food and beverage operating margin increased to 26.6% for the six months ended June 30, 2016 as compared to 26.3% for the six months ended June 30, 2015.

Tower, Retail, Entertainment and Other

Tower, retail, entertainment and other revenues decreased 2.9% to $16.6 million for the six months ended June 30, 2016, compared to $17.1 million for the six months ended June 30, 2015. Tower revenues decreased 8.5% for the six months ended June 30, 2016, compared to the six months ended June 30, 2015. Tower guests decreased 3.6% and revenue per guest decreased 5.3% compared to the six months ended June 30, 2015. Entertainment revenue increased 28.4% for the six months ended June 30, 2016, compared to the six months ended June 30, 2015 due primarily to due primarily to more performances of the MJ Live show at the Stratosphere. MJ Live debuted on March 30, 2015. Retail revenue increased 6.8% for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. Other operating revenue decreased 1.0% for the six months

17



ended June 30, 2016 compared to the six months ended June 30, 2015 due to decreased project development revenue. Project development revenues consist of revenues received in exchange for construction management services provided to certain hotel and gaming entities. Other operating expenses decreased 8.9% to $5.1 million for the six months ended June 30, 2016 compared to $5.6 million for the six months ended June 30, 2015. The decrease in other operating expenses was due primarily to lower labor costs and entertainer fees.


Promotional Allowances

Promotional allowances are comprised of the retail value of goods and services provided to casino patrons under various marketing programs. As a percentage of casino revenues, promotional allowances decreased to 13.2% for the six months ended June 30, 2016 from 13.3% for the six months ended June 30, 2015. Increased room, bingo and retail promotions were partially offset by reduced food promotions.

Selling, General and Administrative (‘‘SG&A’’)

Selling, general and administrative expenses are primarily comprised of payroll, marketing, advertising, utilities and other administrative expenses. These expenses increased 1.0% to $62.0 million, or 29.5% of gross revenues, for the six months ended June 30, 2016, compared to $61.4 million, or 30.1% of gross revenues for the six months ended June 30, 2015. Non-cash expense for share-based compensation was $559,000 for the six months ended June 30, 2016 compared to $601,000 for the six months ended June 30, 2015. Additionally, for the six months ended June 30, 2016, our labor costs increased by $565,000; other tax and license expenses increased by $512,000; and our advertising and related marketing expense increased by $552,000 compared to the six months ended June 30, 2015. These increased expenses were partially offset by an $816,000 decrease in utilities and a $472,000 decrease in guest loss and damage compared to the six months ended June 30, 2015.

Interest Expense

Interest expense decreased 42.4% to $7.2 million for the six months ended June 30, 2016, compared to $12.5 million for the six months ended June 30, 2015. This decrease was due to a $30.0 million principal payment on the First Lien Term Loans on March 31, 2015, the issuance of the 2015 Term Loans to prepay in full the Company's existing debt under the 2013 Credit Agreements on July 7, 2015, and a $35.0 million principal payment on the 2015 Term Loans on March 31, 2016.




18



Financial Condition

Liquidity and Capital Resources

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

As of June 30, 2016 we had $62.7 million in cash and cash equivalents compared to $72.8 million on June 30, 2015. Net cash provided by operating activities was $41.8 million for the six months ended June 30, 2016 compared to $34.2 million for the six months ended June 30, 2015. The increase in cash flow from operations was driven primarily by increased net revenue.

During the six months ended June 30, 2016, our total capital expenditures were $14.9 million (including approximately $365,000 in non-cash items), of which approximately $1.9 million was spent on slot machine replacements and conversions, $2.0 million on renovations to our rooms, public areas and food and beverage venues, $5.8 million on pool renovations at the Stratosphere and Aquarius, $1.6 million on our information technology systems and $3.6 million on our facilities and operations. For the six months ended June 30, 2015, our total capital expenditures were $8.0 million (including approximately $588,000 in non-cash items), of which approximately $2.4 million was spent on slot machine replacements and conversions, $2.5 million on renovations to our rooms, public areas and food and beverage venues, $500,000 on our information technology systems and $2.6 million on our facilities and operations.

Cash flows used in financing activities were $36.5 million for the six months ended June 30, 2016 compared to $31.1 million for the six months ended June 30, 2015. On March 31, 2016, in respect of the 2015 Term Loans, we made a $35.0 million voluntary principal payment. On March 31, 2015, in respect of the First Lien Term Loans, we made an "excess cash flow" principal payment for the 2014 fiscal year of approximately $9.4 million and a voluntary principal payment of $20.6 million. On July 7, 2015, proceeds from the issuance of the 2015 Term Loans of $293.5 million were used together with cash on hand to repay in full the Company’s existing debt under the 2013 Credit Agreements.

Our primary cash requirements for the next twelve months are expected to include (i) expenses associated with ongoing day-to-day operations, (ii) interest and principal payments on indebtedness, (iii) payments for design and development costs of future projects, and (iv) regular maintenance and other capital expenditures. During 2016, we currently anticipate spending approximately $30 million on capital projects.

On July 7, 2015, we entered into a Credit and Guaranty Agreement in an aggregate principal amount of $310 million, consisting of $295 million of 2015 Term Loans and a $15 million 2015 Revolving Facility. The proceeds of the 2015 Term Loans were used, together with cash on hand of approximately $17.4 million, to repay in full the Company’s existing debt under the 2013 Credit Agreements.

The 2015 Term Loans bear interest either at a base rate plus 2.75% per annum or at the reserve-adjusted eurodollar rate plus 3.75% per annum. In the case of eurodollar loans, interest is computed on the basis of a 360-day year and the actual number of days between interest periods with interest payable on the last day of each interest period of one month, two months, or three months, or, in the case of interest periods longer than three months, every three months. The 2015 Term Loans are subject to scheduled principal payments on the last day of each calendar quarter ending on and after December 31, 2015 in an amount equal to 0.25% of the original principal balance. The 2015 Term Loans are also subject to annual principal payments based on excess cash flow for the period of August 1, 2015 through December 31, 2015, and for all fiscal years ending on and after December 31, 2016 through the maturity date of the 2015 Term Loans. The percentage of excess cash flow required to be prepaid will vary based on the ratio of total indebtedness (net of unrestricted cash) to trailing four quarter adjusted EBITDA. In addition, we are entitled to at any time make voluntary principal prepayments to the 2015 Term Loans in amounts of $1 million or greater.


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We believe our cash flow from operations and our cash balances will be sufficient to fund our operations, interest payments and capital expenditures for the next twelve months. However, our ability to fund our operations, make payments on our debt and fund planned capital expenditures will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control as well as the factors described in the section entitled Risk Factors in Item 1A of our annual report on Form 10-K, filed with the SEC on March 23, 2016 (SEC File No. 000-52975).

Off-Balance Sheet Arrangements

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

20



Item 3. Quantitative and Qualitative Disclosures 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 risk exposure relates to interest rate risk.

The fair value of our debt is estimated based on the quoted market prices for the same or similar issues. The estimated fair value of the 2015 Term Loans was approximately $255.1 million as of June 30, 2016.

For the six months ended June 30, 2016, we incurred approximately $7.2 million in interest expense. Interest on the 2015 Term Loans is variable and based on reserve-adjusted eurodollar rate plus a margin, with a floor rate of 1.00%. If the reserve-adjusted eurodollar rate increased by 1.00% above the floor rate, our annual interest costs would increase by approximately $2.6 million.

On July 7, 2015, we entered into a Credit and Guaranty Agreement in an aggregate principal amount of $310 million, consisting of $295 million of 2015 Term Loans, and a $15 million 2015 Revolving Facility. The proceeds of the 2015 Term Loans were used, together with cash on hand of approximately $17.4 million, to repay in full the Company’s existing debt under the 2013 Credit Agreements.

The 2015 Term Loans bear interest either at a base rate plus 2.75% per annum or at the reserve-adjusted eurodollar rate plus 3.75% per annum. In the case of eurodollar loans, interest is computed on the basis of a 360-day year and the actual number of days between interest periods with interest payable on the last day of each interest period of one month, two months, or three months, or, in the case of interest periods longer than three months, every three months. As of June 30, 2016, all outstanding 2015 Term Loans are eurodollar loans. The 2015 Term Loans are subject to scheduled principal payments on the last day of each calendar quarter ending on and after December 31, 2015 in an amount equal to 0.25% of the original principal balance. The 2015 Term Loans are also subject to annual principal payments based on excess cash flow. For the fiscal year ending December 31, 2015, the Company was required to make a principal payment equal to 50% of excess cash flow for the period of August 1, 2015 through December 31, 2015, and for all fiscal years ending on and after December 31, 2016 through the maturity date of the 2015 Term Loans, the percentage of excess cash flow required to be prepaid will vary based on the ratio of total indebtedness (net of unrestricted cash) to trailing four quarter adjusted EBITDA. In addition, we are entitled to at any time make voluntary principal prepayments to the 2015 Term Loans in amounts of $1 million or greater.

We do not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure.

Item 4. Controls and Procedures

Our principal executive officer and principal financial officer, based on their evaluation of our disclosure controls and procedures (as such terms are defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q, have concluded that our disclosure controls and procedures are effective for ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in our internal control over financial reporting that occurred during the first six months of 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.


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PART II-OTHER INFORMATION
 
You should also read, among other things, the risks and uncertainties described in the section entitled Risk Factors in Item 1A of our annual report on Form 10-K, filed with the SEC on March 23, 2016 (SEC File No. 000-52975). There were no material changes to those risk factors during the six months ended June 30, 2016.

Item 6. Exhibits
 
The list of exhibits required by Item 601 of Regulation S-K and filed as part of this report is set forth in the exhibits index.




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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
  
 
AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC
 
 
 
 
 
By:
/s/ EDWARD W. MARTIN, III
 
 
 
Edward W. Martin, III
 
 
 
Authorized Officer, Chief Financial Officer and Treasurer
 
 
 
(Principal Financial Officer)
 
 
Date:
August 12, 2016
 


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EXHIBITS INDEX

EXHIBIT NO.
 
DESCRIPTION
31.1
 
Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of Principal Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*
 
The following information from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015 (audited); (ii) Unaudited Condensed Consolidated Statements of Operations for the three months ended June 30, 2016 and 2015; (iii) Unaudited Condensed Consolidated Statements of Operations for the six months ended June 30, 2016 and 2015; (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015; (v) Unaudited Condensed Consolidated Statement of Members’ Equity for the six months ended June 30, 2016; and (vi) Notes to the Unaudited Condensed Consolidated Financial Statements.

*Pursuant to rule 406T of Regulation S-T, the XBRL related information in this exhibit is furnished and not filed or a part of a registration statement or prospectus for the purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for the purposes of Section 18 of the Securities Exchange of 1934, as amended, and otherwise is not subject to liability under these sections.


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