10-Q 1 d580455d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2013

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: 000-53938

 

 

Nevada Property 1 LLC

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   27-1695189

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3708 Las Vegas Boulevard South

Las Vegas, Nevada

  89109
(Address of principal executive offices)   (Zip Code)

702-698-7000

(Registrant’s telephone number, including area code)

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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  x    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   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The Registrant’s Class A and Class B membership interests are not publicly traded. As of November 8, 2013 Nevada Voteco LLC owns all of the 100 Class A voting membership interests and Nevada Mezz 1 LLC owns all of the 100 Class B non-voting membership interests of the Registrant.

 

 

 


Table of Contents

NEVADA PROPERTY 1 LLC

INDEX

 

     Page
Number
 

PART I — FINANCIAL INFORMATION

  

Item 1. Condensed Consolidated Financial Statements (unaudited)

     1  

Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

     1  

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September  30, 2013 and 2012

     2  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September  30, 2013 and 2012

     3  

Notes to Condensed Consolidated Financial Statements

     4  

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

     17   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     29   

Item 4. Controls and Procedures

     29   

PART II — OTHER INFORMATION

  

Item 1. Legal Proceedings

     30   

Item 1A. Risk Factors

     30   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     30   

Item 3. Defaults Upon Senior Securities

     30   

Item 4. Mine Safety Disclosures

     30   

Item 5. Other Information

     30   

Item 6. Exhibits

     31   

SIGNATURES

     32   


Table of Contents

Part I — Financial Information

Item 1 — Condensed Consolidated Financial Statements

NEVADA PROPERTY 1 LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

     September 30,
2013
    December 31,
2012
 
     (Unaudited)        
ASSETS     

Current assets:

    

Cash held with Deutsche Bank

   $ 32,133      $ 20,388   

Cash held with third parties and on hand

     34,897        28,423   
  

 

 

   

 

 

 

Total cash and cash equivalents

     67,030        48,811   

Accounts receivable, net

     56,437        68,179   

Due from affiliate (Notes 3 and 11)

     38,477        83,105   

Inventories

     12,161        10,749   

Deferred income taxes

     11,561        11,620   

Restricted cash

     1,107        1,551   

Prepaid commissions

     46        88   

Prepaid expenses and other assets

     16,228        18,330   
  

 

 

   

 

 

 

Total current assets

     203,047        242,433   

Property and equipment, net

     2,863,457        2,937,062   

Intangible asset, net

     10,374        11,627   

Deferred income taxes

     87,962        88,772   

Other assets

     36,121        41,038   
  

 

 

   

 

 

 

Total assets

   $ 3,200,961      $ 3,320,932   
  

 

 

   

 

 

 
LIABILITIES AND MEMBERS’ DEFICIT     

Current liabilities:

    

Accounts payable

   $ 11,958      $ 9,136   

Interest payable to affiliate

     9,941        10,867   

Accrued and other liabilities

     81,019        80,456   

Advance condominium deposits

     394        653   
  

 

 

   

 

 

 

Total current liabilities

     103,312        101,112   

Accounts payable — construction

     6,741        163   

Accounts payable — retention

     2,484        154   

Accrued and other liabilities — construction

     3,560        3,957   

Loan payable to affiliate

     3,479,473        3,539,951   

Other liabilities

     5,076        5,936   
  

 

 

   

 

 

 

Total liabilities

     3,600,646        3,651,273   

Commitments and contingencies (Note 12)

    

Members’ deficit

     (399,685     (330,341
  

 

 

   

 

 

 

Total liabilities and members’ deficit

   $ 3,200,961      $ 3,320,932   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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NEVADA PROPERTY 1 LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited — In thousands)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

Revenues:

        

Casino

   $ 44,374      $ 22,557      $ 115,895      $ 92,060   

Hotel

     66,853        59,896        201,750        182,346   

Food and beverage

     81,312        82,424        246,038        237,102   

Entertainment, retail and other

     8,865        8,818        25,797        23,349   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross revenues

     201,404        173,695        589,480        534,857   

Less — promotional allowances

     (31,310     (28,388     (88,677     (80,718
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     170,094        145,307        500,803        454,139   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Casino

     28,040        26,697        82,459        75,071   

Hotel

     9,921        9,921        30,279        28,653   

Food and beverage

     54,567        56,554        162,520        161,839   

Entertainment, retail and other

     8,203        7,309        22,263        20,481   

Sales and marketing

     11,987        12,963        50,897        48,305   

General and administrative

     29,568        29,060        80,466        79,851   

Corporate

     3,193        3,391        13,856        9,342   

Pre-opening

     1,727        —          2,172        —     

(Gain) loss on disposal of assets

     79        (6     85        807   

Depreciation and amortization

     42,759        41,449        132,806        125,169   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     190,044        187,338        577,803        549,518   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (19,950     (42,031     (77,000     (95,379
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Net settlement and default income

     —          110        217        12,771   

Interest income

     11        (111     28        5   

Interest expense due to affiliate, net of amounts capitalized

     (9,903     (11,757     (30,197     (36,125
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (9,892     (11,758     (29,952     (23,349
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (29,842     (53,789     (106,952     (118,728

Income tax benefit

     10,437        19,435        37,608        42,187   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (19,405   $ (34,354   $ (69,344   $ (76,541
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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NEVADA PROPERTY 1 LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited — In thousands)

 

     Nine Months Ended September 30,  
     2013     2012  

Cash flows from operating activities:

    

Net loss

   $ (69,344   $ (76,541

Deferred income taxes (Notes 3 and 11)

     (37,608     (42,187

Depreciation and amortization

     132,806        125,169   

(Gain) loss on disposal of assets

     85        807   

Changes in operating assets and liabilities:

    

Accounts receivable, net

     11,742        (12,612

Due from affiliate (Notes 3 and 11)

     83,105        —     

Inventories

     (1,494     (394

Prepaid expenses and other assets

     7,061        7,523   

Accounts payable

     2,822        4,228   

Accrued and other liabilities

     (297     6,160   

Interest payable to affiliate

     (926     635   

Restricted cash

     444        33,403   

Advance condominium deposits

     (259     (32,382
  

 

 

   

 

 

 

Net cash provided by operating activities

     128,137        13,809   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Ordinary capital expenditures

     (12,234     (4,881

Capital expenditures from major developments and for construction projects

     (37,206     (28,156

Proceeds from sale of assets

     —          101   
  

 

 

   

 

 

 

Net cash used in investing activities

     (49,440     (32,936
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings under loan payable to affiliate

     37,627        21,094   

Principal payments under loan payable to affiliate

     (98,105     (25,000
  

 

 

   

 

 

 

Net cash used in financing activities

     (60,478     (3,906
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     18,219        (23,033

Cash and cash equivalents at beginning of period

     48,811        77,293   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 67,030      $ 54,260   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest due to affiliate, net of interest capitalized

   $ 31,123      $ 36,125   
  

 

 

   

 

 

 

Non-cash investing activities:

    

Change in accrued additions to construction in progress

   $ 8,512      $ 46,766   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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NEVADA PROPERTY 1 LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Organization and Description of the Business

Company Overview

Nevada Property 1 LLC, a limited liability company organized in Delaware (the “Company”), owns and operates The Cosmopolitan of Las Vegas (the “Property” or “The Cosmopolitan”) which commenced operations on December 15, 2010. Prior to December 15, 2010, the Property was in its construction and pre-opening stage.

Acquisition of The Cosmopolitan

The entity that previously owned the Property was Cosmo Senior Borrower LLC (“CSB”), a limited liability company organized in Delaware, which acquired the Property from its affiliate, 3700 Associates, LLC, a Delaware limited liability company (the “Previous Owner”), in December 2005. In April 2004, the Previous Owner purchased approximately 8.7 acres of land in Las Vegas, Nevada, in order to develop the Property and to eventually run the business as The Cosmopolitan. A subsidiary of Deutsche Bank AG New York Branch (“Deutsche Bank”) made a mortgage loan to CSB on December 30, 2005 (the “Cosmopolitan Mortgage Loan”), encumbering the Property. The Cosmopolitan Mortgage Loan went into default on January 15, 2008 and remedies were exercised against CSB.

The Company was formed on July 30, 2008 for the purpose of holding the first lien mortgage loan on the Property and ultimately foreclosing on the Property. On August 29, 2008, the Company, which is an indirect wholly-owned subsidiary of Deutsche Bank, acquired ownership of the Cosmopolitan Mortgage Loan. The Company then acquired the Property at a foreclosure sale for $1 billion on September 3, 2008, and is the current owner of the Property. In accordance with the operating agreement, the Company shall continue in perpetuity until dissolved upon the election of Nevada Mezz 1 LLC (“Nevada Mezz”) and Nevada Voteco LLC (“Nevada Voteco” or “Voteco”) or through a judicial dissolution under Section 18-802 of the Delaware Limited Liability Company Act. Nevada Voteco and Nevada Mezz are collectively referred to as the “Members” within this Quarterly Report on Form 10-Q.

The Company filed a Registration Statement on Form 10 on April 9, 2010, which went effective under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on June 8, 2010.

Corporate Structure

The Company’s wholly-owned subsidiaries are Nevada Restaurant Venture 1 LLC (“Nevada Restaurant”), which was formed on November 24, 2009 as a limited liability company in Delaware and Nevada Retail Venture 1 LLC (“Nevada Retail”), which was also formed on November 24, 2009 as a limited liability company in Delaware. Nevada Restaurant master leases the Property’s restaurants and the nightclub from the Company and has entered into management agreements with third-party restaurant operators and a nightclub operator to manage and operate their respective establishments at the Property. Nevada Retail master leases the retail spaces at the Property from the Company and operates certain of the retail spaces within the Property. In addition, Nevada Retail has also entered into lease agreements with third-party retail operators to manage and operate their respective retail businesses at the Property.

The Company’s operations are conducted entirely at the Property, which includes hotel, casino, food and beverage, retail and other related operations. Given the integrated nature of these operations, the Company is considered to have one operating segment.

The principal executive offices of The Cosmopolitan of Las Vegas are located at 3708 Las Vegas Boulevard South, Las Vegas, Nevada 89109 and the telephone number is (702) 698-7000. The Cosmopolitan’s internet website is located at www.cosmopolitanlasvegas.com. The information on our website is not part of this Quarterly Report on Form 10-Q.

 

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2. Basis of Presentation, Principles of Consolidation and Summary of Significant Accounting Principles

The unaudited interim condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Although we believe the disclosures made are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”) have been condensed or omitted pursuant to such rules or regulations. In management’s opinion, all adjustments and normal recurring accruals necessary for a fair presentation of the results for the interim periods have been made. The unaudited results for the three and nine months ended September 30, 2013 are not necessarily indicative of results to be expected for the full fiscal year. The December 31, 2012 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K which was filed with the SEC on March 29, 2013.

As previously noted, the Company is an indirect wholly-owned subsidiary of Deutsche Bank. In the normal course of business, the Company’s operations may include significant transactions conducted with Deutsche Bank or affiliated entities of Deutsche Bank.

Reclassification and Revision

Prior to January 1, 2013, on the Company’s consolidated statements of operations, sales expenses were historically classified with hotel expenses; and, marketing expenses were included as a component of general and administrative expenses. Effective January 1, 2013, we now present sales and marketing expenses as a separate line item on the condensed consolidated statements of operations and have reclassified amounts in the prior period statements to conform to current period presentations. This reclassification had no effect on previously reported net loss.

Pre-opening Expenses

Costs incurred during a development and construction period that are not related to development and construction are included within pre-opening expenses. Such costs include, but are not limited to, direct marketing and advertising of the project prior to opening, consultants hired to assist the Company in the opening of a project, training of new CoStars (the Company identifies its staff as “CoStars” ), payroll for specific CoStars in our non-development and construction groups specifically assigned to the project, the cost of incremental office lease space associated with the project and used by the Company prior to opening, legal and other consulting fees, general and administrative expenses and other non-construction-related expenses.

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates used by us include, among other things, the estimated useful lives for depreciable and amortizable assets, the estimated allowance for doubtful accounts receivable, estimated income tax provisions, the evaluation of the future realization of deferred tax assets, determining the adequacy of reserves for self-insured liabilities and the Identity Membership Program (our customer guest reward program), estimated cash flows in assessing the recoverability of long-lived assets and asset impairments, and contingencies and litigation. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Although management believes these estimates are based upon reasonable assumptions within the bounds of its knowledge of the Company’s business and operations, actual results could differ materially from those estimates.

 

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Fair Value of Financial Instruments

The carrying value of the Company’s cash and cash equivalents, restricted cash, and accounts payable approximates fair value due to their short-term maturities. All of the Company’s debt is held by an affiliate and accrues interest at the three-month London Interbank Offering Rate (“LIBOR”) plus 85 basis points. LIBOR is determined two days in advance of the funding based on publicly available quotes published by Reuters. Interest is calculated on the basis of actual days outstanding over a 360-day year. Given the related party nature of the Company’s debt, it is unlikely that the Company could obtain similar financing on the same terms with a third-party in an arm’s length transaction.

Newly Issued Accounting Pronouncements

In January 2013 the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies that ordinary trade receivables and receivables are not in the scope of ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU No. 2013-01 is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required under ASU No. 2013-01 will be applied retrospectively for all comparative periods presented. The adoption of this amendment will impact only the disclosures in the Company’s consolidated financial statements in future periods should the Company obtain any of the financial instruments included within the scope of the pronouncement, e.g., derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions.

In February 2013 the FASB issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements, e.g., recognized derivative instruments, bifurcated embedded derivates, etc., for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in US GAAP. ASU No. 2013-04 is effective for fiscal years and interim periods within those years, beginning after December 15, 2013. ASU No. 2013-04 will be applied retrospectively. The Company does not currently have joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. Should the Company enter into such liability arrangements, the adoption of this amendment will impact only the disclosures in the Company’s consolidated financial statements in future periods.

In July 2013 the FASB issued ASU No. 2013-11 (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. Previous to the issuance of ASU No. 2013-11, Topic 740 did not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. As such, the objective of ASU No. 2013-11 is to eliminate diversity in financial statement reporting practices. ASU No. 2013-11 is effective for fiscal years and interim periods within those years, beginning after December 15, 2013. The Company believes that it has no uncertain tax position; however there is no assurance that the taxing authorities will not propose adjustments that are different than the Company’s expected outcome and impact the provision for income taxes in future periods.

No other new accounting pronouncements issued or effective during 2013 or 2012 have had or are expected to have a material impact on the Company’s financial position or results of operations.

 

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3. Income Taxes

For the three months ended September 30, 2013 and 2012, respectively, the effective income tax rate was (35.0%) and (36.1%). The effective income tax rate was (35.2%) and (35.5%) for respective nine months ended September 30, 2013 and 2012.

The Company’s tax jurisdiction is the United States. Effective January 1, 2012, pursuant to broader tax reorganization, the Company is part of a Corporate Consolidated Tax Group (“Consolidated Group”) owned by Deutsche Bank and is included in the Consolidated Group’s tax return (see Note 11).

The Consolidated Group’s income tax return is under examination. During the quarter ended June 30, 2013, the IRS notified the Company that its 2011 federal income tax return was selected for examination. The Company believes that it has no uncertain tax positions; however, there is no assurance that the taxing authorities will not propose adjustments that are different than the Company’s expected outcome and impact the provision for income taxes.

 

4. Accounts Receivable, net

Net accounts receivable consist of the following (in thousands):

 

     September 30,
2013
    December 31,
2012
 

Casino

   $ 31,868      $ 36,665   

Hotel

     27,013        28,074   

Other

     10,400        12,208   
  

 

 

   

 

 

 
     69,281        76,947   

Less: allowance for doubtful accounts

     (12,844     (8,768
  

 

 

   

 

 

 
   $ 56,437      $ 68,179   
  

 

 

   

 

 

 

Accounts receivable, including casino and hotel receivables, are typically non-interest bearing. The Company issues credit to approved casino customers following investigations of creditworthiness. The allowance is estimated based on specific review of customer accounts as well as management’s experience with collection trends in the gaming and hospitality industry and current economic and business conditions.

 

5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):

 

     September 30,
2013
     December 31,
2012
 

Prepaid expenses

   $ 11,102       $ 15,429   

Other assets

     5,126         2,901   
  

 

 

    

 

 

 
   $ 16,228       $ 18,330   
  

 

 

    

 

 

 

Prepaid expenses as of September 30, 2013 and December 31, 2012 consist primarily of expenses relating to gaming taxes, insurance, marketing, operations, property and other taxes and maintenance. Other assets as of September 30, 2013 and December 31, 2012 consist primarily of imprest funds relating to our partner restaurants and security deposits.

 

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6. Property and Equipment, net

Net property and equipment are stated at the lower of cost or fair value and consist of the following (in thousands):

 

     September 30,
2013
    December 31,
2012
 

Land

   $ 110,454      $ 110,454   

Buildings, buildings and land improvements

     2,688,234        2,684,331   

Furniture, fixtures and equipment

     481,420        468,489   

Construction in progress

     49,758        8,647   

Less: accumulated depreciation

     (466,409     (334,859
  

 

 

   

 

 

 
   $ 2,863,457      $ 2,937,062   
  

 

 

   

 

 

 

Interest of $0.1 million and $0.0 million was capitalized for the three months ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013 and 2012, interest of $0.1 million and $0.0 million, respectively, was capitalized. Depreciation expense of $42.3 million and $41.0 million was incurred during the three months ended September 30, 2013 and 2012, respectively; and, $131.6 million and $123.9 million, incurred during the respective nine months ended September 30, 2013 and 2012.

 

7. Owner Controlled Insurance Program

The Company maintained a comprehensive owner controlled insurance program that provided insurance coverage for the Property during construction. The program provided the following coverage: workers’ compensation, primary general liability, excess liability, contractors’ pollution legal liability, builders’ risk and project professional liability. The general contractor and all of the subcontractors working on the Property were required to enroll in the program.

The Company is exposed on a first dollar loss basis for claims filed under either the workers compensation or general liability portions of the program. The Company retains the first $250,000 of the builders’ risk of loss, and $500,000 of each general liability, employer’s liability, and workers’ compensation claims. Claims that exceed the maximum loss amount of $500,000 per claim are covered by a traditional insurance program. The loss payout account receives interest at a rate based on the terms of the policy.

We also maintain a reserve for workers’ compensation claims incurred but not reported (“IBNR”). The IBNR reserve estimate is determined on our actual historical expense experience and reporting patterns. The total reserve at September 30, 2013 is $2.2 million and $2.4 million at December 31, 2012 and is classified as accrued and other liabilities in the accompanying condensed consolidated balance sheets.

The loss payout account will remain open and continue to pay claims until all claims are paid and closed or until the Company’s obligations have been met. The completed operations and professional liability claims period remains open for ten years following the completion of The Cosmopolitan in compliance with Nevada regulations. For insurance coverage purposes, the Project completion date was established as December 1, 2010. Workers’ compensation claims remain open until all claims are settled or benefits paid. Once all claims are paid and all obligations are settled, any residual funds in the loss payout account will be returned to the Company. The Company believes the existing balance in the loss payout account as of September 30, 2013 will be sufficient to pay all existing and expected future claims related to the Property.

As of September 30, 2013, the balance for our owner controlled insurance program was $20.8 million compared to $22.2 million as of December 31, 2012. For the three and nine months ended September 30, 2013, we paid claims of $0.2 million and $0.3 million, respectively; $0.0 million and $0.3 million related to current year and prior year claims, respectively. For the three and nine months ended September 30, 2012, we paid claims of $1.2 million and $1.8 million, respectively; $0.0 million and $1.8 million related to current year and prior year claims, respectively. The Company also earned interest of $0.0 million on the funds maintained in the loss payout account at each of the three and nine months ended September 30, 2013 and 2012, respectively.

 

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The net balance of deposits in the loss payout account is classified as non-current other assets in the accompanying condensed consolidated balance sheets.

 

8. Restricted Cash and Advance Condominium Deposits

Restricted cash consists primarily of tokes (tips) earned by our CoStars in the Company’s slot and table games departments and non-refundable condominium sales deposits plus earned interest that are held in interest bearing escrow accounts. The restricted cash balance at September 30, 2013 is comprised of $0.7 million of tokes and $0.4 million of advance condominium deposits and, as of December 31, 2012, is comprised of $0.9 million of tokes and $0.7 million of advance condominium deposits. The advance condominium balance of $0.4 million and $0.7 million at September 30, 2013 and December 31, 2012 are respectively composed of $0.4 million in principal and $0.0 million in interest and $0.6 million in principal and $0.1 million in interest.

The Company records deposits received under condominium hotel unit sale agreements as restricted cash and deferred revenue. Deposits are refundable in the case of a proven default by the Company. These amounts will be recognized as income upon closing of the sale of the condominium hotel units, except in the case of a proven default by the Company. Interest earned on these deposits is subject to refund in the case of a proven default by the Company. Interest earned on escrow deposits is deferred and is recognized in other income within the condensed consolidated statements of operations at closing or any other termination of the sales contract, except in the case of a proven default by the Company. Income resulting from legal settlements reached with the condominium hotel purchasers or arising due to buyer default is recognized as other income within the condensed consolidated statements of operations (refer to Note 12 for further discussion).

 

9. Accrued and Other Liabilities

Accrued and other liabilities consist of the following (in thousands):

 

     September 30,
2013
     December 31,
2012
 

Accrued accounts payable

   $ 11,315       $ 12,050   

Accrued payroll costs

     22,078         23,680   

Deposits — patrons

     3,086         6,458   

Advance deposits

     14,190         11,385   

Chip liability

     3,305         4,916   

Other liabilities

     27,045         21,967   
  

 

 

    

 

 

 
   $ 81,019       $ 80,456   
  

 

 

    

 

 

 

 

10. Loan Payable to Affiliate

The Company maintains a $3.9 billion credit facility (the “Credit Facility”) with Deutsche Bank AG Cayman Islands Branch (“DBCI”), a branch of Deutsche Bank AG. DBCI has no obligation to provide the Company with additional funding beyond the Credit Facility. The current expiration of the Credit Facility is December 2015. Borrowings carry an interest rate of LIBOR plus a margin of 85 basis points (0.85%). Interest on the loan is payable in arrears and is due and payable on the first business day of each quarter. Principal repayment will be due on the fifth year anniversary of the term loan. The Credit Facility does not include any financial covenants.

 

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Proceeds from the Credit Facility may be used to pay for (i) the costs of constructing and completing our fully-integrated resort, (ii) Property operating deficits and, (iii) payment of interest on the Credit Facility to the extent that cash flow from the Property is insufficient to pay same after paying the cost of operating the Property. All outstanding debt will become due and payable upon a change of control of the Company.

The total amount of the loan payable to affiliate at September 30, 2013 and December 31, 2012 is $3.5 billion for each respective reporting period. Additionally, at September 30, 2013 and December 31, 2012, the Company has an interest payable to affiliate of $9.9 million and $10.9 million, respectively, with a weighted average interest rate at September 30, 2013 of approximately 1.12%.

The Company classifies construction-related accounts payable, retention and accrued and other liabilities as long-term liabilities as they are financed by the Company’s Credit Facility and therefore, will not require the use of working capital.

 

11. Related Party Transactions

The Company is involved in significant financing and other transactions with certain of its affiliates and Deutsche Bank. The following table sets forth amounts held with, receivable from and payable to affiliates and Deutsche Bank (in thousands):

 

     September 30,
2013
     December 31,
2012
 

Cash held with Deutsche Bank

   $ 32,133       $ 20,388   

Due from affiliate

     38,477         83,105   

Loan payable to affiliate

     3,479,473         3,539,951   

Interest payable to affiliate

     9,941         10,867   

Deutsche Bank provides certain administrative and other support services to the Company, including accounting, development management, procurement and logistics, and legal. The Company was charged $0.1 million and $0.0 million during the three months ended September 30, 2013 and 2012, respectively, for those services. During the nine months ended September 30, 2013 and 2012, the Company was charged $0.1 million and $0.0 million, respectively, for those services.

On October 21, 2010, the Company entered into an agreement with Nevada Voteco to pay for all expenses relating to Nevada Voteco and the Nevada Voteco members including costs incurred for the services of all advisors and consultants to the extent such costs are reasonable and documented. On behalf of Nevada Voteco, the Company paid $0.2 million for the respective three months ended September 30, 2013 and 2012; and, $0.7 million and $0.8 million during the nine months ended September 30, 2013 and 2012, respectively.

Effective January 1, 2012, pursuant to broader tax reorganization, the Company became part of a Consolidated Group owned by Deutsche Bank. As of December 31, 2012, the Company had a current tax-effected net operating loss of $83.1 million that will be utilized by the Consolidated Group, which was presented as a receivable from affiliate in the accompanying condensed consolidated balance sheet. During the quarter ended June 30, 2013, the Company was reimbursed for the utilization of its net operating losses in 2012 by the Consolidated Group. In addition, the Company generated $107.0 million ($37.6 million, tax-effected) of net operating losses in the nine months ended September 30, 2013 which are presented as a component of due from affiliate in the accompanying condensed consolidated balance sheet.

 

12. Commitments, Contingencies and Litigation

Prior to the issuance of any of its quarterly or annual financial results and for the purposes of accrual and/or disclosure, we analyze each of our material legal proceedings and other contingencies to determine whether an estimate of a probable or reasonably possible loss or range of loss can be made based upon the facts and legal assessment of such matter. During such assessment, we consider all factors that may impact this assessment, including, without limitation, (a) the stage of the proceeding; (b) the damages, penalties and costs sought; (c) the factual matters that remain to be resolved; and (d) the legal principles that are the subject of the proceeding. It is

 

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often not possible to estimate the loss or a range of possible loss, particularly where (i) the damages sought are unsubstantiated or indeterminate; (ii) the discovery or other material legal proceedings are incomplete; (iii) the proceedings are in the early stages and there is insufficient information available to assess the viability of the stated grounds; (iv) the matters present legal uncertainties; or (v) there are significant facts in dispute. In such cases, there are considerable uncertainties regarding the resolution of the proceeding, which may preclude the determination of the reasonably possible loss or range or loss.

Class Action Suits

a. Wage and Hour

During late 2012, the Company was put on notice and/or served with two separate purported class action lawsuits related to alleged unpaid compensation for time incurred by CoStars while on Property for donning and doffing of the CoStars required uniform, alleged improper rounding of time for hours worked and various other claims related to alleged unpaid compensation. One of the purported wage and hour class action lawsuits is pending in state court, and one is pending in federal court. These matters are in the preliminary stages of proceedings with meaningful discovery just commencing. No depositions have occurred. No motion to certify a class has been filed in the state court action. A motion to conditionally certify certain classes of employees was filed in the federal court action, but that motion has been denied in part and stayed in part. In addition, substantial questions of law and fact remain unresolved in both cases.

The Company is in the process of evaluating the lawsuits and cannot at this time determine the potential impact of the lawsuits on the condensed consolidated financial position, cash flows, or the results of operations of the Company, other than the accrued loss contingency discussed below. Specific additional factors applicable to each case that prevent the Company from providing an estimate of reasonably possible loss in excess of amounts accrued or range of loss include, but are not limited to: (1) whether class certification will be granted and the scope of any class or subclass; (2) the quantification of highly variable damages claimed by the purported classes and subclasses asserted in separate, but overlapping litigation are unspecified or indeterminate; and (3) the outcome of any future settlement negotiations, should they occur, as they may apply to limit the class or eliminate all class claims.

A third purported wage and hour class action was filed in state court in January 2013. The company currently anticipates resolving this action during the fourth quarter of 2013.

During the second quarter of 2013, as part of its ongoing assessment of the wage and hour cases, the Company accrued an estimated loss contingency of $3.0 million (reported as a corporate operating expense on the condensed consolidated statement of operations). We will continue evaluating the adequacy of this accrual as the cases develop. Legal fees associated with the cases are recognized as incurred when the legal services are rendered, and are, therefore, not recognized as part of the loss contingency accrual.

On May 7, 2013, the Company was served with a fourth complaint, naming the Company, another Las Vegas Strip property and a vendor of the Company as defendants in a purported wage and hour class action, regarding alleged unpaid wages for time incurred by certain of the vendor’s employees. The Company filed a motion to dismiss, which was granted on September 5, 2013, but the complaint is subject to appeal.

The Company believes that it has meritorious defenses with respect to these matters and intends to defend its positions vigorously.

 

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b. Alleged Unlawful Taping/Recording

A purported class action lawsuit was filed during the quarterly period ended September 30, 2012 in Superior Court in the State of California against the Company, alleging violation of the California Penal Code regarding the unlawful taping or recording of calls. Subsequently, the Company filed a motion to dismiss, or in the alternative, to strike the class allegations. On July 15, 2013, the U.S. District Court for the Southern District of California issued an order denying these Company motions.

This matter is in the earliest stages of proceedings. Meaningful discovery has not commenced, no depositions have occurred, and no motions to certify a class or subclasses have been filed. Substantial questions of law and fact are unresolved. Specific additional factors applicable to this case that prevent the Company from providing an estimate of reasonably possible loss or range of loss include, but are not limited to: (1) whether class certification will be granted and the scope of any class or subclass; (2) the quantification of highly variable damages claimed by the purported class are unspecified or indeterminate; and (3) the outcome of any future settlement negotiations, should they occur, as they may apply to limit the class or eliminate all class claims. As a result, the Company cannot at this time determine the potential impact of the lawsuit on the consolidated financial position, cash flows, or results of operations of the Company. The Company believes that it has meritorious defenses with respect to this matter and intends to defend its position vigorously

Given the uncertainty of the procedural and substantive legal and factual matters set forth above, no estimate of the reasonably possible loss or range of loss in excess of amounts accrued, if any, can be made at this time with respect to the wage and hour and alleged unlawful taping/recording purported class action lawsuits, nor can the Company determine when it will be able to make such an estimate. Our assessment of these matters, and any accrued loss contingency, may change based on future unexpected events. An unexpected adverse judgment could cause a material impact on our business operations, results of operations or financial position. Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity, but may be material to the results of operations in any given period.

Commitments and Other Legal Proceedings

a. Property General Contractor and Other Purchase Obligations

During 2012, the Company engaged Penta Building Group (“Penta”) to act as the general contractor for certain Property projects. Penta operates under a GMP contract that defines the scope of work to be performed, establishes the budget for the scope of work, and sets the general time scale of the job. Amounts owed to Penta under the GMP contract and related approved change orders are recorded as accounts payable – construction in the condensed consolidated balance sheets.

As of September 30, 2013, the Company had total construction commitments of $12.4 million.

Within the Company’s Credit Facility of $3.9 billion from DBCI is a revolving line of credit for $20.0 million reserved for purposes of issuing standby letters of credit. The Company currently maintains three standby letters of credit totaling $2.8 million pursuant to agreements related to insurance, an administrative office lease, utilities and other services. There were no outstanding borrowings against these standby letters of credit as of September 30, 2013.

b. Condominium Hotel Litigation

The Company was a named defendant in a number of lawsuits and arbitrations concerning the purchase and sale of condominium hotel units located within the East and West Towers of the Property. The thrust of the claims were virtually the same in every matter. The plaintiffs alleged, among other things, that the project had materially changed and that delays in the completion of the Property constituted a material breach by the Company, thus permitting the plaintiff/purchaser to rescind their contract and receive a full refund of their earnest money deposit, plus interest thereon. The Company was represented in each of these matters by outside legal counsel. Virtually all of the original claims have been settled (through either a series of class action or individual settlements) or litigated to completion through court actions or confidential arbitration proceedings.

 

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Cumutatively from prior periods and through September 30, 2013, buyers representing 189 condominium hotel units in The Cosmopolitan, respectively, agreed to settle and release their claims against the Company arising under their agreements to purchase the condominium hotel units. Primarily, under the to-date terms of the settlements, buyers of units in the West Tower of The Cosmopolitan received a refund of 50% of their principal earnest money deposits and buyers of units in the East Tower received a refund of 40% of their principal earnest money deposits. The Company retained 50% of the principal deposits, plus 100% of all interest, under the West Tower purchase contracts, and 60% of the principal deposits, plus 100% of all interest, under the East Tower purchase contracts. As a result of settlements occurring during the three and nine months ended September 30, 2012, the Company recognized as net income a net gain of $0.1 million and $12.8 million, respectively. The Company recognized a net gain of $0.0 million and $0.2 million for the three and nine months ended September 30, 2013.

On or about August 26, 2013, a purported class action lawsuit was filed against the Company in the United States District Court for the Central District of California, captioned Lenny Spangler v. Nevada Property 1 LLC, et al., alleging, among other things, that former class action settlements entered into by the Company with buyers of condominium hotel units in the project were fraudulently induced, and seeking to recover all amounts paid to or retained by the Company in such settlements. On or about October 23, 2013, the Company filed a motion to dismiss the lawsuit or transfer venue to the State of Nevada. This matter is in the earliest stages of proceedings. Discovery has not commenced. Substantial questions of law and facts are unresolved. As a result, the Company cannot at this time determine the potential impact of the lawsuit on the consolidated financial position, cash flows, or results of operations of the Company.

As of September 30, 2013, there are seven condominium hotel units remaining under contract at The Cosmopolitan. The Company is actively engaged in various arbitration and other dispute resolution proceedings with respect to each of those units. Those proceedings are in varying stages and the Company disputes the allegations made by the buyers in those proceedings and is seeking to recover the deposits paid by such buyers due to their failure to close and perform under their respective purchase contracts. The Company has prevailed in many of the pending arbitrations and is in the process of confirming and enforcing the respective arbitration awards. The Company intends to complete arbitration proceedings against the buyers of the remaining units, who have not agreed to settle and release their claims, on terms acceptable to the Company.

c. Patent Infringement

On July 31, 2013, Activision TV, Inc. (“Activision”) filed suit against the Company in the U.S. District Court for the District of Delaware for infringement of various patents owned by Activision relating to digital displays installed at the Property by third-party vendors. This matter is in the earliest stages of proceedings. Discovery has not commenced. Substantial questions of law and fact are unresolved. As a result, the Company cannot at this time determine the potential impact of the lawsuit on the consolidated financial position, cash flows, or results of operations of the Company.

d. Other Matters

The Company is also subject to various other ordinary and routine claims and litigation arising in the normal course of business. In the opinion of management, all pending other legal matters are either adequately covered by insurance or, if not insured, will not have a material adverse impact on the consolidated financial position, cash flows, or the results of operations of the Company.

 

13. Membership Interests

The Company’s membership interests are comprised of Class A and Class B membership interests. Holders of Class A membership interests are entitled to vote on any matter to be voted upon by the Members. Holders of Class B membership interests have all the economic interests in the Company and, except as provided by law, do not have any right to vote.

Nevada Voteco holds 100% of the Company’s Class A membership interests and 100% of the Company’s Class B membership interests are held by Nevada Mezz.

 

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Disclosure Pursuant to Section 13(r) of the Exchange Act

Section 13(r) of the Exchange Act requires a public reporting issuer to disclose in its reports whether it or any of its affiliates has knowingly engaged in specified activities relating to Iran. The Company itself has nothing to report. However, Deutsche Bank AG may be viewed as our affiliate. Deutsche Bank AG has provided us with the disclosure set forth below describing the relevant activities of it and its affiliates for the quarter ended September 30, 2013. All references in this quoted disclosure to “we,” “us” and “our” are to Deutsche Bank AG and its consolidated subsidiaries. None of the disclosed activities or transactions was conducted by the Company.

“Disclosures Under Iran Threat Reduction and Syria Human Rights Act of 2012

Under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) of the U.S. Securities Exchange Act of 1934, as amended, an issuer of securities registered under the Securities Exchange Act of 1934 is required to disclose in its periodic reports filed under the Securities Exchange Act of 1934 certain of its activities and those of its affiliates relating to Iran and to other persons sanctioned by the U.S. under programs relating to terrorism and proliferation of weapons of mass destruction that occurred during the period covered by the report. We describe below a number of potentially disclosable activities of Deutsche Bank AG and its affiliates. Disclosure is generally required regardless of whether the activities, transactions or dealings were conducted in compliance with applicable law.

Legacy Financing Arrangements. Despite having ceased entering into new business in or with Iran in 2007, we continue to be engaged as lender, sponsoring bank and/or facility agent in several long-term financing agreements relating to the construction or acquisition of plant or equipment for the petroleum and petrochemical industries, under which Iranian entities were the direct or indirect borrowers. Before 2007, as part of a number of banking consortia, we entered into a number of financing arrangements, six of which remained outstanding as of July 1, 2013, with the National Iranian Oil Company (NIOC), the National Petrochemical Company (NPC), Bank Melli Iran and their respective group entities as borrowers. The latest final maturity under these loan facilities is in 2019. These loan facilities are guaranteed by national export credit agencies representing two European national governments and one Asian national government. The obligations of the borrowers under these loan facilities are, in principle, secured by assignments of receivables from oil and oil products exported by NIOC, NPC and/or their trading subsidiaries to buyers, mostly in Asia. These delivery obligations, however, are waived for 2013, due to the current sanctions environment. For some of these arrangements, we act as escrow agent, holding escrow accounts for the Iranian borrowers mentioned above or for the former borrower NIOC, into which receivables are in principle paid by the buyers of the oil and oil products. During the third quarter of 2013, however, no receivables were effectively paid to the said escrow accounts. Such accounts are pledged in favor of the relevant banking consortium. We have no involvement in the contractual arrangements related to, or in the physical settlement of, the oil and oil product exports mentioned above. The Iranian entities in whose names the escrow accounts are held are not permitted to draw on these accounts, either because they are parties sanctioned under applicable law or, where this is not the case, due to our business decision to freeze the accounts in light of the overall sanctions environment.

During the third quarter of 2013, approximately € 40,000 was paid into one of the escrow accounts, caused by a partial refund of the premium originally paid to the German export credit agency, due to the prepayment of the covered financing in 2012, and we, in our role as escrow agent, distributed to the participants in the banking consortia approximately € 5,000 including portions attributable to us totalling approximately € 400.

We generated revenues in the third quarter of 2013 of approximately € 0.7 million in respect of these financing arrangements, of which approximately € 0.65 million consisted of escrow account revenues, approximately € 40,000 consisted of loan interest revenues and approximately € 10,000 consisted of fee revenues. The net profits were less than these amounts.

Our portion of the remaining loan facilities amounted to approximately € 31.2 million as of September 30, 2013. We intend to continue pursuing repayment and fulfilling our administrative role under these agreements, but we do not intend to engage in any extensions of or new credit to these or other Iranian entities.

As of September 30, 2013, we have an undrawn commitment under one of the financing agreements referred to above under which the NPC is borrower of approximately € 1.3 million. Due to the export credit agency coverage, this remainder cannot be cancelled without German government approval, for which we have applied but have not yet received. We do not intend to make further disbursements upon this undrawn commitment.

 

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A wholly-owned subsidiary of ours, BHF-BANK AG, which we acquired as part of the acquisition of the Sal. Oppenheim Group in March 2010 and which we intend to sell pending regulatory approvals, was a lender participant in a number of similar arrangements, the borrowers of which were Bank Saderat, Bank Melli, Bank Sepah, Bank Tejarat and NPC. In that capacity, it received no repayments of principal and less than € 1,000 of interest in the third quarter of 2013, which was paid by us to BHF-BANK in our capacity as agent or arranger. Of the amount received, BHF-Bank passed on a half to a participant in such arrangement. In the third quarter of 2013, BHF-BANK’s gross revenues from this business were approximately € 20,000 and its net profits were less than this amount.

Legacy Contractual Obligations Related to Guarantees. Prior to 2007, we provided guarantees to a number of Iranian entities. In almost all of these cases, we issued counter-indemnities in support of guarantees issued by Iranian banks because the Iranian beneficiaries of the guarantees required that they be backed directly by Iranian banks. In 2007, we made a decision to refrain from issuing new guarantees to Iranian or Iran-related beneficiaries. Although these pre-existing guarantees stipulate that they must be either extended or honored if we receive such a demand and we are legally not able to terminate these guarantees, we decided in 2011 to reject any “extend or pay” demands under such guarantees. Even though we exited many of these guarantees, a number are still outstanding, having an aggregate face amount of approximately € 8.3 million as of September 30, 2013. The gross revenues from this business in the third quarter of 2013 were approximately € 11,000 and the net profits we derived from these activities was less than this amount.

We also have outstanding legacy guarantees in relation to a Syrian bank sanctioned by the U.S. under its non-proliferation programs. The aggregate face amount of these legacy guarantees was approximately € 9.0 million as of September 30, 2013, the gross revenues received from non-Syrian parties for these guarantees in the third quarter of 2013 were approximately € 3,000 and the net profits we derived from these activities was less than this amount.

BHF-BANK, based on similar legacy guarantees issued before 2010, paid commissions and charges in the third quarter of 2013 of approximately € 2,000 to accounts of relevant Iranian banks frozen under applicable EU law. BHF-BANK received in the third quarter of 2013 approximately € 35,000 in fees from the non-Iranian parties for which the guarantees were issued and their net profits were less than this amount. The aggregate face amount of these legacy guarantees was approximately € 20.1 million as of September 30, 2013.

BHF-BANK also has outstanding legacy guarantees in relation to a Syrian bank sanctioned by the U.S. under its non-proliferation programs. The aggregate face amount of these legacy guarantees was approximately € 0.4 million, the gross revenues received from non-Syrian parties for these guarantees were less than € 1,500 and the net profits derived from these activities was less than this amount.

We intend to exit these arrangements in the coming years as soon as possible.

Payments. We received 29 payments amounting to less than € 6.4 million in favor of non-Iranian clients in Germany, Belgium and the Netherlands, which payments were subsequently found to have stemmed from a relevant Iranian entity. Revenues for these incoming payments were less than € 7,500. These figures include relevant payments in favor of clients of our subsidiary Postbank. In general, we intend to continue these activities.

Operations of Iranian Bank Branches and Subsidiaries in Germany and/or France. Several Iranian banks, including Bank Melli Iran, Bank Saderat, Bank Tejarat and Europäisch-Iranische Handelsbank, have branches or offices in Germany and/or France, even though their funds and other economic resources are frozen under European law. As part of the payment clearing system in Germany and other European countries, when these branches or offices need to make payments in Germany or Europe to cover their day-to-day operations such as rent, taxes, insurance premia and salaries for their remaining staff, or for any other kind of banking-related operations necessary to wind down their legacy trade business, the German Bundesbank accepts fund transfers from these Iranian banks and disburses them to the applicable (mainly German) payees, some of whom hold accounts with us. In the third quarter of 2013, we received approximately € 2.0 million in such disbursements in less than 300 transactions via the German Bundesbank and French banks in respect of payments from the above-mentioned Iranian banks, and the net profits derived from these payments were negligible (less than one euro per transaction). Relevant transactions of our subsidiary Postbank are included in these figures. In general, we intend to continue these activities.

Based on discussions initiated by the German Bundesbank, BHF-BANK continues to maintain accounts for Bank Sepah’s Frankfurt branch, which accounts are frozen under European sanctions law. In the third quarter of 2013, the total volume of outgoing payments from these accounts was approximately € 5.2 million, which payments were made with the consent of the competent authorities in Germany under applicable law. In the third quarter of 2013, the gross revenues from this activity were approximately € 1,500 and the net profits were less than this amount.

 

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Maintaining of Accounts for Iranian Consulates and Embassies. Iranian embassies and consulates in Germany and the Netherlands also hold accounts with us as well as with Postbank. This includes the provision by a subsidiary of Postbank to the Iranian Consulate of girocard (debit card/ATM) terminals as well as the processing of transactions of cardholders using those terminals; the terminals are used to facilitate the payment of fees for the issuance of visas and other administrative measures by the consulate. The accounts maintained exist to fund the day-to-day operational costs of the embassies and consulates, such as salaries, rent, and electricity. Additionally, Deutsche Bank Netherlands N.V. has a relationship with the Agent Bureau of the Embassy of the Islamic Republic of Iran in The Hague (which is responsible for all Iran-U.S. Claims Tribunal activities). The total volume of outgoing payments from these accounts was approximately € 12 million in the third quarter of 2013, which payments were made with the consent of the competent authorities in the relevant European countries under applicable law. We derived gross revenues of approximately € 12,000 and net profits which were less than this amount from these activities. The German government has requested that we continue to provide these services in the future to enable the Government of Iran to conduct its diplomatic relations with Germany; we intend to continue these activities. In the Netherlands, we are in the process of discontinuing the relevant services.

Activities of Entities in Which We Have Interests. Section 13(r) requires us to provide the specified disclosure with respect to ourselves and our “affiliates,” as defined in Exchange Act Rule 12b-2. Although we have minority equity interests in certain entities that could arguably result in these entities being deemed “affiliates,” we do not have the authority or the legal ability to acquire in every instance the information from these entities that would be necessary to determine whether they are engaged in any disclosable activities under Section 13(r). In some cases, legally independent entities are not permitted to disclose the details of their activities to us because of German privacy and data protection laws or the applicable banking laws and regulations. In such cases, voluntary disclosure of such details could violate such legal and/or regulatory requirements and subject the relevant entities to criminal prosecution or regulatory investigations.

 

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

Cautionary Note Regarding Forward-Looking Statements

Any statements made in this report that are not statements of historical fact or that refer to estimated or anticipated future events are forward-looking statements. These statements may include, or be preceded or followed by, the words “may,” “will,” “should,” “might,” “could,” “potential,” “possible,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “hope” or similar expressions. We have based our forward-looking statements on management’s beliefs and assumptions based on information available to our management at the time these statements are made. Although we believe our expectations are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, our actual results may materially differ from expected results. Factors that could have a material adverse effect on our operations and future prospects or that could cause actual results to differ materially from our expectations include, but are not limited to: continuing recessionary economic and market conditions, particularly in levels of spending in the Las Vegas hotel, resort and casino industry; changes in the competitive environment in our industry; the seasonal nature of the hotel, resort and casino industry; the capital intensive nature of the Las Vegas hotel, resort and casino industry; costs associated with compliance with extensive regulatory requirements; diminishing value of our name, image and brand; maintaining the integrity of customer information; the loss of key members of our senior management; dependence on various third-party operators to provide key amenities; the outcome of pending or future legal proceedings; cyber security risk; our ability to collect gaming receivables from our credit players; and the other risks discussed in the section entitled “Item 1A — Risk Factors” in our Annual Report on Form 10-K which was filed with the SEC on March 29, 2013. In addition, new risks and uncertainties emerge from time to time, and it is not possible for us to predict or assess the impact of every factor that may cause our actual results to differ from those contained in any forward-looking statements. Undue reliance should not be placed on such statements, which speak only as of the date of this document or the date of any document that may be incorporated by reference into this document. Consequently, readers of this Quarterly Report on Form 10-Q should consider these forward-looking statements only as our current plans, estimates and beliefs. We do not undertake and specifically decline any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We undertake no obligation to update or revise any forward-looking statements in this Quarterly Report on Form 10-Q or in our Annual Report on Form 10-K to reflect any new events or any change in conditions or circumstances.

Operations

Property Location

The Cosmopolitan comprises approximately 8.7 acres of land and is located on the Las Vegas Strip directly between MGM Resorts International’s Bellagio and City Center properties. The Cosmopolitan is connected to City Center to the south via an elevated pedestrian bridge and to the east side of the Las Vegas Strip via a second pedestrian bridge, and has ground floor public access from the Bellagio to the north. The Cosmopolitan opened its doors to the public at 8:00 p.m. Pacific Standard Time on December 15, 2010.

The Casino

The approximately 110,000 square-foot casino features the latest in gaming technology offered in a modern, energetic atmosphere. The casino floor includes 1,374 slot machines and 101 table games, with immediate guest access from each of the East and West Towers and is accessible just steps from the Las Vegas Strip. The casino level also contains several destination bar/lounge areas, a three-story feature attraction using an innovative light and music display, as well as an intimate entertainment lounge used to bring live performances to the gaming floor. The casino also has two separate areas for high limit table games and slots, centrally located but distinct from the main gaming floor, catering specifically to our higher limit clientele.

 

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The Hotel

At opening on December 15, 2010, the 50-story East and 52-story West Towers comprised 1,998 hotel and condominium hotel style rooms ranging in size from 730 square feet to over 5,400 square feet in addition to ten three-story bungalow-style suites adjacent to the west pool deck (“Phase I”). The rooms feature contemporary bespoke room décor featuring spacious living areas, luxurious bathrooms, state-of-the-art technology control panels, flat-screen televisions, entertainment systems, wireless internet and a custom in-room bar. The condominium hotel style rooms offer expansive terraces with dazzling views of the Strip. Subsequent to the completion of Phase I, an additional 978 hotel and condominium hotel-style units located in the West Tower (“Phase II”) have been completed, bringing the total rooms available to 2,976.

The top four floors of the East Tower and a restaurant space will be completed at a later date as management deems appropriate based on various factors, including market conditions.

Food and Beverage and the Restaurant Collection

The Cosmopolitan offers a number of casual dining options for our guests, including a premier buffet, a poolside grill, a casual restaurant on the casino level, a pizzeria, and in-room dining options available twenty-four hours a day, seven days a week. The Cosmopolitan also incorporates a number of bars, lounges, and destination venues which collectively feature a comprehensive cocktail and wine program, offering our guests a wide range of the finest in beverage options. In addition, The Cosmopolitan offers a collection of distinctive restaurants, managed and operated by experienced world class third-party restaurateurs.

Retail

Our retail offerings showcase nine eclectic retail boutiques on the second level of the podium in approximately 60,000 square feet of contiguous space. A sizeable amount of foot traffic naturally flows through our second floor retail space, as this is the primary pathway for Las Vegas visitors to travel north and south between City Center and Bellagio. Our retail operators were selected to fit with our overall brand image and profile, and offer our guests a range of accessible, distinctive retail options.

Nightclub and Recreation Deck

The Cosmopolitan features an integrated entertainment venue of approximately 53,000 square feet including a cutting edge, world class nightclub operation called “Marquee Nightclub & Dayclub at The Cosmopolitan” (“Marquee”). The Marquee is approximately 31,000 square feet, and is located at the top of the podium between the two hotel towers. The Marquee encompasses all of the features of a major Las Vegas integrated resort nightclub, including two distinct ultra-lounge experiences and a Dayclub. The Dayclub operates from April through October, and was first opened in April 2011. It features 22,000 square feet of entertainment space including two pools, several bars, a gaming area comprised of nine table games, and grand cabanas with individual infinity pools.

Spa/Salon/Fitness Centers

Our integrated resort offers a 50,000 square-foot spa and hammam facility, located at the base of the West Tower which is easily accessible from any room in The Cosmopolitan. Our spa and hammam facility is a key element in the overall offerings to our guests, and offers a level of quality, service and experience that we believe competes with the best spa offerings in the Las Vegas market.

Separately, the Property also offers two fitness centers, one in the East Tower and the other in the West Tower (including tennis courts), offering our guests twenty-four hours a day, seven days a week access to high quality fitness and exercise equipment.

 

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Convention and Banquet Facility

Our approximately 185,000 square-foot convention and banquet facility is located on the second, third and fourth levels of the podium. The space is designed for maximum flexibility, and can accommodate everything from small group meetings to large conferences in the 66,000 square feet of ballroom space. Directly beneath the hotel towers, the location of the ballroom space is unique to the Las Vegas market, allowing convention attendees immediate, direct access from the hotel towers to the meeting space. The space features full high speed Wi-Fi coverage and support capabilities to enable all modern meeting technology requirements.

The Chelsea

In early 2013, we announced the build-out of our planned 65,000 square foot, approximately 3,000-seat multi-use event center named “The Chelsea”. This entertainment and group venue is intended to encourage companies to book larger conventions, as well as to choose the Property for product launches and other branding events. The Chelsea is scheduled to open at the end of 2013.

Rose.Rabbit.Lie.

During the third quarter of 2013, we announced our newest offering, Rose.Rabbit.Lie, an innovative combination of restaurant, bar, club and show. Rose.Rabbit.Lie. is planned to encompass 23,000 square feet and is scheduled to open at the end of 2013.

Results of Operations

The following table presents selected historical financial data from the condensed consolidated statements of operations for each of the periods indicated. The historical results are not necessarily indicative of the results of operations to be expected in the future.

 

       Three Months Ended September 30,                

(Unaudited — In thousands)

   2013     2012     $ Change     % Change  

Net revenues

   $  170,094      $  145,307      $ 24,787        17.1

Operating expenses

     190,044        187,338        2,706        1.4

Operating loss

     (19,950     (42,031     22,081        52.5

Loss before income taxes

     (29,842     (53,789     23,947        44.5

Income tax benefit

     10,437        19,435        (8,998     (46.3 %) 

Net loss

     (19,405     (34,354     14,949        43.5

 

     Nine Months Ended September 30,              

(Unaudited — In thousands)

   2013     2012     $ Change     % Change  

Net revenues

   $ 500,803      $ 454,139      $ 46,664        10.3

Operating expenses

     577,803        549,518        28,285        5.1

Operating loss

     (77,000     (95,379     18,379        19.3

Loss before income taxes

     (106,952     (118,728     11,776        9.9

Income tax benefit

     37,608        42,187        (4,579     10.9

Net loss

     (69,344     (76,541     7,197        9.4

The Company’s operations are conducted entirely at the Property, which includes hotel, casino, food and beverage, retail and other related operations. Given the integrated nature of these operations, the Company is considered to have one operating segment.

 

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Operating Measures

Certain gaming and hospitality industry specific statistics are included in the discussion of our operating performance. These statistics are defined below:

 

    The table games hold percentage is the percentage of drop (amount of cash and markers issued; net markers paid at the gaming table with cash or chips) that is won by the Property and recorded as revenue.

 

    Average Daily Rate (“ADR”) is calculated by dividing total hotel revenue by total rooms occupied.

 

    Revenue per Available Room (“REVPAR”) is calculated by dividing total hotel revenue by total rooms available.

Our financial results are dependent upon the number of patrons that we attract to our Property and the amounts those guests spend per visit. Additionally, our operating results may be affected by, among other things, overall economic conditions impacting the disposable income of our guests, weather conditions affecting our Property, achieving and maintaining cost efficiencies, competitive factors, gaming tax increases and other regulatory changes, the commencement of new gaming operations, charges associated with debt refinancing, construction at our existing facility and general public sentiment regarding travel. We may experience significant fluctuations in our quarterly operating results due to seasonality, variations in gaming hold percentages and other factors. Consequently, our operating results for any quarter or fiscal year are not necessarily comparable and may not be indicative of future periods’ results.

Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012

Revenues

Our revenues for the three months ended September 30, 2013 and 2012 were as follows:

 

     Three Months Ended September 30,              

(Unaudited — In thousands)

   2013     2012     $ Change     % Change  

Revenues:

        

Casino

   $ 44,374      $ 22,557      $ 21,817        96.7

Hotel

     66,853        59,896        6,957        11.6

Food and beverage

     81,312        82,424        (1,112     (1.3 %) 

Entertainment, retail and other

     8,865        8,818        47        0.5
  

 

 

   

 

 

   

 

 

   

Gross revenues

     201,404        173,695        27,709        16.0

Less — promotional allowances

     (31,310     (28,388     (2,922     10.3
  

 

 

   

 

 

   

 

 

   

Net revenues

   $ 170,094      $ 145,307      $ 24,787        17.1
  

 

 

   

 

 

   

 

 

   

Gross revenues for the three months ended September 30, 2013 increased $27.7 million or 16.0%, when compared to the same period in 2012. For the respective 2013 and 2012 operating periods, the Company’s gross casino revenues consist of table games and slots. Casino revenues increased $21.8 million or 96.7% primarily due to the performance of our table games. The table games hold percentage for the three months ended September 30, 2013 was 16.1% which is above our expected range of 10.0% to 14.0%, as compared to 4.4% for the three months ended September 30, 2012. Our focus continues to be on supplementing the level of table games play at the Property, from both domestic and international customers. We also continue to focus our efforts on increasing the volume of slot play through leveraging our unique Identity Membership Program, building our database of slot customers and expanding our alliance program.

For the three months ended September 30, 2013, hotel revenues grew 11.6% compared to third quarter 2012. ADR and REVPAR also increased over the same period in 2012, primarily reflecting continued strong demand in the free independent traveler and group and convention categories, as well as the Company’s January 1, 2013 resort fee implementation. ADR and occupancy for the three months ended September 30, 2013 were $268 and 91.5%, respectively, generating REVPAR of $245. ADR and occupancy for the three months ended September 30, 2012 were $257 and 85.7%, respectively, generating REVPAR of $220.

 

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Food and beverage revenues for the three months ended September 30, 2013 decreased $1.1 million or 1.3%, when compared to the same period in 2012. Food and beverage revenues generated from restaurants, banquets and conventions, in-room dining and bars include revenues from all Company-operated outlets, as well as the third-party operated restaurants (including the Marquee) which are 100% owned by the Company. Excluding the Marquee, we continue to experience food and beverage revenue growth from the Company-operated and third-party operated dining establishments due to (i) strong growth in our group and convention business which directly contributes to higher revenues generated from banquet and buffet services; (ii) the high volume of customers visiting our restaurants; as well as, (iii) the increased number of customers staying at our Property. On a quarterly comparative basis the decline in our food and beverage revenue is attributable to new day- and nightclub competition.

Entertainment, retail and other revenues are generated from the Property’s spa and salon, retail outlets, concerts, boxing events, and other miscellaneous activities. Entertainment, retail and other revenues for the three months ended September 30, 2013 and 2012 were $8.9 million and $8.8 million, respectively, representing an increase of $0.1 million or 0.5%. The quarter-over-quarter increase in entertainment and other revenues primarily reflects higher revenues generated from an increased number of entertainment events and higher revenue from retail, spa services and various fees.

Revenues for the three months ended September 30, 2013 and 2012 include retail value of accommodations, food and beverage, and other services furnished to our guests without charge. In accordance with industry practice, these promotional allowances are deducted from revenues. We believe the level of promotional allowances incurred for the respective three month periods were necessary to continue to drive customer awareness, build our customer database and create customer loyalty. For the three months ended September 30, 2013 as compared to 2012, promotional allowances as a percentage of gross revenues, decreased slightly to 15.5% from 16.3%, respectively. We expect this level of promotional allowance expense to continue in the short-term, but continue to decline over the long-term.

Operating Expenses

Our operating expenses increased 1.4%, notably below the 16.0% increase in our gross revenues, for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012. The increase in overall operating expenses is partially reflective of the growth in gross revenues for the three months ended September 30, 2013 over the comparable 2012 period. The Company has ongoing efforts focused on restraining the growth, and in some cases, reducing department operating expenses, resulting in higher operating margins.

 

     Three Months Ended September 30,              

(Unaudited — In thousands)

   2013      2012     $ Change     % Change  

Operating expenses:

         

Casino

   $ 28,040       $ 26,697      $ 1,343        5.0

Hotel

     9,921         9,921        —          0.0

Food and beverage

     54,567         56,554        (1,987     (3.5 %) 

Entertainment, retail and other

     8,203         7,309        894        12.2

Sales and marketing

     11,987         12,963        (976     (7.5 %) 

General and administrative

     29,568         29,060        508        1.7

Corporate

     3,193         3,391        (198     (5.8 %) 

Pre-opening

     1,727         —          1,727        100.0

(Gain) loss on disposal of assets

     79         (6     85        (1417.8 %) 

Depreciation and amortization

     42,759         41,449        1,310        3.2
  

 

 

    

 

 

   

 

 

   

Total operating expenses

   $ 190,044       $ 187,338      $ 2,706        1.4
  

 

 

    

 

 

   

 

 

   

 

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Departmental Operating Expenses

Departmental operating expenses include operations associated with casino, hotel, food and beverage, entertainment, retail and other. During the three months ended September 30, 2013, departmental expenses cumulatively increased by $0.3 million or 0.2% over the respective 2012 period. The modest increase in casino operating expenses for the three months ended September 30, 2013 includes higher commissions for independent representatives generated from our expanded host program, as well as continuing refinement of hotel, food and beverage and other costs associated with complimentary goods and services offered to our customers. Per their respective agreements, we generally incur higher management and incentive fees owed to partner restaurants for performing at higher profitability levels. However, for the three months ended September 30, 2013, these incentive fees were partially offset by lower fees related to the decrease in Marquee revenues. Operating expenses within “entertainment, retail and other” include entertainment activities on the casino floor that are offered free of charge to the public. Such costs may fluctuate between periods as a result of the number of shows and the underlying cost for each show. Entertainment is a key component of the overall marketing and position strategy of the Property, and is an important driver of visitation to the Property.

Sales and Marketing, General and Administrative and Corporate Expenses

We now present sales and marketing expenses as a separate line item on the condensed consolidated statements of operations and have reclassified amounts in the prior period statement to conform to the current period’s presentation.

For the three months ended September 30, 2013, sales and marketing decreased 7.5% and general and administrative expenses increased 1.7%, respectively, as compared to the three months ended September 30, 2012. Marketing and advertising spending enhances our strong brand identity, helping to drive traffic to our Property. The timing and placement of our advertising affects quarter-to-quarter comparisons of spending levels.

Pre-opening Expenses

Pre-opening expenses of $1.7 million for the three months ended September 30, 2013 reflects such costs related to the planned December 2013 openings of The Chelsea and Rose.Rabbit.Lie. No pre-opening expenses were incurred during the three months ended September 30, 2012.

Depreciation and Amortization Expenses

Depreciation and amortization charges were $42.8 million for the three months ended September 30, 2013 and $41.5 million for the three months ended September 30, 2012. The primary reason for the increase was that, throughout 2012, certain Phase I and Phase II components of the Property were placed into service.

Other Income (Expense)

Our other income and expenses for the three months ended September 30, 2013 and 2012 were as follows:

 

     Three Months Ended September 30,              

(Unaudited — In thousands)

   2013     2012     $ Change     % Change  

Other income (expense):

        

Net settlement and default income

   $ —        $ 110      $ (110     100.0

Interest income

     11        (111     122        109.8

Interest expense due to affiliate, net of amounts capitalized

     (9,903     (11,757     1,854        15.8
  

 

 

   

 

 

   

 

 

   

Total other income (expense)

   $ (9,892   $ (11,758   $ 1,866        15.9
  

 

 

   

 

 

   

 

 

   

 

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Net Settlement and Default Income

The net settlement and default income of $0.1 million recorded in the three months ended September 30, 2012 represented certain purchasers within the East and/or the West Towers, who had previously opted out of the settlement offers, settling their claims with us in individual transactions on terms identical to the applicable class action settlement.

Interest Expense Due to Affiliate, Net of Amounts Capitalized

The Company had weighted average borrowings of $3.5 billion for each of the respective quarters ended September 30, 2013 and 2012. At September 30, 2013 and 2012 the interest rates were 1.10% and 1.33%, respectively, resulting in a decrease in interest expense for the comparable quarters.

Income Taxes

For the quarters ended September 30, 2013 and 2012, our income tax benefit was $10.4 million and $19.4 million, respectively. Our effective income tax rate was (35.0%) for the quarter ended September 30, 2013, compared to (36.1%) for the corresponding 2012 period. Effective January 1, 2012, the Company is part of a Consolidated Group owned by Deutsche Bank and is party to a tax sharing agreement with the Consolidated Group. The effective income tax rate for the quarter ending September 30, 2013 includes the benefit for being a party to such tax sharing agreement. The Consolidated Group is expected to generate more than sufficient taxable income annually to utilize the Company’s deferred tax assets.

Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012

Revenues

Our revenues for the nine months ended September 30, 2013 and 2012 were as follows:

 

     Nine Months Ended September 30,              

(Unaudited — In thousands)

   2013     2012     $ Change     % Change  

Revenues:

        

Casino

   $ 115,895      $ 92,060      $ 23,835        25.9

Hotel

     201,750        182,346        19,404        10.6

Food and beverage

     246,038        237,102        8,936        3.8

Entertainment, retail and other

     25,797        23,349        2,448        10.5
  

 

 

   

 

 

   

 

 

   

Gross revenues

     589,480        534,857        54,623        10.2

Less — promotional allowances

     (88,677     (80,718     (7,959     9.9
  

 

 

   

 

 

   

 

 

   

Net revenues

   $ 500,803      $ 454,139      $ 46,664        10.3
  

 

 

   

 

 

   

 

 

   

Gross revenues for the nine months ended September 30, 2013 increased $54.6 million or 10.2%, when compared to the same period in 2012. Our casino revenues increased 25.9% compared to the first nine months of 2012. The table games hold percentage for the nine months ended September 30, 2013 was 13.2% (our expected range is 10.0% to 14.0%), up from 8.8% for the nine months ended September 30, 2012, complementing growth in our slot revenues.

For the nine months ended September 30, 2013, hotel revenues, ADR and REVPAR increased over the same period in 2012, primarily reflecting continued strong demand in the free independent traveler and group and convention categories, as well as the Company’s January 1, 2013 resort fee implementation. ADR and occupancy for the nine months ended September 30, 2013 were $274 and 91.0%, respectively, generating REVPAR of $250. ADR and occupancy for the nine months ended September 30, 2012 were $260 and 86.6%, respectively, generating REVPAR of $225.

 

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Food and beverage revenues for the nine months ended September 30, 2013 increased $8.9 million or 3.8%, when compared to the same period in 2012. Revenue growth for the nine months ended September 30, 2013 is primarily attributable to the high volume of customers staying and visiting our Property directly contributing to higher revenues generated from (i) restaurants; (ii) an increased number of individual banquets and banquet group sizes; as well as, (iii) buffet services.

Entertainment, retail and other revenues for the nine months ended September 30, 2013 and 2012 were $25.8 million and $23.3 million, respectively, representing an increase of $2.4 million or 10.5%. The period-over-period increase in entertainment and other revenues primarily reflects higher revenues generated from an increased number of entertainment events and higher revenue from retail, spa services and various fees.

While gross revenues increased by 10.2% for the comparable nine-month periods, promotional allowances as a percentage of gross revenues decreased slightly from 15.1% for the nine months ended September 30, 2012 as compared to 15.0% for the 2013 period.

Operating Expenses

Our operating expenses increased 5.1% for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012. The increase was notably lower than the 10.2% growth in our gross revenues. The Company has ongoing efforts focused on restraining the growth, and in some cases, reducing departmental operating expenses, resulting in higher operating margins.

 

     Nine Months Ended September 30,               

(Unaudited — In thousands)

   2013      2012      $ Change     % Change  

Operating expenses:

          

Casino

   $ 82,459       $ 75,071       $ 7,338        9.8

Hotel

     30,279         28,653         1,626        5.7

Food and beverage

     162,520         161,839         681        0.4

Entertainment, retail and other

     22,263         20,481         1,782        8.7

Sales and marketing

     50,897         48,305         2,592        5.4

General and administrative

     80,466         79,851         615        0.8

Corporate

     13,856         9,342         4,514        48.3

Pre-opening

     2,172         —           2,172        100.0

(Gain) loss on disposal of assets

     85         807         (722     (89.5 %) 

Depreciation and amortization

     132,806         125,169         7,637        6.1
  

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 577,803       $ 549,518       $ 28,285        5.1
  

 

 

    

 

 

    

 

 

   

Departmental Operating Expenses

During the nine months ended September 30, 2013, departmental operating expenses consisting of operations associated with casino, hotel, food and beverage, entertainment, retail and other, increased by $11.5 million or 4.0% over the respective 2012 period. In general, the increase in departmental operating expenses is reflective of higher incremental expenses generated from the Company’s period-over-period revenue growth, e.g., casino player comps, departmental labor, hotel linen replacement, etc. The increase in casino operating expenses for the nine months ended September 30, 2013 includes higher commissions for independent representatives generated from the Company’s expanded host program, as well as continuing refinement of hotel, food and beverage and other costs associated with complimentary goods and services offered to our customers. Hotel operating expenses increased primarily as a function of higher occupancy of our rooms. Food and beverage operating expenses increased modestly overall, the net effect of growth in our operations, combined with the lower fees at Marquee, as noted in our discussion of the third quarter, 2013 results.

 

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Sales and Marketing, General and Administrative and Corporate Expenses

For the nine months ended September 30, 2013, the $2.6 million increase in sales and marketing primarily reflects new or higher levels of spending in certain national target markets. The slight 0.8% increase in general and administrative expenses for the nine months ended September 30, 2013 as compared to the same 2012 period is attributable to the Company’s previously disclosed efforts to control these costs in conjunction with operating revenue growth. Included in corporate expenses is the second quarter of 2013 recognition of a loss contingency of $3.0 million as an estimate of what we believe may be the eventual and reasonably possible loss associated with certain legal cases (as discussed in Note 12 to the condensed consolidated financial statements).

Pre-opening Expenses

Pre-opening expenses of $2.2 million for the nine months ended September 30, 2013 reflects such costs related to The Chelsea and Rose.Rabbit.Lie., both scheduled for a 2013 year-end opening. No pre-opening expenses were recorded during the nine months ended September 30, 2012.

Depreciation and Amortization

Depreciation and amortization charges were $132.8 million for the nine months ended September 30, 2013 and $125.2 million for the nine months ended September 30, 2012. The increase primarily reflects certain Phase I and Phase II components of the Property which were placed into service throughout 2012.

Other Income (Expense)

Our other income and expenses for the nine months ended September 30, 2013 and 2012 were as follows:

 

     Nine Months Ended September 30,              

(Unaudited — In thousands)

   2013     2012     $ Change     % Change  

Other income (expense):

        

Net settlement and default income

   $ 217      $ 12,771      $ (12,554     (98.3 %) 

Interest income

     28        5        23        459.2

Interest expense due to affiliate, net of amounts capitalized

     (30,197     (36,125     5,928        (16.4 %) 
  

 

 

   

 

 

   

 

 

   

Total other income (expense)

   $ (29,952   $ (23,349   $ (6,603     (28.3 %) 
  

 

 

   

 

 

   

 

 

   

Net Settlement and Default Income

Through the nine months ended September 30, 2013 and 2012, certain purchasers of condominium hotel units located within the East and West Towers of the Property agreed to settle and release their claims against the Company. As a result of settlements occurring during the nine months ended September 30, 2013 and 2012, the Company recognized as net income a net gain of $0.2 million and $12.8 million, respectively. The decrease in 2013 net settlement and default income is a result of more condominium hotel unit settlements that occurred in the prior year as compared to the current year.

As of September 30, 2013, there are seven condominium hotel units remaining under contract at The Cosmopolitan.

Interest Expense Due to Affiliate, Net of Amounts Capitalized

The Company had weighted average borrowings of $3.5 billion at September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013 and 2012, the weighted average interest rate was 1.12% and 1.33%, respectively, resulting in a decrease in interest expense for the comparable nine month periods.

 

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Income Taxes

For the nine months ended September 30, 2013 and 2012, our income tax benefit was $37.6 million and $42.2 million, respectively. Our effective income tax rate was (35.2%) and (35.5%) for each of the nine months ended September 30, 2013 and 2012. Effective January 1, 2012, the Company is part of a Consolidated Group owned by Deutsche Bank and is party to a tax sharing agreement with the Consolidated Group. The effective income tax rate for the nine months ending September 30, 2013 includes the benefit for being a party to such tax sharing agreement. The Consolidated Group is expected to generate more than sufficient taxable income annually to utilize the Company’s deferred tax assets.

Non-US GAAP Measure — EBITDA and Adjusted EBITDA

EBITDA and adjusted EBITDA are used by management as the primary measures of operating performance of The Cosmopolitan. Adjusted EBITDA is calculated as the net income (loss) attributable to the Company before interest, income taxes, depreciation and amortization, pre-opening expenses, rent expenses and corporate expenses.

Management has presented EBITDA and adjusted EBITDA information as supplemental disclosures to the reported US GAAP measures because it believes that these measures are widely used to assess the operating performance in the gaming and hospitality industry. Certain items excluded from EBITDA and adjusted EBITDA may be recurring in nature and should not be disregarded in the evaluation of our earnings performance. However, management believes that the exclusion of such items provides a meaningful analysis of current results and trends as these items can vary significantly depending on specific underlying transactions or events that are not comparable between the periods being presented.

EBITDA and adjusted EBITDA should not be construed as alternatives to operating income or net income, as indicators of our performance, as alternatives to cash flows from operating activities, as measures of liquidity, or as any other measures determined in accordance with US GAAP. Also, other companies in the gaming and hospitality industries that report adjusted EBITDA information may calculate adjusted EBITDA in a different manner.

The following table presents a reconciliation of EBITDA and adjusted EBITDA to net loss for the three and nine months ended September 30, 2013 and 2012:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(Unaudited — In thousands)

   2013     2012     2013     2012  

Net loss

   $ (19,405   $ (34,354   $ (69,344   $ (76,541

Interest, net

     9,892        11,868        30,169        36,120   

Income tax benefit

     (10,437     (19,435     (37,608     (42,187

Depreciation and amortization

     42,759        41,449        132,806        125,169   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     22,809        (472     56,023        42,561   

Corporate expenses

     3,193        3,391        13,856        9,342   

Pre-opening expenses

     1,727        —          2,172        —     

Rent expenses

     460        499        1,050        1,575   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 28,189      $ 3,418      $ 73,101      $ 53,478   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Liquidity and Capital Resources

The following table presents condensed consolidated statements of cash flows data for each of the periods indicated:

 

     Nine Months Ended September 30,  

(Unaudited — In thousands)

   2013     2012  

Net cash provided by operating activities

   $ 128,137      $ 13,809   

Net cash used in investing activities

     (49,440     (32,936

Net cash used in financing activities

     (60,478     (3,906

Cash Flows — Operating Activities

Net cash provided by operating activities during the nine months ended September 30, 2013 is primarily attributable to the $83.1 million Consolidated Group reimbursement for the utilization of the Company’s 2012 net operating losses, timing of payments for certain significant prepaid expenses and accrued liabilities, including property taxes and IT management contracts, as well as the purchase of higher liquor inventories to take advantage of pricing efficiencies, as well as improved accounts receivable collections.

The net cash provided by operating activities during the nine months ended September 30, 2012 was primarily attributable to improved operating results and the income generated by the condominium settlement and default income.

Cash Flows — Investing Activities

The ordinary and major capital expenditures of $49.4 million incurred for the nine months ended September 30, 2013 primarily related to (i) construction of certain new components of our integrated resort, primarily The Chelsea and Rose.Rabbit.Lie. (our new venues scheduled to open in late 2013); and, (ii) ordinary capital expenditures primarily associated with new in-room hotel technology.

In addition to direct costs, construction in progress also includes soft costs or indirect costs. These soft costs are generally incurred prior to commencement of the project construction and can include permits, architectural fees, engineering fees, real estate commissions and fees, marketing, taxes, insurance, interest payments, leasing and general administrative costs, etc. For the nine months ended September 30, 2013 and 2012, the Company capitalized related soft costs in the amount of $7.3 million and $2.5 million, respectively.

For the nine months ended September 30, 2012, ordinary and major capital expenditures totaled $33.0 million and were primarily incurred for the payment of construction payables and retention payments from Phase I and Phase II of the Property. Phase I of the Property opened on December 15, 2010 and significant completion of Phase II occurred through September 2011.

Cash Flows — Financing Activities

The Company maintains a $3.9 billion Credit Facility with DBCI, $3.5 billion of which was outstanding as of September 30, 2013. Deutsche Bank has no obligation to provide the Company with additional funding beyond the Credit Facility. Amounts under the total Credit Facility are drawn down in tranches which have varying maturity dates and are automatically renewed upon their expiration at the prevailing interest rates. Borrowings carry an interest rate of LIBOR plus a LIBOR margin of 85 basis points (0.85%). The Credit Facility does not include any financial covenants. The current expiration of the Credit Facility is December 2015.

For the nine months ended September 30, 2013, the net cash used in financing activities balance of $60.5 million includes $37.6 million in borrowings against our Credit Facility which was offset by related principal repayments totaling $98.1 million. Our draws against the Credit Facility were primarily utilized for construction costs relating to The Chelsea and Rose.Rabbit.Lie. and, to a lesser degree, to finance the operations at the Property.

 

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For the nine months ended September 30, 2012, cash flows used in financing activities represent the amounts drawn against our Credit Facility of $21.1 million which we used to pay construction expenses relating to Phases I and II of the Property, construction of the additional high limit gaming area and to finance the operations at the Property. These draws were offset by repayments of principal in the amount of $25.0 million during the nine months ended September 30, 2012.

Liquidity and Capital Resources

As of September 30, 2013, we had $67.0 million in available cash and cash equivalents.

Our integrated resort will have an ongoing need for renovations and other capital improvements to remain competitive, including replacement, from time to time, of furniture, fixtures and equipment. We may also need to make capital expenditures to comply with any changes in applicable laws and regulations. We estimate capital expenditures will total $70.0 million to $80.0 million during the year ending December 31, 2013.

We intend to finance ongoing major capital expenditures, including The Chelsea and Rose.Rabbit.Lie., with borrowings from DBCI through the Credit Facility, which is available through December 2015. We may require additional financing to support future growth. However, due to the existing uncertainty in the capital and credit markets, access to capital may not be available on terms acceptable to us or at all. The cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Continued turbulence in the U.S. and international markets and economies and prolonged declines in business and consumer spending may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers, including our ability to refinance maturing liabilities and access to capital markets to meet liquidity needs.

Under the terms of our Credit Facility, proceeds from these credit facilities may be used to pay for (i) the costs of constructing and completing our fully-integrated resort, (ii) Property operating deficits and, (iii) payment of interest on the Credit Facility to the extent that cash flow from the Property is insufficient to pay same after paying the cost of operating the Property. All outstanding debt will become due and payable upon a change of control of the Company.

The Company classifies construction-related accounts payable, retention and accrued and other liabilities as long-term liabilities as they are financed by the Credit Facility, and therefore, will not require the use of working capital.

Short-Term Liquidity Requirements: We generally consider our short-term liquidity requirements to consist of those items that are expected to be incurred or come due within the next twelve months. We believe those requirements consist primarily of funds necessary to pay construction payables and retention related to the build-out of The Chelsea and Rose.Rabbit.Lie., normal on-going capital expenditures, interest payments, and on-going working capital requirements. We believe that borrowings under the existing Credit Facility and operating cash flows generated by the Property will be sufficient to meet our short-term liquidity requirements. Within the next twelve months, short-term liquidity requirements are estimated to be approximately $90.0 million to $110.0 million.

Long-Term Liquidity Requirements: We generally consider our long-term liquidity requirements to consist of those items that are expected to be incurred beyond the next twelve months and believe these requirements consist primarily of funds necessary to finance future renovation projects and to finance ongoing operational costs. We intend to satisfy our long-term liquidity requirements through borrowings under the existing Credit Facility and operating cash flows generated by the Property.

The debt structure described above will require the Company to generate sufficient cash flow to pay the current interest due on the outstanding borrowings on a quarterly basis. Since interest rates will reset quarterly based on the value of LIBOR at the reset date, the Company will have a variable interest obligation that may cause volatility in our cash flows. The interest rate structure described above does not include a credit risk premium in the spread over the base rate. The lack of a risk premium in the interest rate reflects the fact that the Company is a wholly-owned subsidiary of Deutsche Bank. This interest rate is not representative of third-party interest rates that the Property would have to ordinarily bear if funding were obtained from an unrelated party. Upon a change of control event, we expect that the Company will be required to pay a credit risk premium to any lender that provides financing. In addition, base interest rates are at historic low levels and interest rates will likely increase over time.

 

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Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements in conformity with US GAAP requires us to make estimates and judgments about the effects of matters that are inherently uncertain. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. The critical accounting policies are summarized in Note 2 to our consolidated financial statements included in our 2012 Annual Report on Form 10-K filed on March 29, 2013.

Newly Issued Accounting Pronouncements

Refer to related disclosure within Note 2 to our condensed consolidated financial statements included in Item 1 — Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

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. The outstanding debt under our Credit Facility with DBCI has a variable interest rate. As of September 30, 2013, an increase in market rates of interest by 1.0% would have increased our annual interest cost by $35.0 million.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, as of the end of the period covered by this Quarterly Report, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Controls

There have been no significant changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

See Note 12, Commitments, Contingencies and Litigation, to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a description of our significant current legal proceedings.

Item 1A. Risk Factors

In addition to the other information contained in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Item 1A “Risk Factors” in our Annual Report on Form 10-K which was filed with the SEC on March 29, 2013, in evaluating our business, financial position, future results, and prospects. Although there have been no material changes to the risk factors described in the Annual Report on Form 10-K, the risks described therein are not the only risks facing our Company. Additional risks that we do not presently know or that we currently believe are not material could also materially adversely affect our business, financial position, future results and prospects.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of equity securities.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

On November 6, 2013, the Company entered into a new two-year employment agreement (the “Agreement”) with John Unwin, effective as of July 1, 2013. Upon its expiration, the agreement will be extended for a period of one year unless either party provides 90 days’ prior notice.

Under the terms of the Agreement, Mr. Unwin, age 55, will continue with the Company in the position of Chief Executive Officer. Mr. Unwin has served as Chief Executive Officer of the Company since October 2009 and as a Member of the Board of the Company since 2010. Mr. Unwin has more than 30 years of experience in hospitality and nine years of experience in the gaming industry.

Under the terms of the Agreement, Mr. Unwin will receive an annual base salary of $1.0 million and will be eligible for an annual discretionary bonus. In addition, Mr. Unwin has been granted an award under The Cosmopolitan of Las Vegas Management Incentive Award Plan (the “MIP”) in an amount equal to $2.0 million, subject to the Company’s achievement of certain EBITDA goals in accordance with the MIP. Mr. Unwin has been granted an award (the “Exit Award”) under The Cosmopolitan of Las Vegas Management Exit Award Plan (the “Exit Award Plan”) of thirty percent (30.0%) of the Exit Bonus Pool (as defined in the Exit Award Plan). However, depending on the amount of the Exit Proceeds (as defined in the Exit Award Plan), Mr. Unwin will be entitled to a cash payment in an amount ranging from $3.0 million up to a maximum of $10.0 million. The cash amount required to be paid to Mr. Unwin will be paid to him under the Exit Award Plan; provided that (i) if the Exit Award is less than cash amount required to be paid, the Company will pay the shortfall to Mr. Unwin in cash; and (ii) if the Exit Award is greater than the cash payment, only the cash payment will be paid to Mr. Unwin.

Pursuant to the Agreement, if the Company terminates Mr. Unwin’s employment for any reason (other than for cause) or for no reason, he would be eligible to receive cash severance equal to eighteen months of his annual base salary (which totals $1.5 million), payable in a lump sum. No payments will be made unless Mr. Unwin executes a general release of claims in the form provided to him by the Company and the release becomes effective.

In addition, Mr. Unwin’s agreement provides for a non-compete and non-solicit of employees and customers for a period of six months following termination of employment.

 

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Item 6. Exhibits

 

Exhibit

   
  10.1**†   Employment Agreement, dated November 6, 2013, between Nevada Property 1 LLC and John Unwin.
  10.2*†   Form of Incentive Award Agreement under the Cosmopolitan of Las Vegas Management Incentive Award Plan, incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on March 29, 2013.
  10.3*†   Form of Exit Award Agreement under the Cosmopolitan of Las Vegas Management Exit Award Plan, incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on March 29, 2013.
  31.1**   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2**   Certification of Chief Financial Officer pursuant to Section 302 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 financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, filed with the SEC on November 8, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) the condensed consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012, (ii) the condensed consolidated balance sheets as of September 30, 2013 and December 31, 2012, (iii) the condensed consolidated statements of cash flows for the nine months ended September 30, 2013 and 2012, and (iv) notes to the condensed consolidated financial statements.

 

* Previously filed.
** Filed herewith.
Indicates management contract or compensatory plan.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

 

NEVADA PROPERTY 1 LLC
Registrant

/S/    JOHN UNWIN        

John Unwin

Chief Executive Officer

(Principal Executive Officer)

Date: November 8, 2013

/S/    RONALD G. EIDELL        

Ronald G. Eidell
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Date: November 8, 2013

 

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