10-K 1 a10-1611_110k.htm 10-K

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x      ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2009

 

o         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                         to        

 

Commission file number 333-124924

 

155 East Tropicana, LLC
155 East Tropicana Finance Corp.

(Exact name of registrant as specified in its charter)

 

Nevada
Nevada

 

20-1363044
20-2546581

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

115 East Tropicana Avenue, Las Vegas, NV 89109

(Address and telephone number of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (702) 597-6076

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

None.

 

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

None.

(Title of each class)

 

 

(Title of each class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x

 

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 o

 

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 Regulations 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 o  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Yes x  No o

 

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 o

 

Accelerated filer o

 

 

 

Non-Accelerated filer x

 

Smaller reporting company o

 

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

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.  Not Applicable.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Not applicable.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I

 

 

ITEM 1.

Business

2

ITEM 1A.

Risk Factors

12

ITEM 1B.

Unresolved Staff Comments

27

ITEM 2.

Properties

27

ITEM 3.

Legal Proceedings

27

ITEM 4.

Submission of Matters to a Vote of Security Holders

27

PART II

 

 

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

27

ITEM 6.

Selected Financial Data

28

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

30

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

45

ITEM 8.

Financial Statements and Supplementary Data

47

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

70

ITEM 9A(T)

Controls and Procedures

70

ITEM 9B.

Other Information

71

PART III

 

 

ITEM 10.

Directors, Executive Officers and Corporate Governance

72

ITEM 11.

Executive Compensation

75

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

78

ITEM 13.

Certain Relationships and Related Transactions and Director Independence

80

ITEM 14.

Principal Accounting Fees and Services

82

PART IV

 

 

ITEM 15.

Exhibits, Financial Statement Schedules

82

SIGNATURES

 

84

 

 

 

EXHIBIT INDEX

88

Exhibit 12

Computation of Ratio Earnings to Fixed Charges

 

Exhibit 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.2

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

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PART I

 

ITEM 1.                        BUSINESS.

 

Unless the context indicates otherwise, all references to the “Company”, “155”, “we”, “our”, “ours” and “us” refer to 155 East Tropicana, LLC.

 

Liquidity and Financial Position

 

For discussion of our liquidity and financial position, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Executive Overview-Liquidity and Financial Position” and Note 2 to the accompanying consolidated financial statements.

 

Forward-looking Statements

 

Certain information included herein contains statements that may be considered forward-looking, such as statements relating to projections of future results of operations or financial condition, expectations for our casino, and expectations of the continued availability of capital resources. Any forward-looking statement made by us necessarily is based upon a number of estimates and assumptions that, while considered reasonable by us, is inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control, and are subject to change.  Actual results of our operations may vary materially from any forward-looking statement made by us or on our behalf.  Forward-looking statements should not be regarded as representation by us or any other person that the forward-looking statements will be achieved.  Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date thereof. We undertake no obligation to publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date hereof.  Some of the contingencies and uncertainties to which any forward-looking statement contained herein are subject to include, but are not limited to, those set forth below in the heading “ITEM 1A. Risk Factors.”

 

Corporate Organization

 

We were formed in June 2004 to acquire the Hôtel San Rémo Casino and Resort (the “Hôtel San Rémo”), a casino hotel located in Las Vegas, Nevada, from Eastern & Western Hotel Corporation (“Eastern & Western”).  The Hôtel San Rémo was renovated and re-branded and is now known as Hooters Casino Hotel.  Our common membership interests are held two-thirds through Florida Hooters LLC and one-third through EW Common LLC.

 

Florida Hooters LLC is a joint venture between Hooters Gaming LLC and Lags Ventures, LLC.  Hooters Gaming LLC is owned by the holders of licenses to operate Hooters restaurants in the Tampa Bay, Chicago and Manhattan areas as well as for wholesale foods, calendars and Nevada hotel/gaming and includes most of the original founders of the Hooters brand.  Lags Ventures, LLC is owned by a holder of the license rights to Hooters restaurants in south Florida.  Pursuant to these license rights, the owners of Florida Hooters LLC operate 41 Hooters restaurants, publish Hooters calendars, and operate a Hooters food business.  The owner of Lags Ventures, LLC is also the founder of the Dan Marino concept restaurants and owns and operates 1 Dan Marino concept restaurant.

 

EW Common LLC was formed to hold Eastern & Western’s membership interest in us.  Eastern & Western owns 90% of EW Common LLC while our President owns the balance.  Eastern & Western is beneficially owned by Sukeaki and Toyoroku Izumi.  Eastern & Western and its affiliates owned the Hôtel San Rémo from November 1988 until our acquisition of the hotel casino in August 2004.

 

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Our affiliates have granted us assignments of certain licenses pertaining to the use of the Hooters brand as well as the Pete & Shorty’s concept restaurant, solely for the purposes of allowing us to operate a Hooters Casino Hotel located at our property.  Pursuant to the Hooters license assignment, we are required to pay the owner of the Hooters trademark, HI Limited Partnership, a royalty fee.  For more information, see “Item 1. Business—Intellectual Property” and “Item 13. Certain Relationships and Related Transactions.”  Hooters of America, Inc. is the general partner of HI Limited Partnership and we refer to HI Limited Partnership and Hooters of America, Inc. collectively as “Hooters of America.”  The original founders of the Hooters brand sold the trademark rights (excluding certain rights they retained for themselves) to Hooters of America in 2001.  As a result, Hooters of America is the trademark owner of the Hooters brand and the operator and franchisor of Hooters restaurants.  We are not affiliated with Hooters of America.

 

Before we received our necessary gaming licenses and prior to November 1, 2005, the Hôtel San Rémo was operated by Eastern & Western pursuant to two separate leases with us.  These leases were terminated when we received our gaming license.  The following chart illustrates our corporate structure:

 

 


(1)         155 East Tropicana Finance Corp., which has no assets or operations, was formed for the sole purpose of facilitating the issuance of our 8 ¾ % Senior Secured Notes originally due 2012.  The Notes are currently in default and the Note Holders have the ability to accelerate repayment of the Notes.

 

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Hooters Casino Hotel

 

We purchased the former Hôtel San Rémo in August 2004 and commenced renovations in   March 2005.  On February 3, 2006, we opened the Hooters Casino Hotel to the public.  Our property is located one-half block east of the intersection of Tropicana Avenue and Las Vegas Boulevard, a major intersection on the Las Vegas strip (“The Strip”) that is within walking distance to approximately 30,000 hotel rooms.

 

The Hooters Casino Hotel features the famous Hooters décor, and the Hooters brand is a prominent component of the facility. Our strategy was to build on Hooters’ reputation as a casual, relaxed, fun and welcoming environment.  The Hooters Casino Hotel features:

 

·             an approximately 29,000 square foot “Hooters” themed casino floor with approximately 615 state-of-the-art slot and video poker machines and 24 table games;

 

·             696 hotel rooms, including 17 suites;

 

·             a tropical pool area featuring beach sand, palm trees, lagoon style waterfall, and Pool Bar containing 350 seats;

 

·             distinctive dining and entertainment options, including:

 

·             a world famous Hooters restaurant containing 200 seats;

 

·             Mad Onion Restaurant, (formerly Dan Marino’s) featuring American cuisine and offering 24 hour dining containing 287 seats;

 

·             Night Owl Showroom featuring nightly entertainment;

 

·             Porch Dogs, a Caribbean themed casual indoor-outdoor club offering Hooter’s food and bar containing 200 seats;

 

·             Pete & Shorty’s Tavern, a casual and comfortable  bar featuring a sports book and a poker room containing 100 seats;

 

·             The Lobby Bar, a 24-hour bar located at the entrance to the casino, featuring service by the world famous Hooters girls;

 

·             Dixie’s Dam Country Bar

 

·             Splurge and Bait Shoppe retail stores selling Hooters branded merchandise, and our newest addition Punishment retail store featuring  mixed martial arts, or MMA related clothing.

 

Competition

 

We face competition in the market in which we are located as well as in or near any geographic area from which we attract or expect to attract a significant number of our customers.  As a result, our casino property faces direct competition from all other casinos and hotels in Las Vegas, NV and to a lesser extent, in the Mesquite, Laughlin, Reno and Lake Tahoe areas of Nevada and in Atlantic City, New Jersey, and in the California gaming market, as well as from other forms of gaming.

 

Las Vegas, Nevada.  The hotel casino industry in Las Vegas is highly competitive.  In response to recent economic downturn, many competing properties have significantly reduced their room rates, which has increased competition for the middle market, budget oriented tourist.  The Hooters Casino Hotel competes on the basis of overall atmosphere, range of amenities, level of service, price, location,

 

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entertainment offered, theme and size.  The Hooters Casino Hotel competes with numerous resorts and hotel casinos on The Strip and in downtown Las Vegas, as well as a large number of hotels and motels in and near Las Vegas.  Many competing properties have themes and attractions which draw a significant number of visitors and compete with our property for hotel and gaming customers.  Some of these facilities are operated by companies that have more than one operating facility, and many have greater name recognition and financial and marketing resources than us and market to the same target demographic group as we do. The City Center with 6,800 hotel rooms and condominiums (opening over time), a new casino, shopping mall and numerous restaurants and other facilities recently opened in December 2009 and January 2010 within a mile of us on the Las Vegas Strip.  Additional major hotel casinos and significant expansion of existing properties, containing a significant number of hotel rooms and attractions, have also recently opened in Las Vegas.  Other projects that are currently on hold could also potentially open in the near future.  We seek to differentiate the Hooters Casino Hotel from other major Las Vegas hotel casino resorts by concentrating on the design, atmosphere, personal service and amenities that we provide and the added value of the Hooters brand.

 

California Gaming Market.  Voters in California approved an amendment to the California constitution in 2000 that gave Native American tribes in California the right to offer a limited number of slot machines and a range of house-banked card games.  A number of Native American tribes have already signed, and others have begun signing, gaming compacts with the State of California.  According to the National Indian Gaming Commission, as of February 2009, there are approximately 62 operating tribal casinos in California.  In addition, several Native American tribes in California have reached agreements with the State of California that allow for an increased number of gaming machines within the facilities operated by such tribes in exchange for a revenue-based payment to the state.  The competitive impact on our gaming establishments from the continued growth of gaming in California cannot be definitively determined but, depending on the nature, extent and location of the growth, the impact could be material.

 

Other Forms of Gaming.  We also compete, to some extent, with other forms of gaming on both a local and national level, including state-sponsored lotteries, Internet gaming, dockside casinos, riverboat casinos, on- and off-track wagering and card parlors.  The recent and continued expansion of legalized casino gaming into new jurisdictions throughout the United States has increased competition faced by us and will continue to do so in the future.  Additionally, if gaming were legalized or expanded in jurisdictions near any geographic area from which we attract or expect to attract a significant number of our customers, we could face additional competition which could have a significant adverse impact on our business, financial condition and results of operations.  There can be no assurance that we will be able to continue to compete successfully in our existing markets or that we will be able to compete successfully against any such future competition.

 

Intellectual Property

 

We have entered into an assignment agreement with Florida Hooters, LLC which grants us the right to use certain intellectual property in connection with the operation of the Hooters Casino Hotel.  The intellectual property covered by these agreements is described below.  Additionally, we have been granted a royalty-free license to the Pete & Shorty’s mark.  For more detailed information, see “Item 13. Certain Relationships and Related Transactions.”

 

Hooters Trademark.  The Hooters trademark and logo insignia are the exclusive property of Hooters of America.  We have an exclusive license to use the Hooters brand in connection with gaming, casino or combined hotel, gaming and casino operations solely at the Hooters Casino Hotel property.  Florida Hooters, LLC originally obtained the license through an assignment from Hooters Gaming Corporation, an affiliated entity under common ownership with Hooters Gaming LLC.  The underlying

 

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license agreement was executed between Hooters of America and Hooters Gaming Corporation, and granted to Hooters Gaming Corporation an exclusive license to use the licensed intellectual property in connection with gaming, casino or combined hotel, gaming and casino operations within the State of Nevada. Hooters Gaming Corporation retained any and all rights and obligations in the licensed intellectual property pursuant to the license agreement for all locations within Nevada other than the Hooters Casino Hotel.  Under an Affirmation and Acknowledgement agreement between Hooters Gaming Corporation and 155 East Tropicana, LLC, Hooters Gaming Corporation has agreed not to operate (or license or assign its rights to operate) another Hooters Casino Hotel on The Strip, until such time as none of the Notes is outstanding.  Additionally, under the agreement, Hooters Gaming Corporation agreed not to operate (or license or assign its rights to operate) another Hooters Casino Hotel in Clark County, Nevada for a period of four years from the issuance of the Notes or such earlier time as none of the Notes is outstanding.

 

Combined hotel, gaming and casino operations contemplated under the license agreement include, but are not limited to, the right to provide the following within the facility: (i) room service; (ii) restaurant operations; (iii) retail sales facilities in which third parties are permitted to conduct retail sales of all kinds; and (iv) entertainment facilities, subject to certain quality standards.  In connection with such operations, we have the right to (i) sell approved merchandise bearing some or all of the licensed intellectual property, (ii) use the licensed intellectual property and Hooters Girls to promote, market, and advertise such facilities worldwide, and (iii) include Hooters Girls as part of any facility staff.

 

We are required to pay Hooters of America an annual fee equal to $500.  In addition, we pay to Hooters of America a royalty in an amount equal to two percent (2%) of all net revenues generated in connection with licensed activities (which includes net revenues generated in connection with hotel, casino, and restaurant operations).  We are also required by the license agreement to maintain certain quality standards for the use of the Hooters brand.

 

Hooters Restaurant Concept.  Pursuant to a consent received in 2004 from Las Vegas Wings, Inc., we have the right to use the Hooters restaurant concept at the hotel casino.  The consent permits worldwide promotion, marketing and advertising of the hotel casino and its services.

 

Dan Marino Concept Restaurants.  We had an exclusive license to use certain intellectual property to operate and promote restaurants, taverns, lounges and bars using the marks “Dan Marino’s Fine Food & Spirits” and ‘“13” Martini Bars’.  In November 2009 the license was terminated and we rebranded the restaurant as “Mad Onion”.  The ‘“13” Martini Bar”, which was closed in 2007, was reopened in 2007 as “Night Owl Showroom”. See “Item 13. Certain Relationships and Related Transactions.”

 

Pete & Shorty’s.  Pete & Shorty’s, Inc. has granted us a nonexclusive, royalty-free license to use the Pete & Shorty’s mark in connection with a restaurant, bar and lounge at the Hooters Casino Hotel.  Pursuant to the license agreement, we can also use the mark in connection with affiliated merchandise, entertainment and casino services.  However, Pete & Shorty’s, Inc. maintains the right to obtain federal and/or state registrations for any and all additional services, other than restaurant, bar and cocktail lounge services, which we provide at the Hooters Casino Hotel.

 

Employees

 

As of December 31, 2009, we had 720 employees.  None of our employees are covered by collective bargaining agreements.

 

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Regulation and Licensing

 

The ownership and operation of casino gaming facilities in Nevada are subject to the Nevada Gaming Control Act and the regulations promulgated thereunder (“Nevada Act”), and various local regulations.  In addition, our gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission (“Nevada Commission”), the Nevada State Gaming Control Board (“Nevada Board”), and the Clark County Liquor and Gaming Licensing Board (“CCLGLB” together with the Nevada Commission and the Nevada Board, the “Nevada Gaming Authorities”).  We received our license from the Nevada Gaming Authorities as a limited-liability company licensee in October 2005 and are registered with the Nevada Commission as a publicly traded corporation, referred to as a “Registered Corporation”.  In addition, Florida Hooters LLC and EW Common LLC are registered with the Nevada Gaming Authorities as intermediary companies and licensed as the members of 155 East Tropicana, LLC.  Hooters Gaming LLC, Lags Ventures, LLC, and Eastern & Western are registered with the Nevada Gaming Authorities as holding companies and were found suitable as members of Florida Hooters LLC and EW Common LLC, respectively.  Also, Messrs. Lageschulte, DiGiannantonio, Ranieri, Droste, Johnson, Blakely, S. Izumi, T. Izumi and Hessling are individually licensed as our managers.  Neil Kiefer, Deborah Pierce and Gary Gregg also hold individual licenses as our officers.  Finally, because we pay a percentage of our net profits directly earned from our gaming activities to Hooters Gaming Corporation, it is licensed by the Nevada Gaming Authorities as well.

 

The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things:

 

·             the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity;

 

·             the establishment and maintenance of responsible accounting practices and procedures;

 

·             the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities;

 

·             the prevention of cheating and fraudulent practices; and

 

·             providing a source of state and local revenues through taxation and licensing fees.

 

Changes in these laws, regulations and procedures could have an adverse effect on our business, financial condition and results of operations.

 

Corporations and other entities that operate casinos in Nevada are required to be licensed by the Nevada Gaming Authorities.  A gaming license for such activities requires the periodic payment of fees and taxes and is not transferable.  As a Registered Corporation, we are required to periodically submit detailed financial and operating reports to the Nevada Commission and to furnish any other information that the Nevada Commission may require.

 

The Nevada Gaming Authorities may investigate any individual who has a material relationship to or material involvement with us in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee.  Our owners, officers, managers and certain key employees are required to be licensed by the Nevada Gaming Authorities.  The Nevada Gaming Authorities may deny an application for licensing for any cause that they deem reasonable.  A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation.  Changes in licensed positions must be reported to the

 

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Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position.

 

If the Nevada Gaming Authorities were to find an owner, officer, manager or key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would have to sever all relationships with that person.  In addition, the Nevada Commission may require us to terminate the employment of any person who refuses to file appropriate applications.  Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.

 

As licensees, we are required to submit detailed financial and operating reports to the Nevada Commission.  Substantially all material loans, leases, sales of securities and similar financing transactions by us must be reported to the Nevada Commission.

 

If it were determined that we violated the Nevada gaming laws, our gaming licenses and registrations with the Nevada Commission could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures.  In addition, we and the persons involved could be subject to substantial fines for each separate violation of the Nevada laws at the discretion of the Nevada Commission.  Further, the Nevada Commission could appoint a supervisor to operate our gaming properties and, under certain circumstances, earnings generated during the supervisor’s appointment (except for the reasonable rental value of our gaming properties) could be forfeited to the State of Nevada.  Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect our operations.

 

Since we do not intend to register or sell any of our equity securities, every holder of our equity securities is required to be licensed by the Nevada Gaming Authorities.  In addition, as 155 East Tropicana, LLC has been licensed by the Nevada Gaming Authorities and has become a Registered Corporation, none of its membership interests can be issued, sold, assigned, transferred, pledged, or otherwise disposed of without the prior approval of the Nevada Board and the Nevada Commission.  In addition, the pledge of our equity interests as security for the Notes was approved by the Nevada Board and the Nevada Commission at the time 155 East Tropicana, LLC was licensed by and registered with the Nevada Commission, which was necessary in order for such pledge to remain effective.

 

If certain exemptions are granted under the Nevada Act to a Registered Corporation, then any person who acquires more than 5% of a Registered Corporation’s voting securities is required to report the acquisition to the Nevada Commission.  The Nevada Act requires that beneficial owners of more than 10% of a registered corporation’s voting securities apply to the Nevada Commission for a finding of suitability within 30 days after the Chairman of the Nevada Board mails the written notice requiring the filing for a finding of suitability.  Under certain circumstances, an “institutional investor,” as defined in the regulations of the Nevada Commission, which acquires more than 10%, but not more than 25%, of our voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if that institutional investor holds the voting securities for investment purposes only and for a waiver of the requirement for an approval of a change of control if the acquisition is above 20% of the voting securities.  An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of our board of managers, any change in our corporate charter, bylaws, management, policies or operations, or any of our gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding our voting securities for investment purposes only.  Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include:

 

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·             voting on all matters voted on by stockholders;

 

·             making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and

 

·             other activities as the Nevada Commission may determine to be consistent with such investment intent.

 

If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners.  The applicant is required to pay all costs of investigation.

 

Under the Nevada Act, under certain circumstances, an institutional investor as defined in the Nevada Act, which intends to acquire not more than 15% of any class of securities of a privately-held corporation, limited partnership or limited-liability company that is also a registered holder or intermediary company of the holder of a gaming license, may apply to the Nevada Commission for a waiver of the usual prior licensing or finding of suitability requirements if such institutional investor holds such securities only for investment purposes.  An institutional investor shall not be deemed to hold securities only for investment purposes unless the securities were acquired and are held in the ordinary course of business as an institutional investor, do not give the institutional investor management authority, and do not, directly or indirectly, allow the institutional investor to vote for the election or appointment of members of the board of directors, a general partner or manager, cause any change in the articles of organization, operating agreement, other organic document, management, policies or operations, or cause any other action that the Nevada Commission finds to be inconsistent with holding securities only for investment purposes.  Activities that are not deemed to be inconsistent with holding securities only for investment purposes include:

 

·             nominating any candidate for election or appointment to the entity board of directors or equivalent in connection with a debt restructuring;

 

·             making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in the entity management, policies or operations; and

 

·             such other activities as the Nevada Commission may determine to be consistent with such investment intent.

 

Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable.  The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner.  Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a registered corporation beyond the period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense.  We may become subject to disciplinary action if, after receipt of notice that a person is unsuitable to be a stockholder or to have any other relationship with us, we:

 

·             pay that person any dividend or interest upon voting securities;

 

·             allow that person to exercise, directly or indirectly, any voting right conferred through securities held by that person;

 

·             pay remuneration in any form to that person for services rendered or otherwise; or

 

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·             fail to pursue all lawful efforts to require the unsuitable person to relinquish his voting securities for cash at fair market value.

 

Additionally, the CCLGLB has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license.

 

We may be required to disclose to the Nevada Board and the Nevada Commission the identities of all holders of our Notes.  The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation, including our Notes, to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation.  If the Nevada Commission determines that a person is unsuitable to own a debt security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it:

 

·             pays to the unsuitable person any dividend, interest, or any distribution whatsoever;

 

·             recognizes any voting right by the unsuitable person in connection with debt securities;

 

·             pays the unsuitable person remuneration in any form; or

 

·             makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction.

 

We are required to maintain a current membership ledger in Nevada, which may be examined by the Nevada Gaming Authorities at any time.  If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial holder to the Nevada Gaming Authorities.  A failure to make such disclosure may be grounds for finding the record holder unsuitable.  We are also required to render maximum assistance in determining the identity of the beneficial owner.  The Nevada Commission has the power to require our securities to bear a legend indicating that the securities are subject to the Nevada Act.  However, to date, the Nevada Commission has not imposed such a requirement on us.

 

We may not make a public offering of securities without the prior approval of the Nevada Commission if the securities or proceeds from the securities are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for the purposes of constructing, acquiring or financing gaming facilities.  Furthermore, any approval, if granted, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered.  Any representation to the contrary is unlawful.  Pursuant to the Nevada Act, any entity which is not an “affiliated company,” as such term is defined in the Nevada Act, or which is not otherwise subject to the provisions of the Nevada Act, including us, which plans to make a public offering of securities intending to use such securities or the proceeds from the sale thereof for the construction or operation of gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes, may apply to the Nevada Commission for prior approval of such public offering.  The Nevada Commission may find an applicant unsuitable based solely on the fact that it did not submit such an application, unless upon a written request for a ruling, the Chairman of the Nevada Board has ruled that it is not necessary to submit such an application.

 

Changes in control of a Registered Corporation through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby that person obtains control (including foreclosure on pledged shares), may not occur without the prior approval of the Nevada Commission.  Entities seeking to acquire control or ownership of a Registered

 

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Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation.  The Nevada Commission may also require the stockholders, officers, managers and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.

 

The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming.  The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada’s gaming industry and to further Nevada’s policy to:

 

·             assure the financial stability of corporate gaming operators and their affiliates;

 

·             preserve the beneficial aspects of conducting business in the corporate form; and

 

·             promote a neutral environment for the orderly governance of corporate affairs.

 

Approvals are, in certain circumstances, required from the Nevada Commission before we can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated.  The Nevada Act also requires prior approval of a plan of recapitalization proposed by the board of directors in response to a tender offer made directly to the Registered Corporation’s owners for the purposes of acquiring control of the Registered Corporation.

 

License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Nevada licensee’s respective operations are conducted.  Depending upon the particular fee or tax involved, these fees and taxes are payable monthly, quarterly or annually and are based upon either:

 

·             a percentage of the gross revenues received;

 

·             the number of gaming devices operated; or

 

·             the number of table games operated.

 

Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons, or “licensees,” and who is or who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada Board of the licensees’ participation in foreign gaming.  The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission.  Thereafter, licensees are also required to comply with certain reporting requirements imposed by the Nevada Act.  Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to a foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities or enter into associations that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ, contract with or associate with a person in the foreign operation who has been denied a license or a finding of suitability in Nevada on the ground of personal unsuitability.

 

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Potential Changes in Tax and Regulatory Requirements

 

In the past, federal and state legislators and officials have proposed changes in tax law, or in the administration of the laws, affecting the gaming industry.  Regulatory commissions and state legislatures sometimes consider limitations on the expansion of gaming in jurisdictions where we operate and other changes in gaming laws and regulations.  Proposals at the national level have included a federal gaming tax and limitations on the federal income tax deductibility of the cost of furnishing complimentary promotional items to customers, as well as various measures which would require withholding on amounts won by customers or on negotiated discounts provided to customers on amounts owed to gaming companies.  It is not possible to determine with certainty the likelihood of possible changes in tax or other laws or in the administration of the laws.  The changes, if adopted, could have a material adverse effect on our financial results.

 

Compliance with Other Laws and Regulations

 

In addition to the regulations described above, our operations are also subject to extensive state and local laws, regulations and ordinances that apply to non-gaming businesses generally, and, on a periodic basis, we must obtain various other licenses and permits, including those required to sell alcoholic beverages.  We have not incurred, and do not expect to incur, material expenditures with respect to these laws and regulations.  There can be no assurances, however, that we will not incur material liability under these laws and regulations in the future. See also “Item 1A. Risk Factors—Risks Related to Our Business—Governmental Regulations” and “—Factors Beyond Our Control.”

 

ITEM 1A.     RISK FACTORS.

 

The following risks, if any one or more occurs, could materially harm our business, financial condition or future results of operations.

 

Risks Related to Our Business

 

Going Concern—There is substantial doubt about our ability to continue as a going concern.

 

Our independent registered public accounting firm included an explanatory paragraph that expresses doubt as to our ability to continue as a going concern in their audit report contained in this Form 10-K report for the year ended December 31, 2009 and 2008.  As discussed in Note 2 to the consolidated financial statements within this Form 10-K report, we have incurred recurring operating losses, have a working capital deficiency and have an accumulated deficit.  We cannot provide any assurance that we will in fact operate our business profitably, maintain existing financings, or obtain sufficient financing in the future to sustain our business in the event we are not successful in our efforts to generate sufficient revenue and operating cash flow and/or obtain a forbearance agreement from our Note holders.

 

Our ability to continue as a going concern will be determined by our ability to obtain additional funding or restructure or negotiate waivers on our existing indebtedness and to generate sufficient revenue to cover our operating expenses.  The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amount.

 

Recent Economic Developments — Recent instability in the financial markets may continue to impact our business.

 

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Recently, the residential real estate market in Las Vegas and the U.S. has experienced a significant downturn due to declining real estate values, substantially reducing mortgage loan originations and securitizations, and precipitating more generalized credit market dislocations and a significant contraction in available liquidity globally. These factors, combined with fluctuating oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic recession. Individual consumers are experiencing higher delinquency rates on various consumer loans and defaults on indebtedness of all kinds have increased.  There can be no assurance that the decline is over and there can be no assurance that government response to these conditions will successfully address the fundamental weakness, restore consumer confidence or lead to improvement of the markets.  Further declines in real estate values in Las Vegas and the U.S. or elsewhere and continuing credit and liquidity concerns that have had an adverse affect on our results of operations and are likely to continue until such time as these aforementioned conditions improve.

 

Dependence Upon Cash Flow of Property—With our Credit Facility fully drawn, our cash flow to meet our payment obligations under the Notes and our other indebtedness and to fund our operations is dependent solely on the hotel casino.

 

Currently our Credit Facility is fully extended and we have no additional availability to borrow against the Credit Facility.  As a result, we now rely exclusively on cash flow generated by our hotel casino to meet our payment obligations under our indebtedness and to fund our operations and planned or committed capital expenditures, including any renovation of our existing property.  We failed to pay our interest obligation under the Notes on April 1, 2009 and October 1, 2009 and anticipate an inability to pay interest on the Notes in 2010.  If adverse regional and national economic conditions persist, worsen, or fail to improve significantly, we could experience decreased revenues from our operations attributable to decreases in consumer spending levels and could fail to generate sufficient cash to fund our liquidity needs or fail to meet our payment obligations for future interest payments our other indebtedness. We cannot provide assurance that our business will generate sufficient cash flow from operations to enable us to pay our indebtedness or to fund our other liquidity needs.  See “Item 1A. Risk Factors—Risks Related to the Notes and Other Company Debt—Ability to Service Debt.”

 

Sensitivity to Consumer SpendingOur business is particularly sensitive to reductions in discretionary consumer spending as a result of downturns in the economy.

 

Consumer demand for casino hotel properties, such as ours, are particularly sensitive to downturns in the economy and the corresponding impact on discretionary spending on leisure activities. Changes in discretionary consumer spending or consumer preferences brought about by factors such as perceived or actual general economic conditions, the current housing crisis and the credit crisis, the impact of high energy and food costs, the increased cost of travel, the potential for continued bank failures, perceived or actual disposable consumer income and wealth, effects of the current recession and changes in consumer confidence in the economy, or fears of war and future acts of terrorism could further reduce customer demand for the amenities that we offer, thus imposing practical limits on pricing and harming our operations.

 

Domestic and International Events — Our business may be adversely impacted by domestic and international events.

 

The terrorist attacks that took place in the United States on September 11, 2001, were unprecedented events that created economic and business uncertainties, especially for the travel and tourism industry.  The potential for future terrorist attacks, the national and international responses, and other acts of war or hostility, including the ongoing conflicts in Iraq and Afghanistan, have created

 

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economic and political uncertainties that could materially adversely affect our business, results of operations and financial condition in ways we cannot predict.

 

Gaming Taxes and Fees — If the State of Nevada or Clark County increases gaming taxes and fees, our results of operations could be adversely affected.

 

State and local authorities raise a significant amount of revenue through taxes and fees on gaming activities. From time to time, legislators and officials have proposed changes in tax laws, or in the administration of such laws, affecting the gaming industry. In addition, worsening economic conditions could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes.  If the State of Nevada or Clark County, Nevada were to increase gaming taxes and fees, our results of operations could be adversely affected.

 

License Agreement—We are required to pay numerous royalty and other fees to the licensors, some of whom are our affiliates, for the right to use certain intellectual property.

 

The Hooters trademark and logo insignia are the exclusive property of Hooters of America.   Pursuant to certain licenses and an assignment of those license rights to us, we have a royalty-bearing license to use certain intellectual property related to the Hooters brand solely for purposes of the operation of a Hooters Casino Hotel located at our property.  Our operation of the Hooters Casino Hotel is conditioned on payment of certain royalty fees to Hooters of America and some of our affiliates based on percentages of revenues and sales generated by our gaming and restaurant activities, as described under “Item 1. Business—Intellectual Property” and “Item 13. Certain Relationships and Related Transactions,” and satisfaction of other conditions under the license.  Failure to satisfy the conditions could result in termination of the license.  Furthermore, in a bankruptcy of a licensor, the bankruptcy court could conclude that the trademark license agreements are executory contracts and, subject to certain legal requirements, may approve rejection of the license agreements.  Although we would take the position that our license agreement with Hooters of America is perpetual and not an executory contract, there can be no assurance that a bankruptcy court would so conclude in a bankruptcy of Hooters of America.  Rejection would give rise to a claim for damages for breach of the license and might prevent us from continuing to use the trademark or on the same terms.  The loss of our license rights could prevent us from operating as the Hooters Casino Hotel, which would have a material adverse effect on our business, financial condition and results of operations.

 

Use of Hooters Brand—Use of the Hooters brand by entities other than us, including in Las Vegas and other areas of Nevada, could adversely affect our business, financial condition and results of operations.

 

We believe we benefit from the name recognition and reputation generated by the Hooters restaurants that are operated worldwide.  We have the right to use the Hooters brand and certain related intellectual property solely for purposes of the Hooters Casino Hotel. Hooters Gaming Corporation, an affiliate under common ownership with Hooters Gaming LLC, is the sole owner of the right to use the Hooters brand in connection with the conduct of gaming and the operation of hotels elsewhere in the state of Nevada. Hooters Gaming Corporation has agreed not to operate (or license or assign its rights to operate) another Hooters Casino Hotel on The Strip until our Notes are no longer outstanding.  Additionally, Hooters Gaming Corporation has agreed not to operate (or license or assign its rights to operate) another Hooters Casino Hotel in Clark County, Nevada for a period of four years from the issuance of our Notes or such earlier time as none of our Notes are outstanding.  However, Hooters Gaming Corporation or its assignee can exploit the Hooters brand and logo in connection with hotel casinos and casinos in other areas of Nevada and elsewhere, including marketing worldwide, and once the Notes are no longer outstanding, on The Strip.  For example, other Hooters Casino Hotels could be

 

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opened in areas (other than The Strip) in Las Vegas and Nevada and throughout the world where gaming operations are permitted. We cannot assure that the development of other hotel casinos, casinos or restaurants using the Hooters brand in Nevada or elsewhere will not adversely affect our business, financial condition and results of operations.  Nor can we assure that our business, financial condition and results of operations will not be adversely affected by the management of the Hooters brand or any negative public image or other adverse event that becomes associated with the Hooters brand.

 

Licensing—We are required to maintain gaming, liquor and other licenses to operate the Hooters Casino Hotel. The gaming industry is highly regulated.

 

Our operation of the Hooters Casino Hotel is contingent upon the maintenance of various regulatory licenses, permits, approvals, registrations, findings of suitability, orders and authorizations.  The laws, regulations, and ordinances requiring these licenses, permits and other approvals generally relate to the responsibility, financial suitability and character of the owners and managers of our gaming operations, as well as persons financially interested or involved in our gaming operations, almost all of whom had never been licensed previously.  The scope of the approvals required to operate a facility were extensive.  Failure to maintain the necessary approvals could adversely affect our ability to operate the Hooters Casino Hotel. See “Item 1. Business—Regulation and Licensing.”

 

Risk of a New Venture—We have a limited operating history or history of earnings as the Hooters Casino Hotel.

 

We were formed to acquire, operate, renovate and re-brand the Hôtel San Rémo.  While the Hôtel San Rémo has a history of operations and a history of earnings, our operating history is limited.  Moreover, our hotel/casino is identified by the Hooters brand which has not been associated with other hotels or casinos.  Consequently, we cannot be certain that we will ultimately attract the number and type of hotel and casino customers and other visitors we desire to achieve our objective of improving the profitability of the hotel casino.

 

We are subject to significant business, economic, regulatory and competitive uncertainties frequently encountered by new businesses in competitive environments, many of which are beyond our control.  Because we have a limited operating history, it may be more difficult for us to prepare for and respond to these types of risks, and the other types of risks described herein, as compared with an established business.  Our business prospects should be evaluated in light of the difficulties frequently encountered by companies in the early stages of gaming projects and the risks inherent in the establishment of a new business enterprise.  There can be no assurance that we will be able to successfully operate the hotel casino or manage these risks successfully, that the hotel casino will be profitable or that we will generate sufficient cash flow to meet our payment obligations under the Notes and our other indebtedness, which would in turn negatively affect our business, financial condition and results of operations.

 

Competition—We are subject to intense local competition as well as competition in the gaming industry that could hinder our ability to operate profitably.

 

Competition in Las Vegas has increased over the last several years as a result of significant increases in hotel rooms, casino sizes and convention, trade show and meeting facilities.  In response to the recent economic downturn, many competing properties have significantly reduced their room rates, which has increased competition.  Our success is dependent upon the success of the hotel casino and its continuing ability to attract visitors and operate profitably.  The hotel casino, located one-half block east of The Strip, competes with high-quality Las Vegas resorts and other Las Vegas hotel casinos, including those located on The Strip and in downtown Las Vegas, on the basis of overall atmosphere, range of

 

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amenities, level of service, price, location, entertainment offered, theme and size.  Currently, there are approximately 39 major gaming properties located on or near The Strip, 16 additional major gaming properties in the downtown area and additional gaming properties located in other areas of Las Vegas.  Some of these facilities are operated by companies that have more than one operating facility, and many have greater name recognition and financial and marketing resources than us and market to the same target demographic group as we do.  Furthermore, additional major hotel casinos and significant expansion of existing properties, containing a significant number of hotel rooms and attractions, are expected to open in Las Vegas within the coming years.  There can be no assurance that the Las Vegas market will continue to grow or that hotel casino resorts will continue to be popular.  A decline or leveling off of the growth or popularity of such facilities would adversely affect our business, financial condition and results of operations.  See “Item 1. Business—Competition.”

 

There also is substantial competition among gaming companies in the gaming industry generally, which includes land-based casinos, dockside casinos, riverboat casinos, casinos located on Native American land, including in California, and other forms of legalized gambling.  If other casinos operate more successfully, if existing properties are enhanced or expanded, or if additional hotels and casinos are established in and around the locations where we conduct business, we may lose market share.  We also compete, to some extent, with other forms of gaming on both a local and national level, including state-sponsored lotteries, Internet gaming, on- and off-track wagering and card parlors.  In particular, the legalization of gaming or the expansion of legalized gaming in or near any geographic area from which we attract or expect to attract a significant number of our customers could have a significant adverse effect on our business, financial condition and results of operations.

 

Increased competition may also require us to make substantial capital expenditures to maintain and enhance the competitive position of our hotel casino.  Because we are highly leveraged, there can be no assurance that we will have sufficient financing to make such expenditures.  If we are unable to make such expenditures, our competitive position and our results of operations could be materially adversely affected.

 

Governmental Regulations—We face extensive regulation from gaming and other government authorities.

 

As owners and operators of gaming facilities, we are subject to extensive Nevada state and local regulation.  Nevada state and local government authorities require us and our subsidiaries to maintain gaming licenses and require our officers and key employees to demonstrate suitability to hold gaming licenses.  The Nevada state and local government may limit, condition, suspend or revoke a license for any cause deemed reasonable by the respective licensing agency.  They may also levy substantial fines against us or the individuals involved in violating gaming laws or regulations.  The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

 

No assurances can be given that any new licenses, registrations, findings of suitability, permits and approvals, including for any proposed expansion of our hotel casino, will be renewed when they expire.  Any failure to renew or maintain our licenses or receive new licenses when necessary would have a material adverse effect on us.

 

We are subject to a variety of other rules and regulations, including zoning, environmental, construction and land-use laws and regulations governing the serving of alcoholic beverages.  We also pay substantial taxes and fees in connection with our operations as a gaming company, which taxes and fees are subject to increase or other change at any time.  Any changes to these laws could have a material adverse effect on our business, financial condition and results of operations.

 

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The compliance costs associated with these laws, regulations and licenses are significant.  A change in the laws, regulations and licenses applicable to our business or a violation of any current or future laws or regulations or our gaming licenses could require us to make material expenditures or could otherwise materially adversely affect our business, financial condition or results of operations.  For more detailed information, see “Item 1. Business—Regulation and Licensing.”

 

Union Efforts to Organize Employees—Our business, financial condition, and results of operations may be harmed by union efforts to organize our employees.

 

Our employees were not covered by collective bargaining agreements as of December 31, 2009.  Unionization of our employees could result in disruption in our business and could incur significant costs, both of which could have a material adverse effect on our results of operation and financial condition.  We could experience significant increases in our labor costs which could also have a material adverse effect on our business, financial condition, and results of operations.

 

Possible Conflicts of Interest—The relationship of our chief executive officer to Hooters Inc. and related entities creates potential for conflicts of interest.

 

Neil Kiefer, our chief executive officer is the President, Chief Executive Officer and director of Hooters Inc. and related entities, which are based in Florida, and some of which may have interests adverse to us.  Due to Mr. Kiefer’s responsibilities to serve both companies, there is potential for conflicts of interest.  At any particular time, the needs of Hooters Inc. could cause Mr. Kiefer to devote attention to Hooters Inc. at the expense of devoting attention to us.  In addition, matters may arise that place Mr. Kiefer in conflicting positions.  No assurance can be given that material conflicts will not arise which could be detrimental to our business, financial condition and results of operations.

 

Factors Beyond Our Control—Our business, financial condition and results of operations are dependent in part on a number of factors that are beyond our control.

 

The economic health of our business is generally affected by a number of factors that are beyond our control, including:

 

·             general economic conditions and economic conditions specific to our primary markets;

 

·             inaccessibility to our property due to construction on adjoining or nearby properties, streets or walkways;

 

·             levels of disposable income of casino customers;

 

·             increased transportation costs;

 

·             continued increases in healthcare costs;

 

·             local conditions in key gaming markets, including seasonal and weather-related factors;

 

·             increase in gaming taxes or fees;

 

·             decline in tourism and travel due to occurrences or threats of terrorism or other destabilizing events;

 

·             substantial increase in the cost of electricity, natural gas and other forms of energy;

 

·             competitive conditions in the gaming industry, including the effect of such conditions on the pricing of our games and products;

 

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·             the relative popularity of entertainment alternatives to casino gaming that compete for the leisure dollar;

 

·             the adoption of anti-smoking regulations; and

 

·             an outbreak or suspicion of an outbreak of an infectious communicable disease.

 

Any of these factors could negatively impact our property or geographic location in particular or the casino industry generally, and as a result, our business, financial condition and results of operations.

 

Environmental Matters—We are subject to environmental laws and potential exposure to environmental liabilities. This may cause us to incur costs or affect our ability to develop, sell or rent our property or to borrow money using such property as collateral.

 

We are subject to various federal, state and local environmental laws, ordinances and regulations, including those governing discharges to air and water, the generation, handling, management and disposal of petroleum products, asbestos containing materials and other hazardous substances, and the health and safety of our employees.  Permits may be required for our operations and these permits are subject to renewal, modification and, in certain cases, revocation.  In addition, as a property owner and operator, we may be liable for the costs of investigating and remediating these substances or products on, under or in our property, without regard to whether we knew of, or caused, the presence of the contaminants, and regardless of whether the practices that resulted in the contamination were legal at the time they occurred.  The presence of, or failure to remediate properly, the substances may adversely affect our ability to sell or lease our property or to borrow funds using it as collateral.  Additionally, we may be subject to claims by third parties based on damages and costs resulting from environmental contamination emanating from our property.

 

We have not identified any such issues associated with our property that could reasonably be expected to have an adverse effect on us or the results of our operations.  However, it is possible that historical or neighboring activities have affected our property and, as a result, there can be no assurance that material obligations or liabilities under environmental laws will not arise in the future which may have a material adverse effect on us.  Moreover, it is also possible that future developments could lead to material environmental compliance costs or other liabilities for us and that these costs could have a material adverse effect on our business and financial condition.

 

Uninsured Losses—We may incur losses that are not adequately covered by insurance which may harm our financial condition and results of operations.

 

Although we maintain insurance that we believe is customary and appropriate for our business, we cannot assure you that insurance will be available or adequate to cover all loss and damage to which our business and our assets might be subjected.  In connection with insurance renewals subsequent to the terrorist events of September 11, 2001, the insurance coverage for certain types of damages or occurrences have been diminished substantially and is unavailable at commercial rates.  The lack of adequate insurance for certain types or levels of risk could expose us to significant losses in the event that a catastrophe or lawsuit occurred for which we are underinsured.  Any losses we incur that are not adequately covered by insurance may decrease our future operating income, require us to find a replacement for or repair destroyed property and reduce the funds available for payment of our obligations on the Notes and our other indebtedness.

 

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Risks Related to the Notes and Other Company Debt

 

Substantial debt- our substantial level of debt could adversely affect our financial condition and prevent us from fulfilling our obligations under the Notes and our other debt.

 

We have substantial debt.   Our substantial level of debt has adversely affected our financial condition and prevented us from fulfilling our obligations under the Notes and our other debt. In addition, national and local economic conditions have affected our financial condition.  As of December 31, 2009, we have total debt of $146.1 million.  Due to economic conditions and our results of operations, we did not  make our scheduled interest payment on our Notes on April 1, 2009 and October 1, 2009.  We do not believe that we will be able to make interest payments for the foreseeable future.  We are in default under the indenture governing the Notes due to our failure to make previous interest payments.  We are also in default under our Credit Facility due to our failure to make scheduled interest payments on the Notes and our failure to enter into control account agreements on certain of our bank accounts.   A default under the indenture governing our Notes permits the lenders under our Credit Facility to declare a default under the Credit Agreement.  See “Risks Related to the Notes and Other Company Debt” regarding limitations on collateral and ability to exercise remedies.  Our substantial debt has had and may have in the future important consequences and significant effects on our business. For example, it did or could:

 

·             make it more difficult for us to cure existing defaults and satisfy our obligations under the Notes and our other debt;

 

·             result in further events of default if we fail to satisfy our other obligations under the Notes or our other debt or fail to comply with the financial and other restrictive covenants contained in the indenture governing the Notes or our Credit Facility.  Current events of default have resulted in all of our debt becoming immediately due and payable and could permit our lenders to foreclose on our assets securing such debt;

 

·             require us to dedicate a substantial portion of our cash flow from our business operations to pay our debt, thereby reducing the availability of cash flow to fund working capital, capital expenditures, development projects, general operational requirements and other purposes;

 

·             limit our ability to obtain additional financing for working capital, capital expenditures and other activities;

 

·             limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

·             increase our vulnerability to general adverse economic and industry conditions or a downturn in our business; and

 

·             place us at a competitive disadvantage compared to competitors that are not as highly leveraged.

 

Risks Relating To Our Business And Our Capital Structure

 

We Are in Breach of Affirmative Covenants Under Our Credit Facility.

 

In connection with our Credit Facility as defined in Item 7 below, we agreed to affirmative covenants obligating us to, among other things, to deliver a deposit account control agreement for each of the Company’s depository accounts.  In 2009, the Company received a notice of default, or Notice, on its Credit Facility, which relates to the Company’s failure to provide a deposit account control agreement

 

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in relation to an account at a depository bank and failure to make the scheduled interest payments on our Notes,  among other defaults.

 

The Notice further provided that as a result of the default, we will no longer have the option to request LIBOR Rate loans.  As a result of losing the availability of LIBOR Rate loans under the Credit Facility, the interest rate on the Credit Facility has increased to the default rate of 4% over prime.  If we are not successful in negotiating a waiver or forbearance agreement with the holder of the Credit Facility regarding the Notice the holder would have the ability to accelerate repayment of all amounts outstanding under the Credit Facility ($14.5 million at December 31, 2009), to commence to foreclose on some or all of our assets securing the debt, or exercise other rights and remedies granted under the Credit Facility and as may be available pursuant to applicable law.  If the Credit Facility were to be accelerated, we would be required to refinance or restructure the payments on that debt.  We cannot assure you that we would be successful in completing a refinancing or consensual out-of-court restructuring, if necessary.

 

Ability to Service Debt—To service our debt, we will require a significant amount of cash. Based on current operations we are currently unable to service our Notes.

 

With our Credit Agreement fully extended, we will rely exclusively on funds generated from our operations to pay our expenses and to pay the amounts due under the Notes, our Credit Facility and our other debt. Due to our current cash and anticipated cash flow from operations, we will not make the $5.7 million interest payment due on April 1, 2010.  We are already in default under our indenture and Credit Agreement due to our failure to make previous interest payments due under the indenture.  Our ability to meet our expenses and pay additional amounts due under the Notes and other debt will depend on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control.  If adverse regional and national economic conditions persist, worsen, or fail to improve significantly, we could experience decreased revenues from our operations attributable to decreases in consumer spending levels and could fail to generate sufficient cash to pay additional amounts due under our debt, including the Notes, or to fund other liquidity needs, such as future capital expenditures.  If recent economic conditions, including the availability of credit, persist, worsen, or fail to improve significantly, we also may be unable to refinance all or part of our debt, sell assets, reduce or delay capital expenditures or borrow more money.  In addition, the terms of existing or future debt agreements, including our Credit Facility and the indenture governing the Notes, may restrict us from adopting any of these alternatives.

 

Limitations on Collateral—The collateral securing the Notes does not include any of our gaming assets or certain other excluded assets.

 

The Notes and any subsidiary guarantees thereof are secured by a security interest in substantially all of our and any subsidiary guarantors’ existing and future assets (other than certain excluded assets), a pledge of our equity interests and the equity interests in any subsidiary guarantors.  As of December 31, 2009, there are no subsidiary guarantors.  The collateral does not include gaming licenses or any gaming equipment or other assets securing furniture, fixtures and equipment financing, and there are no restrictions on the amount of gaming equipment financed in this manner.  The collateral also does not include contracts, agreements, licenses (including gaming and liquor licenses) and other rights that by their express terms prohibit the assignment thereof or the grant of a security interest therein.  Some of these may be material to us and such exclusion could have a material adverse effect on the value of the collateral.

 

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Value of Collateral Securing the Notes—The fair market value of the collateral securing the Notes may not be sufficient to pay the amounts owed under the Notes.

 

Our Notes and Credit Facility are secured by a security interest in substantially all of our existing and future assets (other than in certain excluded assets) (“Collateral”).  The proceeds of any sale of collateral following an event of default with respect to the Notes may not be sufficient to satisfy, and may be substantially less than, amounts due on the Notes.  No appraisal has been made of the collateral.  The total value of the collateral is likely less than the amount due on the Notes.

 

The value of the collateral in the event of liquidation will depend upon market and economic conditions, the availability of buyers and similar factors.  By its nature, some or all of the collateral may not have a readily ascertainable market value or may not be saleable or, if saleable, there may be substantial delays in its liquidation.  To the extent that liens, security interests and other rights granted to other parties (including the lenders under our Credit Facility) encumber assets owned by us, those parties have or may exercise rights and remedies with respect to the property subject to their liens that could adversely affect the value of that collateral and the ability of the trustee under the indenture governing the Notes or the holders of the Notes to realize or foreclose on that collateral.  Consequently, we cannot give assurance that liquidating the collateral securing the Notes would produce proceeds in an amount sufficient to pay any amounts due under the Notes after also satisfying the obligations to pay any creditors with prior claims on the collateral.

 

In addition, under the intercreditor agreement between the trustees under the indenture governing the Notes and the lenders under our Credit Facility, the right of the lenders to exercise remedies with respect to the collateral could delay liquidation of the collateral.  The gaming licensing process, along with bankruptcy laws and other laws relating to foreclosure and sale, as discussed below, also could substantially delay or prevent the ability of the trustee or any holder of the Notes to obtain the benefit of any collateral securing the Notes.  Such delays could have a material adverse effect on the value of the collateral.

 

The indenture governing the Notes also permits us to designate one or more of our restricted subsidiaries as an unrestricted subsidiary.  If we designate a restricted subsidiary as an unrestricted subsidiary, all of the liens on any collateral owned by the unrestricted subsidiary or any of its subsidiaries and any guarantees of the Notes by the unrestricted subsidiary or any of its subsidiaries will be released under the indenture but not necessarily under our Credit Facility.  Designation of an unrestricted subsidiary will reduce the aggregate value of the collateral securing the Notes to the extent that liens on the assets of the unrestricted subsidiary and its subsidiaries are released.  In addition, the creditors of the unrestricted subsidiary and its subsidiaries will have a prior claim (ahead of the Notes) on the assets of such unrestricted subsidiary and its subsidiaries.

 

If the proceeds of any sale of collateral are not sufficient to repay all amounts due on the Notes, the holders of the Notes (to the extent not repaid from the proceeds of the sale of the collateral), would have only an unsecured claim against our remaining assets.

 

Lien Subordination of Notes—The lien on the collateral securing the Notes are contractually subordinated pursuant to the intercreditor agreement to the liens securing our Credit Facility.

 

The security interests securing the Notes and any guarantees, if applicable, of the Notes are contractually subordinated to up to $15.0 million principal amount of debt (plus related interest, fees, indemnities, costs and expenses) that may be incurred under our Credit Facility, pursuant to an intercreditor agreement between the trustee under the indenture governing the Notes and the lenders under our Credit Facility.  We are currently in default under our Credit Facility.  In addition, lenders of

 

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furniture, fixtures and equipment financing and other purchase money debt have a security interest in the assets securing that debt, although those assets, so long as they secure only such debt, will not secure the Notes.  The indenture permits unlimited gaming furniture, fixtures and equipment financing and up to $2.5 million of other secured purchase money financing.  As a result, upon any distribution to our creditors, whether or not in bankruptcy, liquidation, reorganization or similar proceedings, or following acceleration of our debt or an event of default under such debt, the lenders under our Credit Facility will be entitled to be repaid in full from the proceeds of the assets securing such debt before any payment is made to holders of Notes from such proceeds and the lenders of furniture, fixtures and equipment financing and other purchase money debt will be entitled to be repaid in full from the proceeds of the assets securing such debt before any payment is made to holders of Notes from such proceeds.

 

Consequently, the liquidation of the collateral securing the Notes may not produce proceeds in an amount sufficient to pay the amounts due on the Notes after also satisfying the obligations to pay our Credit Facility lenders and purchase money lenders, even if the fair market value of the collateral securing the Notes would be sufficient, absent our Credit Facility and purchase money debt, to pay all amounts due on the Notes.  If the proceeds of any sale of collateral are not sufficient to repay all amounts due on the Notes, the holders of the Notes (to the extent not repaid from the proceeds of the sale of the collateral), would have only an unsecured claim against our remaining assets.

 

Limited Ability of Holders of the Notes to Exercise Remedies—The rights of the trustee and holders of Notes to exercise remedies under the indenture governing the Notes are limited by an intercreditor agreement between the trustee and the lenders under our Credit Facility.

 

A number of the rights and remedies of the trustee and the holders of the Notes are significantly limited under the intercreditor agreement.  For instance, if the Notes become due and payable prior to the stated maturity or are not paid in full at the stated maturity at a time during which we have debt outstanding under our Credit Facility, the trustee will not have the right to foreclose upon the collateral that also secures the obligations under our Credit Facility unless and until the lenders under our Credit Facility fail to take steps to exercise remedies with respect to or in connection with such collateral within 90 days following notice to such lenders of the occurrence of an event of default under the indenture governing the Notes.  We are currently in default under our Credit Facility.  In addition, the intercreditor agreement prevents the trustee and the holders of the Notes from pursuing remedies with respect to certain of the collateral in an insolvency proceeding.

 

The rights and remedies of the trustee also are subject to additional practical limitations with respect to certain collateral so long as such collateral also secures our Credit Facility.  The trustee does not and will not have possession (if certificated) of our equity interests in any subsidiary guarantors or the equity interests of 155 East Tropicana, LLC and 155 East Tropicana Finance Corp. (even though such equity interests will constitute collateral), so long as such equity interests also secure our Credit Facility.  As a result, so long as such equity interests also secure our Credit Facility, the trustee (although it will have a perfected security interest in such equity interests) will not be able to take possession of such equity interests upon the occurrence of an event of default under the indenture governing the Notes.  In addition, the trustee does not have a perfected security interest in certain other portions of the collateral—including deposit accounts—that consist of assets that are not perfected by filing a Uniform Commercial Code financing statement, or that require that the issuers or any subsidiary guarantor, as applicable, to cause the trustee to obtain “control” (as defined in the Uniform Commercial Code) or possession of such assets (and, after commercially reasonable efforts, the issuers or any such guarantor, as applicable, are unable to cause the trustee to obtain such control or possession).

 

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Limited Ability of Holders of Notes to Realize on Collateral—Gaming laws, bankruptcy laws and other factors may delay or otherwise impede the trustee’s ability to foreclose on the collateral securing the Notes.

 

In addition to our intercreditor arrangements with lenders under our Credit Facility, the gaming laws of the State of Nevada and the licensing processes, along with other laws relating to foreclosure and sale, could substantially delay or prevent the ability of the trustee or any holder of the Notes to obtain the benefit of any collateral securing the Notes.  For example, if the trustee sought to operate, or retain an operator for, any of our gaming properties, the trustee would be required to obtain Nevada gaming licenses.  Potential purchasers of our gaming properties or the gaming equipment would also be required to obtain a Nevada gaming license.  This could limit the number of potential purchasers in a sale of our gaming properties or gaming equipment, which may delay the sale of and reduce the price paid for the collateral.

 

In addition, the trustee’s ability to repossess and dispose of collateral is subject to the procedural and other restrictions of state real estate, commercial and gaming law, as well as the prior approval of the lenders under our Credit Facility.  Among other things, if the trustee did conduct a foreclosure sale, and if the proceeds of the sale were insufficient, after expenses, to pay all amounts due on the Notes, the trustee might, under certain circumstances, be permitted to assert a deficiency claim against us.  There can be no assurance that the trustee would be able to obtain a judgment for the deficiency or that we would have sufficient other assets to pay a deficiency judgment.

 

Federal bankruptcy law also could impair the trustee’s ability to foreclose upon the collateral.  If we or a guarantor become a debtor in a case under the United States Bankruptcy Code, as amended, or the Bankruptcy Code, if any, the automatic stay, imposed by the Bankruptcy Code upon the commencement of a case, would prevent the trustee from foreclosing upon the collateral or (if the trustee has already taken control of the collateral) from disposing of it, without prior bankruptcy court approval.

 

The bankruptcy court might permit us to continue to use the collateral while the bankruptcy case was pending, even if the Notes were then in default.  Under the Bankruptcy Code, holders of Notes and the trustee may be entitled to “adequate protection” of the interest of holders of Notes in the collateral as provided for in Section 361 of the Bankruptcy Code, if necessary to protect against any diminution in value during the case.  There can be no assurance that the court would require us to provide holders of Notes with any form of “adequate protection,” or that any protection so ordered would, in fact, be adequate.

 

In a bankruptcy case, the court would allow a claim for all amounts due under the Notes, including all accrued and unpaid interest through the date of bankruptcy.  Under the Bankruptcy Code, interest stops accruing on the date of bankruptcy except under certain specified circumstances, and there can be no assurance that the court would allow a claim for post-bankruptcy interest.  If the court held that the value of the collateral securing the Notes was less than the amount due, the trustee would be permitted to assert a secured claim in an amount equal to the collateral’s value and an unsecured claim for the deficiency.

 

For these and other reasons, if we or our subsidiaries, if any, become debtors in cases under the Bankruptcy Code, there can be no assurance:

 

·             whether any payments under the Notes would be made;

 

·             whether or when the trustee could foreclose upon or sell the collateral;

 

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·             whether the term or other conditions of the Notes or any rights of the holders could be altered in a bankruptcy case without the trustee’s or the investors’ consent;

 

·             whether the trustee or investors would be able to enforce the investors’ rights against the guarantors under their guarantees; or

 

·             whether or to what extent holders of the Notes would be compensated for any delay in payment or decline in the collateral’s value.

 

Finally, the trustee’s ability to foreclose on the collateral on behalf of the holders of Notes may be subject to the consent of third parties, prior liens (as discussed above) and practical problems associated with the realization of the trustee’s security interest in the collateral.

 

Restrictive Covenants—The indenture governing the Notes and our Credit Facility contain covenants that significantly restrict our operations.

 

The indenture governing the Notes and the agreement governing our Credit Facility contain, and any other future debt agreements may contain, numerous covenants imposing financial and operating restrictions on our business.  These restrictions may affect our ability to operate our business, may limit our ability to take advantage of potential business opportunities as they arise and may adversely affect the conduct of our current business.  Additionally, as described in the Risk Factors, we are in default under the indenture and Credit Facility.  These covenants place restrictions on our ability and the ability of our restricted subsidiaries to, among other things:

 

·             manage our cash;

 

·             pay dividends, redeem stock or make other distributions or restricted payments;

 

·             incur debt or issue preferred equity interests;

 

·             make certain investments;

 

·             create liens;

 

·             agree to payment restrictions affecting the guarantors;

 

·             consolidate or merge;

 

·             sell or otherwise transfer or dispose of assets, including equity interests of our restricted subsidiaries;

 

·             enter into transactions with our affiliates;

 

·             designate our subsidiaries as unrestricted subsidiaries; and

 

·             use the proceeds of permitted sales of our assets.

 

Our failure to comply with our debt-related obligations could result in additional events of default under the Notes, Credit Facility and our other debt.

 

Ability to Repurchase Notes—Our ability to repurchase the Notes upon a change of control or an asset sale may be limited.

 

Upon the occurrence of specific “change of control” events and “asset sale” events, in each case as defined in the indenture governing the Notes, we will be required to offer to repurchase all outstanding Notes at 101% of the principal amount (in the case of a change of control) and 100% of the principal amount (in the case of an asset sale), in each case, plus accrued and unpaid interest to the date of

 

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repurchase.  The lenders under our Credit Facility will have a similar right to be repaid upon a change of control.  Any of our future debt agreements may contain similar provisions with respect to a change of control or asset sale.  However, we may not have sufficient funds at the time of the change of control or asset sale to make the required repurchase of Notes or repayment of our other debt.  The terms of our Credit Facility also will limit our ability to purchase Notes until all debt under our Credit Facility is paid in full.  Any of our future debt agreements may contain similar restrictions.  If we fail to repurchase any Notes submitted in a change of control or asset sale offer, it would constitute an event of default under the indenture which would, in turn, constitute an event of default under our Credit Facility and could constitute an event of default under our other debt, even if the change of control itself would not cause a default.

 

Important corporate events, such as takeovers, recapitalizations or similar transactions, may not constitute a change of control under the indenture governing the Notes and thus not permit the holders of the Notes to require us to repurchase or redeem the Notes.

 

Required Regulatory Redemption—Note holders may be required to be licensed by a gaming authority and, if not so licensed, their Notes will be subject to redemption.

 

We are required to notify the Nevada Board as to the identity of, and may be required to submit background information regarding, each record or beneficial owner of the Notes.  For purposes of these rules, “beneficial interest” includes all direct and indirect forms of ownership or control, voting power or investment power held through any contract, lien, lease, partnership, stockholding, syndication, joint venture, understanding, relationship, present or reversionary right, title or interest, or otherwise.  The Nevada Board may determine that holders of the Notes have a “beneficial interest” in the issuers.

 

If the Nevada Gaming Authorities require any person, including a record or beneficial owner of the Notes, to be licensed, qualified or found suitable, that person must apply for a license, qualification or finding of suitability within the time period specified by the gaming authority.  The person would be required to pay all costs of obtaining a license, qualification or finding of suitability.  If a holder of the Notes is unable or unwilling to obtain such license, qualification or finding of suitability, such agencies and authorities may not grant us or, if already granted, may suspend or revoke our licenses unless we terminate our relationship with the holder.  Under these circumstances, we would be required to repurchase such Notes.  There can be no assurance that we will have sufficient funds or otherwise will be able to repurchase any or all of the Notes.  See “Item 1. Business—Regulation and Licensing.”

 

Fraudulent Transfer—Under certain circumstances, a court could cancel the obligations under the Notes or any guarantees and the liens that secure the Notes and guarantees.

 

Unless designated as an unrestricted subsidiary, each and any domestic subsidiary we form or acquire will be required to guarantee the Notes and grant a security interest in certain of its assets (junior to the security interest granted to the lenders under our Credit Facility) to secure its guarantee.  Under federal bankruptcy law and comparable provisions of state fraudulent transfer laws, under certain circumstances a court could avoid (i.e., cancel) a guarantee and the security interest in the guarantor’s assets, and order the return of any payments made hereunder to the guarantor or to a fund for the benefit of its other creditors.

 

A court might take these actions if it found that when the guarantor entered into its guarantee (or, in some jurisdictions, when payments became due on its guarantee), (i) it received less than reasonably equivalent value or fair consideration for its guarantee, and (ii) any of the following conditions was then satisfied:

 

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·             the guarantor was insolvent or rendered insolvent by reason of incurring its obligations under its guarantee or granting a security interest in its assets;

 

·             the guarantor was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital; or

 

·             the guarantor intended to incur, or believed (or reasonably should have believed) that it would incur, debts beyond its ability to pay as those debts matured.

 

In applying these factors, a court would likely find that a subsidiary guarantor did not receive fair consideration or reasonably equivalent value for its guarantee, except to the extent that it benefited directly or indirectly from the Notes’ issuance.  The determination of whether a subsidiary was or was rendered “insolvent” would vary depending on the law of the jurisdiction being applied.  Generally, an entity would be considered insolvent if the sum of its debts (including contingent or unliquidated debts) is greater than all of its property at a fair valuation or if the present fair salable value of its assets is less than the amount that will be required to pay its probable liability on its existing debts (including contingent or unliquidated debts) as they become absolute and matured.

 

A court might also avoid a guarantor’s guarantee and the security interest in its assets, if the court concluded that the guarantor entered into the guarantee with actual intent to hinder, delay, or defraud creditors.  If a court avoided a guarantor’s guarantee, you would no longer have a claim against that subsidiary, and the claims of creditors of the subsidiary generally would be entitled to payment in full before the subsidiary paid any dividends or made any distributions to us for the purpose of our satisfying any claims under the Notes.

 

Similarly, under federal bankruptcy law and comparable provisions of state fraudulent transfer laws, under certain circumstances a court could avoid (i.e., cancel) the Notes and the security interest in an issuer’s assets, and order the return of any payments made there under to the issuer or to a fund for the benefit of its other creditors subject to certain safe-harbor provisions.

 

A court might take these actions if it found that when an issuer issued the Notes, (i) it received less than reasonably equivalent value or fair consideration, and (ii) any of the following conditions was then satisfied:

 

·             the issuer was insolvent or rendered insolvent by reason of incurring obligations under the Notes or granting a security interest in its assets;

 

·             the issuer was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital; or

 

·             the issuer intended to incur, or believed (or reasonably should have believed) that it would incur, debts beyond its ability to pay as those debts matured.

 

In 2005, we used a substantial portion of the proceeds from the Notes to repay amounts due under our then existing indebtedness.  To the extent that we used the proceeds of that indebtedness to make payments to Eastern & Western (the parent of one of our members), in connection with our acquisition of our hotel casino, a court might find that we did not receive reasonably equivalent value or fair consideration for incurring our debt obligations under the Notes to repay our existing indebtedness.  Alternatively, a court might find that repayment of the existing indebtedness, which is guaranteed by certain of our affiliates, was for the benefit of these affiliates.

 

Regardless of the factors identified above, a court might also avoid the obligations of the issuers under the Notes and the security interest in their assets and order the return of any payments made under

 

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the Notes either to the issuers or to a fund for the benefit of the issuers’ other creditors if the court found that the issuers incurred the obligations under the Notes with actual intent to hinder, delay, or defraud creditors of the issuers.

 

ITEM 1B.       UNRESOLVED STAFF COMMENTS.

 

Not applicable.

 

ITEM 2.          PROPERTIES.

 

Our principal properties currently consist of the following:

 

Hooters Casino Hotel.  We own the approximately seven-acre site on which the Hooters Casino Hotel is located in Las Vegas, Nevada.  The Hooters Casino Hotel consists of an approximately 29,000 square-foot casino with 696 guest rooms located in the hotel casino building and within two towers.  In addition, a six-level, 556-space parking garage is located adjacent to the hotel casino, and 202 additional surface parking spaces are located on the site.

 

Executive Offices and Conference Facility.  We own an approximately two-acre site consisting of a one-level, 17,472 square-foot executive office building and conference facility and an 183-space parking lot.

 

Our Credit Facility and our Notes are secured by liens on all of our real property.

 

ITEM 3.          LEGAL PROCEEDINGS.

 

From time to time we are party to various claims arising in the normal course of business.  Management believes, however, that there are no proceedings pending or threatened against us, which, if determined adversely, would have a material adverse effect on our financial condition, results of operations or liquidity.

 

ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

Not applicable.

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

 

Not applicable.

 

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ITEM 6.                             SELECTED FINANCIAL DATA.

 

The historical selected financial data of 155 East Tropicana, LLC and of the Hôtel San Rémo Casino and Resort set forth below should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.”  The statement of operations data for the periods ended December 31, 2009, 2008, 2007 and 2006, and the balance sheet data at December 31, 2009 and 2008 of 155 East Tropicana, LLC are derived from, and are qualified by reference to, the audited financial statements included in “Item 8. Financial Statements and Supplementary Data.”

 

155 EAST TROPICANA, LLC

 

 

 

As of or for the periods ended

 

 

 

 

 

December 31,

 

 

 

 

 

2009

 

2008

 

2007

 

2006

 

2005 (1) (2)

 

 

 

(dollars in thousands)

 

Results of Operations:

 

 

 

 

 

 

 

 

 

 

 

Net revenues (3)

 

$

46,809

 

$

60,095

 

$

66,480

 

$

67,956

 

$

8,001

 

Operating expenses (4)

 

43,721

 

54,282

 

59,804

 

60,357

 

4,314

 

Depreciation

 

6,612

 

6,544

 

6,250

 

5,842

 

1,956

 

Intangible assets impairment charge

 

 

3,458

 

 

 

 

Pre-opening expense

 

 

 

 

5,293

 

4,825

 

Related party royalties expense

 

1,062

 

1,362

 

1,387

 

1,459

 

 

Loss on disposal of assets

 

 

 

 

1,199

 

 

Total operating loss

 

(4,586

)

(5,551

)

(962

)

(6,194

)

(3,094

)

Interest expense, net (5)

 

(13,659

)

(13,200

)

(13,157

)

(12,247

)

(8,526

)

Purchase deposit and extension fee

 

 

5,500

 

 

 

 

Loss on extinguishment of debt

 

 

 

 

 

(2,247

)

Net loss

 

$

(18,245

)

$

(13,251

)

$

(14,119

)

$

(18,441

)

$

(13,867

)

Balance Sheet:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,383

 

$

4,980

 

$

5,862

 

$

6,164

 

$

14,191

 

Total assets

 

123,102

 

126,427

 

139,147

 

145,593

 

163,159

 

Total debt (6)

 

146,063

 

141,362

 

138,587

 

134,940

 

130,000

 

Total liabilities

 

168,206

 

152,686

 

152,154

 

144,482

 

143,607

 

Members’ (deficit) equity

 

(45,104

)

(26,259

)

(13,007

)

1,111

 

19,553

 

 


(1)   We obtained our gaming and liquor licenses, thereby completing the final stage of the acquisition of substantially all the assets and certain liabilities of the hotel casino, in October 2005.  The results of operation reflect the casino and hotel operations from November 1, 2005 through December 31, 2005.

 

(2)   We were considered a development stage company until November 1, 2005.

 

(3)   Net revenues for 2005 include related party lease income of $5.4 million received from Eastern & Western for the lease of the hotel casino from January 1, 2005 through October 31, 2005.

 

(4)   Excludes depreciation expense, intangible assets impairment charge, pre-opening expense, related party royalties expense, and loss on disposal of assets.

 

(5)   Interest expense, net of interest income.

 

(6)   Total debt is classified as current, exclusive of the long-term portion of equipment loans.

 

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The following historical information of the Hôtel San Rémo Casino and Resort is derived from its audited financial statements for 2005.

 

HÔTEL SAN RÉMO CASINO AND RESORT

 

 

 

Ten Months Ended
October 31,

 

 

 

2005 (1)

 

 

 

(dollars in thousands)

 

Results of Operations:

 

 

 

Revenues:

 

 

 

Casino

 

$

8,947

 

Food and beverage

 

5,557

 

Hotel and other

 

12,217

 

Gross revenues

 

26,721

 

Promotional allowances

 

(1,770

)

Net revenues

 

$

24,951

 

 

 

 

 

Operating expenses:

 

 

 

Casino

 

$

5,275

 

Food and beverage

 

4,977

 

Hotel and other

 

3,628

 

General and administrative

 

6,678

 

Depreciation

 

335

 

Related party lease expense (2)

 

5,439

 

Restructuring costs

 

 

Total operating expense

 

$

26,332

 

 

 

 

 

Operating (loss) income

 

$

(1,381

)

 

 

 

 

Other income (expenses):

 

 

 

Interest income from affiliate

 

$

346

 

Interest expense

 

(7

)

Loss on sale of assets

 

 

Foreign currency translation

 

 

Total other income (expenses)

 

339

 

(Loss) income before income taxes

 

(1,043

)

Benefit (provision) for income taxes

 

397

 

Net (loss) income

 

$

(646

)

 

 

 

 

Balance sheet

 

 

 

Cash and cash equivalents

 

$

2,903

 

Total assets

 

8,215

 

Total debt

 

 

Total liabilities

 

4,355

 

Division equity

 

3,860

 

 


(1)          The completion of the final stage of the acquisition of the Hôtel San Rémo Casino and Resort occurred in October 2005, upon receipt of our gaming and liquor licenses.  The results of operation reflect the casino and hotel operations from January 1, 2005 through October 31, 2005 when the Hôtel San Rémo Casino and Resort ceased operations.

 

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(2)          In connection with the August 3, 2004 contribution of the Hôtel San Rémo Casino and Resort real property and non-gaming assets to us, Eastern & Western entered into lease arrangements to lease back the hotel casino until we received all of the necessary government and regulatory approvals to operate the hotel casino.  In October 2005, we received the necessary gaming and liquor licenses; therefore, the lease arrangements were terminated on October 31, 2005.

 

The following selected quarterly financial data of 155 East Tropicana, LLC for the years ended December 31, 2009 and 2008 is derived from the quarterly condensed consolidated financial statements of 155 East Tropicana, LLC . The financial data for the fourth quarter of 2009 and 2008 are derived from the annual consolidated financial statements of 155 East Tropicana, LLC included in “Item 8 Financial Statements and Supplementary Data.

 

 

 

155 EAST TROPICANA, LLC

 

 

 

 

 

For the fiscal quarter ended

 

 

 

 

 

March 31,
2009

 

June 30,
2009

 

September 30,
2009

 

December 31,
2009

 

Total

 

 

 

(dollars in thousands)

 

 

 

Net revenues

 

$

13,341

 

$

11,674

 

$

10,729

 

$

11,065

 

$

46,809

 

Operating loss

 

(727

)

(1,622

)

(1,916

)

(321

)

(4,586

)

Net loss

 

(4,059

)

(5,050

)

(5,378

)

(3,758

)

(18,245

)

 

 

 

155 EAST TROPICANA, LLC

 

 

 

 

 

For the fiscal quarter ended

 

 

 

 

 

March 31,
2008

 

June 30,
2008

 

September 30,
2008

 

December 31,
2008

 

Total

 

 

 

(dollars in thousands)

 

 

 

Net revenues

 

$

16,441

 

$

16,123

 

$

14,212

 

$

13,319

 

$

60,095

 

Operating (loss) income

 

1,071

 

259

 

(1,942

)

(4,939

)

(5,551

)

Net income (loss) (1)

 

(2,195

)

2,443

 

(5,261

)

(8,238

)

(13,251

)

 


(1) Net income for the second quarter of 2008 includes the $5.5 million gain from the forfeited purchase deposit and extension fees related to the cancelled sale to Hedwigs and net loss for the fourth quarter of 2008 includes the intangible assets impairment charge of $3.5 million.

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

 

The following discussion should be read in conjunction with, and is qualified in its entirety by, the financial statements and related notes thereto and other financial information included in “Item 8. Financial Statements and Supplementary Data.”  Certain statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking.

 

Economic Conditions and Related Risks and Uncertainties

 

The United States is currently experiencing a widespread recession accompanied by, among other things, weakness in the commercial and investment banking systems resulting in reduced credit and capital financing availability, and highly curtailed gaming and other recreational activities and general discretionary consumer spending, and is also engaged in war, all of which are likely to continue to have far-reaching effects on economic conditions in the country for an indeterminate period. The effects and duration of these conditions and related risks and uncertainties on the Company’s future operations and

 

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cash flows, including its access to capital or credit financing, cannot be estimated at this time, but may likely be significant.

 

Liquidity and Financial Position

 

We have significant indebtedness and financial commitments in 2009.  As of December 31, 2009, we had $160.3 million in total debt and unpaid interest.  Currently, the Credit Facility is fully extended and we have no additional availability to borrow against the Credit Facility.  We do not believe we will be able to generate sufficient cash flows from operations to fund our  financial commitments over the next year and cannot provide any assurances that we will be able to raise additional capital.

 

Based on anticipated future operations, we do not believe that cash on hand at December 31, 2009 of $5.3 million and expected cash flows will be adequate to meet our total financial obligations which include (1) anticipated operational expenses, (2) debt service on equipment leases and Credit Facility, (3) capital expenses and (4) scheduled payments of interest on the Notes.  We were unable to make the interest payment on the Notes due April 1, 2009 and October 1, 2009 and do not expect to make the payment due April 1, 2010 or October 1, 2010.  Currently, our other obligations are being paid in the normal course of business.  Due to our inability to make the interest payments , an event of default occurred under the indenture governing the Notes.  As a result, the note holders could exercise certain remedies provided under the indenture governing the Notes.   We received default and reservation of rights letters (“Default Letters”) from the lenders under the Credit Facility.  The Default Letters state that (i) an event of default exists under the Credit Facility as a result of our failure to obtain control agreements for one or more deposit accounts established and maintained by us and also as a result of failure to pay interest on the Notes, (ii) as a result of the event of default, the lenders are under no further obligation to extend further credit under the Credit Facility, (iii) the lenders will continue to evaluate their response to the event of default, and (iv) we no longer have an option of paying the LIBOR interest rate, but must pay the Wells Fargo prime rate plus the default rate, which is equal to four percentage points above prime rate.  The lenders have not elected to accelerate the indebtedness under the Credit Facility.  We have entered into discussions with the note holders and the Credit Facility lenders to attempt to negotiate forbearance agreements pursuant to which they would agree not to exercise, for a specified period of time, their remedies under the indenture or the Credit Facility.  We have engaged a financial advisor to assist with the evaluation of financial and strategic alternatives, which may include a recapitalization, refinancing, restructuring or reorganization of our obligations or a sale of some or all of our business.  Our advisors and we are actively working toward such a transaction.  We cannot be assured that we will be successful in negotiating forbearance with the note holders or Credit Facility lender or in undertaking any such alternative transaction in the near term.

 

If we are not successful in obtaining a forbearance or entering into a transaction to address our liquidity and capital structure, the note holders have the ability to accelerate repayment of all amounts outstanding under the indenture ($144.2 million at December 31, 2009) and the Credit Facility lenders have the ability to accelerate repayment of all amounts outstanding under the Credit Facility ($14.5 million at December  30, 2009, plus an irrevocable letter of credit for $0.5 million at December 31, 2009).  If either the Notes indebtedness or the Credit Facility indebtedness were to be accelerated, we would be required to refinance or restructure the payments on that debt.  We cannot be assured that we would be successful in completing a refinancing or restructuring.  If we are unable to do so, we may determine to seek protection under Chapter 11 of the U.S. Bankruptcy Code.

 

The conditions and events described above raise a substantial doubt about the Company’s ability to continue as a going concern.  We have classified most of our debt at December 31, 2009, and all debt at December 31, 2008, as a current liability on the balance sheet.  The accompanying condensed

 

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consolidated financial statements do not include all adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern.

 

Overview for 155 East Tropicana, LLC

 

155 East Tropicana, LLC (“we”, “us”, “our”, or “155”) was formed on June 17, 2004 to acquire the Hôtel San Rémo Casino and Resort (“Hôtel San Rémo”), from Eastern & Western Hotel Corporation (“Eastern & Western”). Our common membership interests are held two-thirds through Florida Hooters LLC and one-third through EW Common LLC.

 

Florida Hooters LLC is a joint venture between Hooters Gaming LLC and Lags Ventures, LLC. The owners of Hooters Gaming LLC, which include most of the original founders of the Hooters brand, hold licenses to sell wholesale foods and calendars and to operate hotel casinos in Nevada and Hooters restaurants in Tampa Bay, Florida, Chicago, Illinois, and downtown Manhattan in New York. Lags Ventures, LLC is owned by a holder of the license rights to certain Hooters restaurants in South Florida and the State of Nevada. Pursuant to these license rights, the owners of Florida Hooters LLC operate 41 Hooters restaurants, publish Hooters calendars, and operate a Hooters foods business. The owner of Lags Ventures, LLC is also the founder of the Dan Marino concept restaurants and owns and operates 1 Dan Marino concept restaurant.

 

Eastern & Western owns 90% of EW Common LLC, while our President owns the balance. Eastern & Western owned the Hôtel San Rémo from November 1988 until our acquisition of the Hôtel San Rémo in 2004.

 

Our affiliates have granted us assignments of certain license agreements pertaining to the use of the Hooters brand as well as the Pete & Shorty’s concept restaurant, which will allow us to operate the Hooters Casino Hotel. The original founders of the Hooters brand sold the trademark rights (excluding certain rights they retained for themselves) to Hooters of America in 2001. As a result, Hooters of America is the trademark owner of the Hooters brand and the operator and franchisor of Hooters restaurants. Pursuant to the Hooters license assignment; we are required to pay Hooters of America a royalty fee, which totaled approximately $0.8 million for the year ending December 31, 2009. Aside from the abovementioned royalty fee, we are not otherwise affiliated with Hooters of America.

 

In August 2004, we agreed to the acquisition of the real property and other assets of the Hôtel San Rémo for approximately $74.6 million including transaction costs and expenses, and as adjusted for final purchase price adjustments.

 

On March 29, 2005, we issued $130.0 million aggregate principal amount of 8¾% Senior Secured Notes due 2012, or the old notes, in a private placement. The old notes were subsequently exchanged with new notes, or (“Notes”), registered under the Securities Act of 1933 on Form S-4. Interest payments on the Notes are due semi-annually, on each April 1 and October 1.

 

We used the proceeds from the offering to refinance existing indebtedness, and used the remaining proceeds (together with cash from operations and proceeds from equipment financing) to renovate the hotel casino and to provide working capital.

 

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In connection with the offering, we formed a wholly owned subsidiary, 155 East Tropicana Finance Corp., solely for facilitating the offering as a co-issuer of the old notes.

 

We also entered into a $15.0 million senior secured credit facility (“Credit Facility”) concurrently with the offering. At December 31, 2009, $14.5 million was outstanding on the Credit Facility, which, together with a letter of credit in the amount of $0.5 million, represents all of the funds available under the Credit Facility.

 

The Company was unable to make the interest payment on the Notes due April 1, 2009 and October 1, 2009 and does not expect to make the payment due April 1, 2010 or October 1, 2010. Currently, our other obligations are being paid in the normal course of business.  Due to the Company’s inability to make the interest payments, an event of default occurred under the indenture governing the Notes.  As a result, the note holders could exercise certain remedies provided under the indenture.   The Company has received Notice of Default and Reservation of Rights letters (the “Default Letters”) from the lenders under the Credit Facility.  The Default Letters state that (i) an event of default exists under the Credit Facility as a result of the Company’s failure to obtain control agreements for one or more deposit accounts established and maintained by the Company and as a result of failure to pay interest on the Notes, (ii) as a result of the event of default, the lenders are under no further obligation to extend further credit under the Credit Facility, (iii) the lenders will continue to evaluate their response to the event of default, and (iv) the Company no longer has an option of paying the LIBOR interest rate, but must pay the Wells Fargo prime rate  plus the default rate, which is equal to four percentage points above prime rate.  The lenders have not elected to accelerate the indebtedness under the Credit Facility.  The Company has entered into discussions with the note holders and the Credit Facility lenders to attempt to negotiate forbearance agreements pursuant to which they would agree not to exercise, for a specified period of time, their remedies under the indenture or the Credit Facility.  The Company has engaged a financial advisor to assist with its evaluation of financial and strategic alternatives, which may include a recapitalization, refinancing, restructuring or reorganization of its obligations or a sale of some or all of its business.  The Company and its advisors are actively working toward such a transaction.  The Company cannot be assured that it will be successful in negotiating forbearance with the note holders or Credit Facility lender or in undertaking any such alternative transaction in the near term.

 

Prior to November 1, 2005 we conducted no business operations other than in connection with the acquisition and subsequent leasing of the Hôtel San Rémo. Through October 31, 2005, Eastern & Western held the gaming license in Nevada and owned all gaming assets by the Hôtel San Rémo. Under a casino lease and hotel lease, Eastern & Western operated the Hôtel San Rémo. After obtaining the necessary gaming and liquor licenses to operate the hotel casino in October 2005, we assumed operations of the hotel casino on November 1, 2005 and the leases with Eastern & Western were terminated.

 

Casino revenue is derived primarily from patrons wagering on slot machines, table games and other gaming activities. Table games include blackjack, craps, roulette, and specialty games. Casino revenue is defined as the win from gaming activities, computed as the difference between gaming wins and losses, not the total amount wagered. “Table game drop” and “slot handle” are casino industry specific terms used to identify the amount wagered by patrons for a casino table game or slot machine, respectively. “Table game hold” and “slot hold” represent the percentage of the total amount wagered by the patron that the casino has won. Hold is derived by dividing the amount won by the casino (“table

 

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game win” and “slot win”) by the amount wagered by the patron. Casino revenue is recognized at the end of each gaming day.

 

Casino revenues vary from time to time due to general economic conditions, table game hold, slot hold, and occupancy percentages at the Hooters Casino Hotel and other hotels in Las Vegas. Casino revenues also vary depending upon the amount of gaming activity as well as variations in the odds for different games of chance. Casino revenues, room revenues, food and beverage revenues, and other revenues vary due to general economic conditions and competition.

 

Room revenue is derived from rooms and suites rented to guests. “Average daily rate” is an industry specific term used to define the average amount of revenue per rented room per day. “Occupancy percentage” defines the total percentage of rooms occupied, and is computed by dividing the number of rooms occupied by the total number of rooms available. Room revenue is recognized at the time the room is provided to the guest.

 

Food, beverage and entertainment revenues are derived from food and beverage sales in the food, bar and entertainment outlets of the hotel casino, including restaurants, room service, bars, entertainment showroom and banquets. Food, beverage, and entertainment revenue is recognized at the time food and/or beverage is provided to the guest. “Covers” are the number of patrons served in a food outlet. “Average check” is the average amount of food and beverage revenue charged to patrons on their restaurant checks.

 

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The following table summarizes the results of operations of 155 East Tropicana, LLC (in thousands):

 

 

 

155 E. Tropicana, LLC

 

155 E. Tropicana, LLC

 

 

 

155 E. Tropicana, LLC

 

 

 

 

 

Year Ended
December 31,
2009

 

Year Ended
December 31,
2008

 

%
Change
2009 - 2008

 

Year Ended
December 31,
2007

 

%
Change
2008 - 2007

 

 

 

(dollars in thousands)

 

Casino revenues

 

$

18,089

 

$

24,951

 

-27.5

%

$

24,993

 

-0.2

%

Casino expenses

 

10,991

 

14,572

 

-24.6

%

14,883

 

-2.1

%

Profit margin

 

39.2

%

41.6

%

 

 

40.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Food, beverage and entertainment revenues

 

$

18,680

 

$

22,137

 

-15.6

%

$

23,318

 

-5.1

%

Food, beverage and entertainment expenses

 

11,400

 

14,501

 

-21.4

%

17,722

 

-18.2

%

Profit margin

 

39.0

%

34.5

%

 

 

24.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel and other revenues

 

$

15,048

 

$

20,686

 

-27.3

%

$

24,484

 

-15.5

%

Hotel and other expenses

 

6,758

 

8,066

 

-16.2

%

9,222

 

-12.5

%

Profit margin

 

55.1

%

61.0

%

 

 

62.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Promotional allowances

 

$

5,009

 

$

7,678

 

-34.8

%

$

6,316

 

21.6

%

Percent of gross revenues

 

9.7

%

11.3

%

 

 

8.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

$

12,925

 

$

16,624

 

-22.3

%

$

17,978

 

-7.5

%

Percent of net revenues

 

27.6

%

27.7

%

 

 

27.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring expense

 

$

1,647

 

$

519

 

217.3

%

 

 

 

 

Percent of net revenues

 

0.9

%

0.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

$

6,612

 

$

6,544

 

1.0

%

$

6,250

 

4.7

%

 

 

 

 

 

 

 

 

 

 

 

Intangible assets impairment charge

 

$

600

 

$

3,458

 

-82.6

%

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related party royalties expense

 

$

1,062

 

$

1,362

 

-22.0

%

$

1,387

 

-1.8

%

 

 

 

 

 

 

 

 

 

 

 

 

Purchase deposit and extension fee

 

$

 

5,500

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

1

 

$

124

 

-99.2

%

$

91

 

36.3

%

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

13,660

 

$

13,324

 

2.5

%

$

13,248

 

0.6

%

 

Comparison of Year Ended December 31, 2009 with the Year Ended December 31, 2008

 

Net operating revenues for the year ended December 31, 2009 were $46.8 million, a decrease of $13.3 million or 22.1%, from $60.1 million of net operating revenues for the year ended December 31, 2008.

 

We offset most of the $13.3 million decline in net operating revenues through targeted cost reductions of $12.2 million.  The operating loss for the year ended December 31, 2009 declined by $0.4 million from the prior year.

 

As discussed earlier, during 2009, there have been decreases in visitor volumes to Las Vegas and in customer spending, including convention participants, principally due to the status of the national, state and local economies.  In addition, we have been challenged with conditions that affect our property in particular.  We closed 235 rooms or approximately a third of our rooms on May 28, 2009 in order to retrofit the plumbing risers.  These rooms re-opened  August of 2009.  In addition, the county was working on laying utilities down our frontage street, Tropicana Avenue, in order to provide utilities to the new airport terminal currently under construction.  This disrupted the auto traffic flow into our property and disrupted the walk-in traffic to our property via the walkway between the MGM Grand Hotel and us.  This disruption occurred for most of the third quarter and was completed in September 2009.  To offset

 

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these business disruptions and economic conditions, we have continued to focus on managing costs.

 

Casino.  Casino revenues decreased by $6.9 million to $18.1 million for the year ended December 31, 2009, compared to $25.0 million for the year ended December 31, 2008 because of decreased traffic in the casino and a decrease in spending per player.

 

Table games revenue was $6.7 million for the year ended December 31, 2009, a decrease of $2.2 million, or 24.4%, compared to the table games revenue of $8.9 million from the prior year.  Table game drop decreased to $37.9 million, or by 27.0%, for the year ended December 31, 2009 compared to $51.9 million for the year ended December 31, 2008, while table game hold percentage increased from 17.1% in 2008 to 17.7% in 2009.  The table games generated an average win per table of $752 per day for the year of 2009 compared to $932 for the year of 2008.

 

Slot revenue of $11.0 million for the year ended December 31, 2009 was a decrease of $4.5 million or 28.8% compared to $15.5 million in the same period in 2008.  The average win per machine per day was $49 for the year ended December 31, 2009 compared to $67 for the year of 2008.

 

Casino expenses decreased by $3.6 million or 24.6% to $11.0 million for the year ended December 31, 2009 compared to $14.6 million for the year ended December 31, 2008. The profit margin for casino operations decreased from 41.6% during the year ended December 31, 2008 to 39.2% during the year ended December 31, 2009.

 

Food, beverage and entertainment.  Food, beverage and entertainment revenue was $18.7 million for the year ended December 31, 2009 as compared to $22.1 million for December 31, 2008, a decrease of $3.4 million or 15.6%.  The food revenues decreased $1.9 million or 12.9% to $12.8 million for the year ending December 31, 2009 compared to $14.7 million for the year ending December 31, 2008. Beverage revenue (which includes complimentary beverages) decreased by $1.6 million or 21.0% to $5.8 million for the year ended December 31, 2009 from $7.4 million during the year ended December 31, 2008.  Showroom revenue decreased $0.8 million in 2009 to $0.6 million as compared to showroom revenue of $1.4 million in 2008.  Our showroom acts were changed to “four-wall” events in March 2009.  The acts keep most of the revenue in the showroom, but also cover most of the expenses.

 

Food, beverage and entertainment expenses decreased from $14.5 million during the year ended December 31, 2008 to $11.4 million during the year ended December 31, 2009, a decrease of $3.1 million or 21.4%.  The profit margin for food, beverage and entertainment operations increased from 34.5% during the year ended December 31, 2008 to 39.0% during the year ended December 31, 2009 due to operational efficiencies in payroll and cost of sales in the food and beverage departments.  We saved $0.7 million in showroom expenses because we adopted a “four-wall” format as described above.

 

Hotel and other.  Hotel and other revenue (which includes hotel room revenue, retail, and other miscellaneous revenue) decreased by $5.7 million, or 27.3%, to $15.0 million for the year ended December 31, 2009 from $20.7 million for the year ended December 31, 2008.  Room revenue decreased $5.4 million or 35.5% to $9.8 million for the year ended December 31, 2009 compared to $15.2 million in 2008 due to the drop in visitors to Las Vegas, disruptions caused by the closure of rooms for retrofitting and road construction along our frontage street.  The average daily room rate decreased to $49 for the year ended December 31, 2009 compared to $66 for the prior year.  The occupancy rate fell from 91.6%

 

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in 2008 to 87% in 2009.  The number of rooms occupied declined, partially due to the 235 rooms taken out of service from May 28, 2009 to August 14, 2009 for plumbing retrofit.

 

Sales from the retail outlets was $3.6 million in the year ended December 31, 2009, a decrease of $0.8 million from the year ended December 31, 2008.

 

Hotel and other expenses decreased by $1.3 million or 16.2% from $8.1 million during the year ended December 31, 2008 to $6.8 million during the year ended December 31, 2009 due to operational efficiencies in payroll and departmental expenses. The profit margin for hotel and other was 55.1% for the year ended December 31, 2009 compared to 61.0% for the same period in the prior year..

 

General and administrative.  General and administrative expense includes costs associated with corporate marketing, information technology, and finance, accounting, and property operations.  General and administrative expense decreased $3.7 million or 24.6% to $12.9 million for the year ended December 31, 2009 compared to $16.6 million for the year ended December 31, 2008. This decrease was principally due to significant decreases in advertising and marketing expenses, legal fees and various other administrative costs.

 

Restructuring expense.  Restructuring expenses associated with financial advisory services and related legal expenses for the year ended December 31, 2009 were $1.6 million.  These expenses began in September 2008 and are expected to continue in future months until our recapitalization, refinancing, restructuring or reorganization of our obligations, or sale of some or all of the business assets is completed.  No assurances can be given that we will be able to complete a restructuring of our obligations.

 

Depreciation and amortization expense.  Depreciation and amortization expense of $6.6 million for the year ended December 31, 2009 increased by $0.1 million, or 1.0%, from $6.5 million for the year ended December 31, 2008.

 

Intangible assets impairment charge.  With respect to our indefinite-lived intangible assets, we performed our annual test during the fourth quarter of 2009.  As a result of this analysis, we recognized a non-cash impairment charge of $0.6 million to write-down the Hooters licensing trademark.  As a result of a decrease in revenue from food and beverage and the continuing economic conditions, we lowered our forecasts of cash flow from food and beverage operations in future years, which results in the impairment charge.

 

Related party royalties expense.  Beginning on February 3, 2006, we incurred related party royalty fees pursuant to agreements with Hooters Gaming Corporation, Lags Ventures, Inc., and Las Vegas Wings, Inc.  These related party royalties expense totaled $1.4 million for the year ended December 31, 2008 as compared to $1.1 million for year ended December 31, 2009. The payment of the related party royalties is restricted under the Notes indenture.  The fees can only be paid after the close of the fiscal year and only if our debt coverage ratio is 1.5 to 1 for that fiscal year and certain other conditions are met.  We can not be in default on our Notes.  We have not and will not qualify to pay out related party royalty expenses in the foreseeable future.

 

Income on forfeited deposits and extension fees.  In June of 2008, we recorded income on forfeited deposits and extension fees of $5.5 million in connection with the termination of the purchase

 

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agreement with Hedwigs Las Vegas Top Tier, LLC.

 

Interest expense.  Interest expense was $13.7 million for the year ended December 31, 2009, compared to $13.3 million for the year ended December 31, 2008, an increase of $0.4 million due to an increase in the debt outstanding on the line of credit and an increase in the interest rate on the line of credit.

 

Provision for income taxes.  155 is a limited-liability company and is treated as a partnership for federal income tax purposes.  Accordingly, a provision for federal income taxes is not recorded on our consolidated financial statements.  Taxable income or loss will be included in the income tax returns of the members.

 

Comparison of Year Ended December 31, 2008 with the Year ended December 31, 2007

 

The current state of the economy has negatively impacted our results of operations in 2008 and we expect that impact to continue in 2009.  Because we are in the hospitality and recreation business, which is largely dependant on discretionary spending, we believe that the weak housing market, increases in unemployment, decreases in air flights to Las Vegas, decreases in the value of stock and other investments and the general tightening of spending on business travel have all affected visitations to Las Vegas and the spending budget of our customers.

 

Our operating results of the first quarter of 2009 indicate to us that there may be further decreases in visitor volumes to Las Vegas and in customer spending, including convention participants.  Because of these economic conditions, we have continued to focus on managing costs.  For 2009 we froze management salaries, are managing staffing levels, will not make matching contributions to the 401K plan and will continue to eliminate other operating expenses where possible.

 

Net loss of $13.3 million was generated for the year ended December 31, 2008 compared to a net loss of $14.1 million for the year ended 2007.  The $0.8 million improvement was due to $5.5 million in income from forfeited deposits and extension fees as described in more detail in the paragraphs below, netted against a non-cash impairment charge to intangible assets of $3.5 million and a decline in net revenue.

 

The operating loss of $5.6 million for the year ended December 31, 2008 increased by $4.6 million from a loss of $1.0 million in the same period last year.  We charged a $3.5 million write-down of goodwill and other intangible assets to operations in 2008.  In addition, the remaining decrease in profitability from operations was due to a decline in revenues of $6.4 million, partially offset by a cost savings of $5.3 million in other operating expenses.

 

Net operating revenues for the year ended December 31, 2008 were $60.1 million; a decrease of $6.4 million or 9.6%, from $66.5 million of net operating revenues for the year ended December 31, 2007 and were largely as a result of the $3.8 million or 15.5% decline in hotel and other revenues.

 

Casino.  Casino revenues were flat at $25.0 million for both years ended December 31, 2008 and 2007, in spite of a decline on the Las Vegas Strip of 10.6% in gaming revenue for the year ended December 31, 2008 according to Gaming Revenue Report issued by the Nevada State Gaming Control Board.  We outperformed the market due to new aggressive slot promotions offered during the year.

 

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Table games revenue was $8.9 million for the year ended December 31, 2008, a decrease of $0.7 million, or 7.2%, compared to the table games revenue of $9.6 million from the prior year.  Table game drop decreased to $51.9 million, or by 9.0%, for the year ended December 31, 2008 compared to $57.0 million for the year ended December 31, 2007, while table game hold percentage increased from 16.8% in 2007 to 17.1% in 2008.  The table games generated an average win per table of $932 per day for the year ended 2008 compared to $873 for the year ended 2007. Slot revenue of $15.5 million for the year ended December 31, 2008 was an increase of $0.8 million or 5.5% compared to $14.7 million in the same period in 2007.  The average win per machine per day was $67 for the year ended December 31, 2008 compared to $62 for the same period in 2007.

 

Casino expenses decreased by $0.3 million or 2.1% to $14.6 million for the year ended December 31, 2008 compared to $14.9 million for the year ended December 31, 2007.  The decrease was due to controls over payroll and benefits in the table games department that saved $0.7 million in expenses, partially offset by additional casino marketing expense.  The profit margin for casino operations increased from 40.5% during the year ended December 31, 2007 to 41.6% during the year ended December 31, 2008.

 

Food, beverage and entertainment.  Food, beverage and entertainment revenue was $22.1 million for the year ended December 31, 2008 as compared to $23.3 million for December 31, 2007, a decrease of $1.2 million or 5.1%.  The food revenues decreased $0.7 million or 5.6% to $12.2 million for the year ending December 31, 2008 compared to $12.9 million for the year ending December 31, 2007. Beverage revenue (which includes complimentary beverages) decreased by $1.0 million or 10.4% to $8.5 million for the year ended December 31, 2008 from $9.5 million during the year ended December 31, 2007.  Showroom revenue increased $0.6 million in 2008 to $1.4 million as compared to showroom revenue of $0.8 million in 2007.

 

Food, beverage and entertainment expenses decreased from $17.7 million during the year ended December 31, 2007 to $14.5 million during the year ended December 31, 2008, a decrease of $3.2 million or 18.2%.  The cost savings were due to the consolidation of food operations from three restaurants to two and the elimination of excess labor in food preparation.  The profit margin for food, beverage and entertainment operations increased from 24.0% during the year ended December 31, 2007 to 34.5% during the year ended December 31, 2008 due to operational efficiencies in payroll and cost of sales.

 

Hotel and other.  Hotel and other revenue (which includes hotel room revenue, retail, spa and other miscellaneous revenue) decreased by $3.8 million, or 15.5%, to $20.7 million for the year ended December 31, 2008 from $24.5 million for the year ended December 31, 2007.  Room revenue decreased $3.0 million or 16.2% to $15.2 million for the year ended December 31, 2008 compared to $18.2 million in 2007 due to a drop in average daily room rate (“ADR”). The ADR decreased by 18.5% to $66 for the year ended December 31, 2008 compared to $81 for the prior year.  This drop in ADR exceeds the Las Vegas average decline in ADR of 9.8% as published for 2008 by the Las Vegas Convention and Visitor Authority (“LVCVA”).  Occupancy for the year ended December 31, 2008 increased to 91.6% compared to 89.6% for year ended December 31, 2007, an increase of 2.0% in the hotel occupancy.  According to the LVCVA, the average occupancy in Las Vegas dropped 4.4% and visitor counts dropped 4.4% in 2008.

 

Sales from the retail outlets was $4.4 million in the year ended December 31, 2008, a decrease of $0.5 million from the year ended December 31, 2007.

 

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Hotel and other expenses decreased by $1.1 million or 12.5% from $9.2 million during the year ended December 31, 2007 to $8.1 million during the year ended December 31, 2008 due to operational efficiencies in payroll and departmental expenses. The profit margin for hotel and other was 61.0% for the year ended December 31, 2008 compared to 62.3% for the same period in the prior year.

 

General and administrative.  General and administrative expense includes costs associated with  marketing, information technology, and finance, accounting, property operations and in 2008, corporate restructuring costs.  General and administrative expense decreased $0.9 million or 4.6% to $17.1 million for the year ended December 31, 2008 compared to $18.0 million for the year ended December 31, 2007. This decrease was principally due to a $0.3 million decrease in payroll and benefits, $0.1 million in insurance, $0.2 million in utilities, $0.2 in advertising expenses, $0.6 million in general expenses, offset by $0.5 million spent for corporate restructuring consultants.

 

Depreciation and amortization expense.  Depreciation and amortization expense of $6.5 million for the year ended December 31, 2008 increased by $0.3 million, or 4.7%, from $6.2 million for the year ended December 31, 2007.

 

Intangible assets impairment charge.  With respect to our goodwill and other indefinite-lived intangible assets, we performed our annual test during the fourth quarter of 2008.  As a result of this analysis, we recognized a non-cash impairment charge of $2.2 million to write-off the goodwill associated with the acquisition of the San Remo Hotel & Casino in 2004 and a non-cash $1.3 million write-down of the Hooters licensing, trademark.  The impairment charges resulted from factors impacted by current economic conditions.  We lowered our forecasts of cash flows from operations in future years and applied a higher discount rate as a result of the turmoil in the credit and equity markets.

 

Related party royalties expense.  Beginning on February 3, 2006, we incurred related party royalty fees pursuant to agreements with Hooters Gaming Corporation, Lags Ventures, Inc., and Las Vegas Wings, Inc.  These related party royalties expense totaled $1.4 million during both the years ended December 31, 2008 and 2007. The payment of the related party royalties is restricted under the Notes indenture.  The fees can only be paid after the close of the fiscal year and only if our debt coverage ratio is 1.5 to 1 for that fiscal year.  The payments of the royalty fees are further limited to the sum of 2% of revenue and 3% of EBITDA as defined in the indenture.

 

Income on purchase deposit and extension fee.  In June of 2008, we recorded income on forfeited deposits and extension fees of $5.5 million in connection with the termination of the purchase agreement (the “Purchase Agreement”) with Hedwigs Las Vegas Top Tier, LLC. (“Hedwigs”).

 

Interest income.  Interest income was $124,000 for the year ended December 31, 2008, compared to $91,000 for the year ended December 31, 2007.

 

Interest expense.  Interest expense was $13.3 million for the year ended December 31, 2008, compared to $13.2 million for the year ended December 31, 2007, an increase of $0.1 million due to an increase in the debt outstanding on the line of credit.  .

 

Provision for income taxes.  155 is a limited-liability company and is treated as a partnership for federal income tax purposes.  Accordingly, a provision for federal income taxes is not recorded on our

 

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consolidated financial statements.  Taxable income or loss will be included in the income tax returns of the members.

 

Liquidity and Capital Resources (155 East Tropicana, LLC)

 

For additional discussion of our liquidity and capital resources, please see “Liquidity and Financial Position” discussion presented in the Executive Overview at the beginning of Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 to the accompanying consolidated financial statements.

 

For year ended December 31, 2009, we were provided $0.8 million of cash from operating activities.

 

For the year ended December 31, 2009, $2.8 million of cash was used for capital expenditures largely as a result of $2.4 million in expenditures for the retrofit of the rooms.  We also spent $0.2 million during 2009 for deposits.

 

For the year ended December 31, 2009, we were provided $2.7 million in cash from financing activities. We borrowed $3.4 million on our line of credit, offset by $0.7 million in principal payments on debt.

 

The Notes indenture contains certain provisions, which restrict or limit our ability to, among other things, incur more debt, pay dividends, redeem stock or make other distributions, enter into transactions with affiliates or transfer or sell assets.

 

Our Credit Facility is a revolving credit facility of $15.0 million.  As of December 31, 2009, we had outstanding draws of $14.5 million. An additional $0.5 million of the Credit Facility is not available due to an outstanding letter of credit issued.   Currently, the Credit Facility is fully extended and we have no additional availability to borrow against the Credit Facility.  All outstanding principal and interest under the Credit Facility is due and payable on September 30, 2011 unless accelerated under the default provisions.  Due to the defaults under the Note indenture and Credit Facility, we have classified the amount due under the Credit Facility and Notes and some equipment purchase debt, totaling $145.1 million, as a current liability at December 31, 2009.

 

At December 31, 2009, we had cash and cash equivalents of approximately $5.4 million.  As discussed earlier in the Executive Overview at the beginning of Item 2, “Management Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 to the accompanying consolidated financial statements, we are in default under both the indenture and the Credit Facility and we have entered into discussions with the note holders and the Credit Facility lender to attempt to negotiate forbearance agreements pursuant to which they would agree not to exercise, for a specified period of time, their remedies under the indenture or the Credit Facility.  We cannot assure you that we will be successful in negotiating a forbearance with the note holders or Credit Facility lender or in undertaking any financial or strategic alternative transaction in the near term.

 

Contractual Obligations

 

The following table summarizes the contractual commitments of 155 East Tropicana, LLC as of December 31, 2009:

 

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Payments Due By Year

 

 

 

Total

 

Less than
1 year

 

1-3
years

 

4-5
years

 

Thereafter

 

 

 

(dollars in thousands)

 

Debt (1)

 

$

158,680

 

158,680

 

 

 

 

Equipment purchase financing agreements (2)

 

1,583

 

657

 

926

 

 

 

Operating contracts (3)

 

3,581

 

3,371

 

206

 

4

 

 

Total

 

$

163,844

 

$

162,708

 

$

1,132

 

$

4

 

$

 

 


(1)   The debt represents the $14.5 million in outstanding draws against our Credit Facility as of December 31, 2009 with an original due date on September 30, 2011 and the $130.0 million Notes issued on March 29, 2005 and due in 2012.  The company is in default on both of these facilities and interest of $14.2 million has not been paid on the notes.  The repayment dates have been adjusted for potential acceleration under the default provisions of the contracts.  The debt balance includes $14.2 million in accrued, unpaid interest on the notes.

 

(2)   We entered into various equipment purchase agreements in connection with the renovation and rebranding of the Hooters Casino Hotel.  During the first quarter of 2009, we entered into an equipment purchase agreement for $2.0 million in slot system equipment.

 

(3)   Operating contracts represent various contracts for services in connection with the operations of the Hooters Casino Hotel.

 

Critical Accounting Policies and Estimates

 

Management has identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of 155 East Tropicana, LLC’s consolidated financial statements.  The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities.  On an on-going basis, management evaluates those estimates, including those related to asset impairment, accruals for slot marketing points, compensation and related benefits, revenue recognition, allowance for doubtful accounts, contingencies, and litigation.  These accounting policies are stated in the notes to the financial statements and in relevant sections of the management discussion and analysis.  These estimates are based on the information currently available to management and on various other assumptions that management believes to be reasonable under the circumstances.  Actual results could vary from those estimates and estimates and assumptions may be changed in the future.  Changes in these estimates and assumptions may have a material affect on the results of operations and financial condition of 155 East Tropicana, LLC.

 

We believe that the following critical accounting policies affect significant judgments and estimates used in the preparation of the consolidated financial statements:

 

Cash and Cash Equivalents.  We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.  The carrying amount of cash and equivalents approximates its fair value.

 

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Accounts Receivable. Accounts receivable are due within one year and are recorded net of amounts estimated to be uncollectible.  We reserve an estimated amount for receivables to reduce the receivables to their net realizable value which approximate fair value.  Historical collection rates and customer relationships of the previously operated Hôtel San Rémo were considered in determining the reserve for 155 East Tropicana, LLC.

 

Inventories.  Inventories are stated at the lower of cost (using the first-in, first-out method) or market values.

 

Property and Equipment.  Property and equipment are stated at cost.  Costs of improvements are capitalized. Cost of normal repairs and maintenance are charged to expense as incurred.  Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the respective accounts, and the resulting gain or loss, if any, is included in the accompanying consolidated statements of operations.

 

Depreciation is provided on a straight-line basis over the estimated useful life of the assets.  The service lives of assets are generally 30 to 40 years for buildings and 3 to 10 years for furniture and equipment.

 

The carrying values of our assets are reviewed when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable in accordance with Financial Accounting Standards Board, or the FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, or SFAS No. 144.  Under SFAS No. 144, an asset impairment is determined to exist when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and if estimated future cash flows, undiscounted and without interest charges, are less than the carrying amount.  If it is determined that an impairment has occurred, then an impairment loss is recognized in the consolidated statement of operations and the related assets are adjusted to their estimated fair value less sales costs.

 

Deferred Financing Costs.  Deferred financing costs consist of loan origination and commitment fees and are amortized to interest expense over the term of the related financing on a straight line basis which approximates the effective interest rate method.

 

Intangible Assets.  Intangible assets represent (1) the value of intellectual property related to the Hooters brand contributed to us pursuant to an assignment agreement with Florida Hooters LLC, (2) the value of the slot club customer list acquired from Eastern & Western, and (3) the excess of the purchase price over the fair market value of the Hôtel San Rémo assets acquired, or Goodwill.

 

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, or SFAS No. 142. We evaluate the amortization periods and possible impairment of its intangible assets in accordance with SFAS No. 142 on an annual basis.  The intellectual property related to the Hooters brand contributed to us and the Goodwill are intangible assets not subject to amortization.  The slot customer list is being amortized using the straight line method over five years.

 

We perform our annual impairment test for goodwill and indefinite-lived intangible assets in the fourth quarter of each year.  Goodwill was tested for impairment using a discounted cash flow analysis based on our forecasted future results discounted for cost of capital in 2008 and as a result was written-off in 2008.  The impairment of the Company’s Hooter’s license trademark is tested for impairment using the relief-from-royalty method.

 

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There are several estimates inherent in evaluating these assets for impairment.  In particular, future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates.  In addition, the determination of capitalization rates and discount rates used in the goodwill impairment test are highly judgmental and dependent in large part on expectations of future market conditions.

 

See Intangible Assets in Note 3 of the consolidated financial statements for discussion of impairment of goodwill and Hooter’s license trademark recorded in 2008 and 2009.

 

Jackpots and Prizes. We have progressive slot machines.  As coins are played, the amount available to win increases and will be paid out when the jackpot is awarded.  In accordance with industry practice, we record the liability and expense related to such progressives as incurred.

 

Casino Revenues and Promotional Allowances.  In accordance with industry practice, we recognize as casino revenue the net win from gaming activities, which is the difference between gaming wins and losses.  The retail value of rooms, food, and beverage furnished to customers without charge is included in gross revenues and then deducted as promotional allowances.

 

Player Club Points.  Prior to March 31, 2009, our slot club allowed customers to earn cash back.  Currently our slot club allows customers to earn certain complimentary products, based on the volume of the customer’s gaming activity.  Prior to March 31, 2009, we recorded a liability for the estimated cost of cash back earned by customers and not redeemed. Currently, at the time redeemed, the retail value of complimentaries under the program is recorded as revenue with a corresponding offsetting amount included in promotional allowances.  The cost associated with complimentary food, beverage, rooms and entertainment redeemed under the program is recorded in casino costs and expenses.  Play Club points redeemed for cash were also recorded as a promotional allowance.

 

Advertising.  Prepaid advertising costs are expensed the first time the advertising takes place.  Advertising costs are included in general and administrative expenses.

 

Capitalized Interest.  The interest cost associated with a major construction project is capitalized and included in the cost of the project.  When no debt is incurred specifically for a project, interest is capitalized on amounts expended on the project using the weighted-average cost of our outstanding borrowings.

 

Income Taxes.  155 East Tropicana, LLC is a limited-liability company and is taxed as a partnership for federal income tax purposes.  Accordingly, no provision for federal income taxes has been recorded in the accompanying consolidated financial statements since the taxable income or loss is included in the income tax return of the members.

 

Use of Estimates.  The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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 financial statements, and the reported amounts revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Reclassifications.  Certain reclassifications, having no effect on net loss, have been made to the previously issued consolidated financial statements to conform to the current period’s presentation of the Company’s financial statements.

 

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Recently Issued Accounting Pronouncements.  In June 2009, the Financial Accounting Standards Boards (“FASB”) issued Accounting Standards Update No. 2009-01, “Generally Accepted Accounting Principles” (ASC Topic 105), which establishes the FASB Accounting Standards Codification (“Codification” or “ASC”) as the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”). Effective for financial statements issued for interim and annual periods ending after September 15, 2009, the Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents are superseded and all other accounting literature not included in the Codification will be considered non-authoritative. The Codification also includes most, but not necessarily all, relevant Securities and Exchange Commission (“SEC”) guidance organized using the same topical structure in separate sections within the Codification.

 

The Company adopted the Codification, effective July 1, 2009, which requires references to authoritative U.S. GAAP to refer to the appropriate section of the Codification. The adoption of the Codification does not have an impact on the Company’s financial position, results of operations or cash flows. In order to ease the transition to the Codification, Codification cross-references are provided alongside the references to the Standards issued and adopted prior to the adoption of the Codification.

 

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, which amends Fair Value Measurements and Disclosures — Overall (ASC Topic 820-10) to provide guidance on the fair value measurement of liabilities. This update, among other matters, provides guidance on how to measure fair value in circumstances in which a quoted price in an active market for the identical liability is not available. This update is effective beginning in the fourth quarter of 2009.

 

In June 2009, the FASB issued (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46(R)” (ASC Topic 810). The guidance is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. This guidance is effective for interim and annual periods ending after November 15, 2009.  The Company does not expect the adoption of SFAS 167 to have a material impact on its consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets” (ASC Topic 860) which will require more information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosure. This standard is effective for interim and annual periods ending after November 15, 2009. The Company does not expect the adoption of SFAS 166 to have a material impact on its consolidated financial statements.

 

A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, that the implementation of such proposed standards would have on our consolidated financial statements.

 

ITEM 7A.       Quantitative and Qualitative Disclosures About Market Risk.

 

The following discusses our exposure to market risk related to changes in interest rates, equity prices and foreign currency exchange rates.  We do not believe that their respective exposure to market risk is material.

 

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Market risk is risk of loss arising from changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices.  At December 31, 2009, we had $130,000,000 aggregate principal amount of the Notes, slot equipment purchase agreements of $1.5 million carrying an interest rate of 7.0%  The Notes carry a fixed interest rate of 8.75 %.  Since the Notes and equipment purchase agreements have fixed interest rates, there is no market risk associated with these loans other than fair value market risk, which we believe to be insignificant.  We have market risk associated with funds that may be borrowed on our $15.0 million Credit Facility, due to an interest rate that floats with the prime rate.  The term of our Credit Facility will mature on September 30, 2011 unless there is acceleration under the default provisions.  At December 31, 2009, $14.5 million was outstanding under the variable rate Credit Facility, carrying interest at 7.25%.  Assuming a 100 basis-point change in prime at December 31, 2009, and assuming no change in the funds borrowed on the $15.0 million Credit Facility, our annual interest cost would change by approximately $145,000.  We received a Notice of Default and Reservation of Rights letter (the “Default Letter”) from the lenders under the Credit Facility that states that events of default exist and that as a result of such defaults the applicable interest rate was increased to the default rate, which equals the Wells Fargo prime rate plus four percentage points.  At December 31, 2009, the default rate based on prime rate was 7.25%.

 

We do not have any significant foreign currency exchange rate risk or commodity price risk and do not currently trade any market sensitive instruments.

 

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ITEM 8.                             FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

INDEX TO FINANCIAL STATEMENTS

 

The following consolidated financial statements of 155 East Tropicana, LLC are presented herein on the pages indicated:

 

155 EAST TROPICANA, LLC

 

AUDITED CONSOLIDATED FINANCIAL STATEMENTS:

 

Report of Independent Registered Public Accounting Firm

48

Consolidated Balance Sheets

49

Consolidated Statements of Operations

50

Consolidated Statements of Members’ Equity

51

Consolidated Statements of Cash Flows

52

Notes to Consolidated Financial Statements

54

 

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Report of Independent Registered Public Accounting Firm

 

To the Members of 155 East Tropicana, LLC:

 

We have audited the accompanying consolidated balance sheets of 155 East Tropicana, LLC and its subsidiary (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, members’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We are not engaged to perform an audit of the Company’s internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiary at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred recurring operating losses, has a working capital deficiency and has an accumulated deficit.  In addition, on April 7, 2009, the Company received a Notice of Default and Reservation of Rights Letter in connection with the Company’s credit facility.  The Company has been unable to meet 2009 payment obligations under certain debt agreements and anticipates they will be unable to meet 2010 payment obligations under certain debt agreements, which, absent forbearance or waiver from the creditors, will result in additional  events of default.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 2.  The 2009 financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

 

/s/ Ernst & Young LLP

 

Las Vegas, Nevada

March 31, 2010

 

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155 East Tropicana, LLC
(A Nevada Limited-Liability Company)

 

CONSOLIDATED BALANCE SHEETS

 

 

 

December 31,

 

December 31,

 

 

 

2009

 

2008

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

5,382,524

 

$

4,980,299

 

Accounts receivable, net of allowance for doubtful accounts of $80,681 and $199,872 in 2009 and 2008, respectively

 

572,016

 

662,683

 

Inventories

 

857,161

 

839,643

 

Prepaid expenses

 

1,141,389

 

1,409,819

 

Total current assets

 

7,953,090

 

7,892,444

 

Property and equipment, net

 

109,468,531

 

111,254,020

 

Other long-term assets:

 

 

 

 

 

Deferred financing costs

 

2,614,971

 

3,801,924

 

Intangible assets

 

2,343,258

 

2,995,168

 

Other assets

 

722,456

 

483,695

 

Total other long-term assets

 

5,680,685

 

7,280,787

 

Total assets

 

$

123,102,306

 

$

126,427,251

 

 

 

 

 

 

 

Liabilities and Members’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,590,036

 

$

2,794,378

 

Accrued interest payable

 

14,311,346

 

2,843,750

 

Accrued liabilities

 

968,903

 

1,475,062

 

Current portion of long-term debt

 

145,137,293

 

141,362,004

 

Total current liabilities

 

162,007,578

 

148,475,194

 

Related party royalties payable

 

5,272,584

 

4,210,567

 

Long-term debt

 

925,913

 

 

Total liabilities

 

168,206,075

 

152,685,761

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Members’ (deficit) equity:

 

 

 

 

 

Membership interests

 

34,333,375

 

34,333,375

 

Accumulated deficit

 

(79,437,144

)

(60,591,885

)

 

 

(45,103,769

)

(26,258,510

)

Total liabilities and members’ deficit

 

$

123,102,306

 

$

126,427,251

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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155 East Tropicana, LLC
(A Nevada Limited-Liability Company)

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Year Ended December 31,

 

Year Ended December 31,

 

Year Ended December 31,

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

Casino

 

$

18,089,346

 

$

24,950,887

 

$

24,993,443

 

Food, beverage and entertainment

 

18,680,330

 

22,136,579

 

23,318,248

 

Hotel and other

 

15,048,351

 

20,685,695

 

24,483,805

 

 

 

51,818,027

 

67,773,161

 

72,795,496

 

Less promotional allowances

 

(5,008,971

)

(7,678,360

)

(6,315,609

)

Net operating revenues

 

46,809,056

 

60,094,801

 

66,479,887

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Casino

 

10,991,269

 

14,572,098

 

14,882,800

 

Food, beverage and entertainment

 

11,399,733

 

14,501,343

 

17,721,954

 

Hotel and other

 

6,757,923

 

8,065,765

 

9,222,140

 

General and administrative

 

12,925,461

 

16,624,001

 

17,977,767

 

Restructuring expense

 

1,646,804

 

518,893

 

 

Depreciation and amortization

 

6,612,073

 

6,543,518

 

6,249,991

 

Intangible assets impairment charge

 

600,000

 

3,458,131

 

 

Related party royalties expense

 

1,062,017

 

1,361,772

 

1,386,914

 

Total operating expenses

 

51,995,280

 

65,645,521

 

67,441,566

 

Operating loss

 

(5,186,224

)

(5,550,720

)

(961,679

)

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

Interest expense

 

(13,660,428

)

(13,324,441

)

(13,248,133

)

Interest income

 

1,393

 

123,983

 

90,953

 

Forfeited purchase deposit and extension fee

 

 

5,500,000

 

 

Other income (expense), net

 

(13,659,035

)

(7,700,458

)

(13,157,180

)

Net loss

 

$

(18,845,259

)

$

(13,251,178

)

$

(14,118,859

)

 

 

 

 

 

 

 

 

Income (loss) allocable to preferred and common member interests:

 

 

 

 

 

 

 

Income allocable to preferred interest EW Common, LLC

 

$

1,000,000

 

$

1,000,000

 

$

1,000,000

 

 

 

 

 

 

 

 

 

Loss allocable to common member interests

 

(19,845,259

)

(14,251,178

)

(15,118,859

)

Net loss

 

$

(18,845,259

)

$

(13,251,178

)

$

(14,118,859

)

 

The accompanying notes are an integral part of these consolidated financial statements

 

50



Table of Contents

 

155 East Tropicana, LLC
(A Nevada Limited-Liability Company)

 

CONSOLIDATED STATEMENTS OF MEMBERS’ (DEFICIT) EQUITY

 

 

 

Florida Hooters
LLC

 

EW Common
LLC

 

Total

 

 

 

 

 

 

 

 

 

Balance at December 31, 2006

 

(12,814,523

)

13,926,050

 

1,111,527

 

 

 

 

 

 

 

 

 

Net loss during the year ended December 31, 2007

 

(9,412,573

)

(4,706,286

)

(14,118,859

)

 

 

 

 

 

 

 

 

Balance at December 31, 2007

 

(22,227,096

)

9,219,764

 

(13,007,332

)

 

 

 

 

 

 

 

 

Net loss during the year ended December 31, 2008

 

(8,834,163

)

(4,417,015

)

(13,251,178

)

 

 

 

 

 

 

 

 

Balance at December 31, 2008

 

(31,061,259

)

4,802,749

 

(26,258,510

)

 

 

 

 

 

 

 

 

Net loss during the year ended December 31, 2009

 

(12,563,507

)

(6,281,752

)

(18,845,259

)

 

 

 

 

 

 

 

 

Balance at December 31, 2009

 

$

(43,624,766

)

$

(1,479,003

)

$

(45,103,769

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

51



Table of Contents

 

155 East Tropicana, LLC
(A Nevada Limited-Liability Company)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Year Ended
December 31,
2009

 

Year Ended
December 31,
2008

 

Year Ended
December 31,
2007

 

 

 

 

 

 

 

 

 

Cash Flow From Operating Activities

 

 

 

 

 

 

 

Net loss

 

$

(18,845,259

)

$

(13,251,178

)

$

(14,118,859

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

6,612,073

 

6,543,518

 

6,249,991

 

Amortization of debt issuance costs

 

1,186,953

 

1,169,237

 

1,395,464

 

Amortization of intangible asset

 

51,910

 

51,910

 

51,910

 

Intangible assets impairment charge

 

600,000

 

3,458,131

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

90,667

 

1,217,771

 

(270,698

)

Inventories

 

(17,519

)

91,386

 

(84,378

)

Prepaid expenses

 

268,430

 

166,537

 

(6,376

)

Accounts payable

 

(1,204,343

)

(179,855

)

5,169

 

Accrued interest payable

 

11,467,596

 

 

 

Accrued liabilities

 

(506,159

)

75,132

 

(866,810

)

Related party royalties payable

 

1,062,017

 

1,361,771

 

1,386,915

 

Net cash provided by (used in) operating activities

 

766,366

 

704,360

 

(6,257,672

)

 

 

 

 

 

 

 

 

Cash Flow From Investing Activities

 

 

 

 

 

 

 

Capital expenditures

 

(2,795,822

)

(713,026

)

(886,100

)

(Increase) decrease in other assets

 

(238,760

)

(147,674

)

7,251

 

Net cash used in investing activities

 

$

(3,034,582

)

$

(860,700

)

$

(878,849

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

52



Table of Contents

 

155 East Tropicana, LLC
(A Nevada Limited-Liability Company)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

 

 

 

Year Ended
December 31,
2009

 

Year Ended
December 31,
2008

 

Year Ended
December 31,
2007

 

 

 

 

 

 

 

 

 

Cash Flow From Financing Activities

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

3,400,117

 

4,824,212

 

5,342,955

 

Principal payments on equipment purchase agreements

 

(729,676

)

(2,049,565

)

(2,008,635

)

Redemption of purchase deposits and extension fees

 

 

(5,500,000

)

 

Proceeds from purchase deposit and extension payments

 

 

2,000,000

 

3,500,000

 

Net cash provided by (used in) financing activities

 

2,670,441

 

(725,353

)

6,834,320

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

402,225

 

(881,692

)

(302,201

)

Cash and cash equivalents, beginning of period

 

4,980,299

 

5,861,991

 

6,164,192

 

Cash and cash equivalents, end of period

 

$

5,382,524

 

$

4,980,299

 

$

5,861,991

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,098,471

 

$

12,155,204

 

$

11,852,669

 

 

 

 

 

 

 

 

 

Assets acquired through equipment purchase agreements

 

$

2,030,761

 

$

 

$

312,619

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

53



Table of Contents

 

155 East Tropicana, LLC
(A Nevada Limited-Liability Company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2009

 

1.  Organizational and Basis of Presentation

 

155 East Tropicana, LLC, a Nevada limited-liability company (the “Company”) was incorporated on June 17, 2004 to acquire the real and personal property of the Hôtel San Rémo Casino and Resort (the “Hôtel San Rémo”) in Las Vegas, Nevada with the intention of renovating the existing casino and hotel facility with a “Hooters” entertainment concept and theme.  The renovations were completed and the Hôtel San Rémo property was reopened as the new Hooters Casino Hotel on February 3, 2006.  The Company’s business is concentrated at the one casino and hotel property in Las Vegas, Nevada.  The renovations were financed by the Company and its wholly owned subsidiary, 155 East Tropicana Finance Corp. through a $130 million Senior Secured Notes offering on March 29, 2005.  The Company’s membership interests are held two-thirds through Florida Hooters LLC and one-third through EW Common LLC.  The initial capitalization of the Company was provided by Florida Hooters LLC in the form of a $5.1 million cash contribution and the assignment of rights with respect to the Hooters trademark and logo and other intellectual property and by EW Common LLC in the form of a $25.0 million deemed capital contribution.  The deemed capital contribution from EW Common LLC carries with it a priority return of four percent on the contribution annually as described in Note 10.  The payment of this priority return is subject to meeting certain financial covenants associated with the Company’s debt.

 

Florida Hooters LLC is a joint venture between Hooters Gaming LLC and Lags Ventures, LLC.  Hooters Gaming LLC is owned by the holders of licenses to operate Hooters restaurants in the Tampa Bay, Florida, Chicago, Illinois and downtown Manhattan in New York as well as for the sale of wholesale foods and calendars and Nevada hotel/gaming and includes most of the original founders of the Hooters brand.  Pursuant to these license rights, the owners of Florida Hooters LLC operate 41 Hooters restaurants, publish Hooters calendars and operate a Hooters food business.  Lags Ventures, LLC is owned by a holder of the license rights to Hooters restaurants in South Florida and the State of Nevada.  The owner of Lags Ventures, LLC is also the founder of the Dan Marino concept restaurants and owns and operates 1 Dan Marino concept restaurant.

 

EW Common LLC is owned 90% by Eastern & Western Hotel Corporation (“Eastern & Western”) and 10% by the president of the Company.  Eastern & Western and its affiliates owned the real property and non-gaming assets of Hôtel San Rémo from November 1988 until the Company’s acquisition of the Hôtel San Rémo in August 2004.

 

Florida Hooters LLC and EW Common LLC entered into a joint venture agreement for the purpose of forming the Company and documenting the terms of their investments and business venture.

 

The Hooters Casino Hotel features a casino floor with 615 slot and video poker machines, 24 table games, 696 hotel rooms including 17 suites, a tropical pool area, retail outlets, and dining and

 

54



Table of Contents

 

155 East Tropicana, LLC
(A Nevada Limited-Liability Company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

1.  Organizational and Basis of Presentation (continued)

 

entertainment options which include a Hooters restaurant, and Mad Onion restaurant, (formerly Dan Marino’s restaurant) a sports bar, and several bars and Night Owl Showroom.

 

Significant intercompany transactions between the Company and its wholly owned subsidiary have been eliminated in consolidation.

 

In preparing these financial statements, the Company had evaluated events and transactions for potential recognition or disclosure through March 31, 2010, the date the financial statements were issued.

 

2.  Liquidity and Financial Position

 

The Company has significant indebtedness and financial commitments in 2009.  As of December 31, 2009, the Company has $160.3 million in total debt and unpaid interest.  Currently, the Senior Secured Credit Facility, (“Credit Facility”), is fully extended and the Company has no additional availability to borrow against the Credit Facility.  The Company does not believe it will be able to generate sufficient cash flows from operations to fund its financial commitments over the next year and cannot provide any assurances that it will be able to raise additional capital.

 

Based on anticipated future operations, the Company does not believe that cash on hand at December 31, 2009 of $5.4 million and expected cash flows in 2010 will be adequate to meet the total financial obligations which include (1) anticipated operational expenses, (2) debt service on equipment leases and the Credit Facility, (3) capital expenses and (4) scheduled payments of interest on the Notes.  The Company was unable to make the interest payment on the Notes due April 1, 2009 and October 1, 2009 and does not expect to make the payment due April 1, 2010 or October 1, 2010. Currently, our other obligations are being paid in the normal course of business.  Due to the Company’s inability to make the interest payments, an event of default occurred under the indenture governing the Notes.  As a result, the note holders could exercise certain remedies provided under the indenture.   The Company has received Notice of Default and Reservation of Rights letters (the “Default Letters”) from the lenders under the Credit Facility.  The Default Letters state that (i) an event of default exists under the Credit Facility as a result of the Company’s failure to obtain control agreements for one or more deposit accounts established and maintained by the Company and as a result of failure to pay interest on the Notes, (ii) as a result of the event of default, the lenders are under no further obligation to extend further credit under the Credit Facility, (iii) the lenders will continue to evaluate their response to the event of default, and (iv) the Company no longer has an option of paying the LIBOR interest rate, but must pay the Wells Fargo prime rate  plus the default rate, which is equal to four percentage points above prime rate.  The lenders have not elected to accelerate the indebtedness under the Credit Facility.  The Company has entered into discussions with the note holders and the Credit Facility lenders to attempt to negotiate

 

55



Table of Contents

 

155 East Tropicana, LLC
(A Nevada Limited-Liability Company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

2. Liquidity and Financial Position (continued)

 

forbearance agreements pursuant to which they would agree not to exercise, for a specified period of time, their remedies under the indenture or the Credit Facility.  The Company has engaged a financial advisor to assist with its evaluation of financial and strategic alternatives, which may include a recapitalization, refinancing, restructuring or reorganization of its obligations or a sale of some or all of its business.  The Company and its advisors are actively working toward such a transaction.  The Company cannot be assured that it will be successful in negotiating forbearance with the note holders or Credit Facility lender or in undertaking any such alternative transaction in the near term.

 

If the Company is not successful in obtaining a forbearance or entering into a transaction to address its liquidity and capital structure, the note holders have the ability to accelerate repayment of all amounts outstanding under the indenture ($144.2 million at December 31, 2009) and the Credit Facility lenders have the ability to accelerate repayment of all amounts outstanding under the Credit Facility ($14.5 million at December 31, 2009, plus an irrevocable letter of credit for $0.5 million at December 31, 2009).  If either the Notes indebtedness or the Credit Facility indebtedness were to be accelerated, the Company would be required to refinance or restructure the payments on that debt.  The Company cannot be assured that it will be successful in completing a refinancing or restructuring.  If the Company is unable to do so, it may determine to seek protection under Chapter 11 of the U.S. Bankruptcy Code.

 

The conditions and events described above raise a substantial doubt about the Company’s ability to continue as a going concern.  The Company has classified most of its debt at December 31, 2009, and all debt at December 31, 2008, as a current liability on the balance sheet.  The accompanying condensed consolidated financial statements do not include all adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

 

3.  Summary of Significant Accounting Principles

 

Cash and Cash Equivalents.  The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.  The carrying amount of cash and equivalents approximates its fair value.

 

Accounts Receivable. Accounts receivable are due within one year and are recorded net of amounts estimated to be uncollectible.  The Company reserves an estimated amount for receivables to reduce the receivables to their net realizable value which approximate fair value.  Historical collection rates and customer relationships of the previously operated Hôtel San Rémo were considered in determining the reserve.  Bad debt expense was $140,000, $394,800 and $160,880 for the years ended December 31, 2009, 2008 and 2007 respectively.

 

56



Table of Contents

 

155 East Tropicana, LLC
(A Nevada Limited-Liability Company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

3.              Summary of Significant Accounting Principles (continued)

 

Inventories.  Inventories are stated at the lower of cost (using the first-in, first-out method) or market value.

 

Property and Equipment.  Property and equipment are stated at cost.  Costs of improvements are capitalized. Cost of normal repairs and maintenance are charged to expense as incurred.  Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the respective accounts, and the resulting gain or loss, if any, is included in the accompanying consolidated statements of operations.

 

Depreciation is provided on a straight-line basis over the estimated useful life of the assets.  The service lives of assets are generally 30 to 40 years for buildings and 3 to 10 years for furniture and equipment.

 

The carrying values of the Company’s assets are reviewed when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable in accordance with Financial Accounting Standards Board (FASB) Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets.  Under SFAS No. 144, an asset impairment is determined to exist when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and if estimated future cash flows, undiscounted and without interest charges, are less than the carrying amount.  If it is determined that an impairment has occurred, then an impairment loss is recognized in the consolidated statement of operations and the related assets are adjusted to their estimated fair value less sales costs.  During the fourth quarter of 2009, the Company reviewed the carrying values of the Company’s assets and determined that no impairment of the long-lived assets had occurred

 

Deferred Financing Costs.  Deferred financing costs consist of loan origination and commitment fees and are amortized to interest expense over the term of the related financing on a straight line basis which approximates the effective interest rate method.

 

Intangible Assets. Intangible assets represent (1) the value of intellectual property related to the Hooters brand contributed to the Company pursuant to an assignment agreement with Florida Hooters LLC, (2) the value of the slot club customer list acquired from Eastern & Western, and (3) the excess of the purchase price over the fair market value of the assets acquired (“Goodwill”).  The intellectual property related to the Hooters brand contributed to the Company and the Goodwill are intangible assets not subject to amortization.  The slot customer list is being amortized using the straight line method over five years.

 

57



Table of Contents

 

155 East Tropicana, LLC
(A Nevada Limited-Liability Company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

3.  Summary of Significant Accounting Principles (continued)

 

In accordance with SFAS 142, “Goodwill and Other Intangible Assets”, we test for impairment of goodwill and indefinite-lived intangible assets annually. For the years ending December 31, 2008 and 2007, we utilized the income approach for goodwill, which focuses on the income-producing capability of the respective property during the fourth quarter of each fiscal year. The underlying premise of this approach is that the value of an asset can be measured by the present worth of the net economic benefit (cash receipts less cash outlays) to be received over the life of the subject asset. The steps followed in applying this approach include estimating the expected after-tax cash flows attributable to the property and converting these after-tax cash flows to present value through discounting. The discounting process uses a rate of return, which accounts for both the time value of money and investment risk factors. The present value of the after-tax cash flows is the totaled to arrive at an indication of the fair value of the assets. If the fair value of the assets exceeds the carrying value, the impairment is measured based on the difference between the calculated fair value and the carrying value. We determined that there was no impairment during 2007.  We determined there was impairment during 2008 and recorded an impairment charge of $2.2 million in the fourth quarter of 2008.  This resulted in the write-off of the goodwill as of December 31, 2008.  (See Note 5)

 

The impairment of the Company’s Hooter’s license trademark is tested for annual impairment using the relief-from-royalty method.  We determined that there was no impairment during 2007.  We determined there was impairment during 2009 and 2008 and recorded an impairment charge of $0.6 million and $1.3 million in the fourth quarter for each year, respectively.  (See Note 5)

 

Jackpots and Prizes. The Company has progressive slot machines.  As coins are played, the amount available to win increases and will be paid out when the jackpot is awarded.  In accordance with industry practice, the Company records the liability and expense related to such progressives as incurred.

 

Casino Revenues and Promotional Allowances.  In accordance with industry practice, the Company recognizes as casino revenue the net win from gaming activities, which is the difference between gaming wins and losses.  The retail value of rooms, food, and beverage furnished to customers without charge is included in gross revenues and then deducted as promotional allowances.

 

The estimated departmental cost of providing such promotional allowances is included in casino costs and expenses and consists of the following for the years ended December 31, 2009, 2008 and 2007 (dollars in thousands):

 

 

 

2009

 

2008

 

2007

 

Food and Beverage

 

$

925

 

$

1,144

 

$

1,028

 

Hotel and other

 

403

 

725

 

428

 

 

 

$

1,328

 

$

1,869

 

$

1,456

 

 

58



Table of Contents

 

155 East Tropicana, LLC
(A Nevada Limited-Liability Company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

3.  Summary of Significant Accounting Principles (continued)

 

Player Club Points.  The Company’s slot club program allows customers to redeem points earned from their gaming activity for complimentary food, beverage, rooms, and entertainment.  Prior to March 31, 2009, the Company allowed points earned in the slot club program to be redeemed as cash.  At the time redeemed, the retail value of complimentaries under the program is recorded as revenue with a corresponding offsetting amount included in promotional allowances.  The cost associated with complimentary food, beverage, rooms, and entertainment redeemed under the program is recorded in casino operating expenses.

 

The Company has recorded the value of points earned and redeemed for cash rebates as promotional allowances.  Such amounts totaled $65,633, $349,344 and $535,905 for the years ended December 31, 2009, 2008 and 2007 respectively.

 

Advertising.  Prepaid advertising costs are expensed the first time the advertising takes place. Prepaid advertising included in prepaid expenses was $163,931 and $143,590 at December 31, 2009, and 2008 respectively.  Advertising costs included in general and administrative expenses were $2,507,126, $4,214,084 and $4,379,402 for the years ended December 31, 2009, 2008, and 2007, respectively.

 

Capitalized Interest.  The interest cost associated with a major construction project is capitalized and included in the cost of the project.  When no debt is incurred specifically for a project, interest is capitalized on amounts expended on the project using the weighted-average cost of the Company’s outstanding borrowings.  There was no capitalized interest for the years ended December 31, 2009, 2008, or 2007.

 

Income Taxes.  The Company is a limited-liability company and is taxed as a partnership for federal income tax purposes. Accordingly, no provision for federal income taxes has been recorded in the accompanying consolidated financial statements since the taxable income or loss is included in the income tax return of the members.  As the Company is not liable for federal income tax, the Company has recorded no liability associated with uncertain tax positions. The Company files income tax returns in the US federal jurisdiction. The statute of limitation for Internal Revenue Service (“IRS”) examination of the Companys’ federal tax returns is determined by the statute governing the tax returns of its members.

 

Use of Estimates.  The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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 financial statements, and the reported amounts revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Reclassifications. Certain reclassifications of participation fees and player club points, having no effect on net income (loss), have been made to the previously issued condensed consolidated financial statements to conform to the current period’s presentation of the Company’s condensed consolidated financial statements.

 

59



Table of Contents

 

155 East Tropicana, LLC
(A Nevada Limited-Liability Company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

3.  Summary of Significant Accounting Principles (continued)

 

Income (Loss) Allocable to Preferred and Common Member Interests.  A schedule is presented on the consolidated statements of operations which allocates net income (loss) between the preferred interest held by EW Common, LLC and the common member interests. As described in footnote 10, Preferred Return, a preferred return began accumulating on March 1, 2006 and accumulates whether or not there are profits or funds available for the payment of the preferred return. Under the Notes indenture, the preferred return is payable only if the Company’s coverage ratio meets certain criteria. No payments have ever been made through December 31, 2009 or in subsequent periods.

 

Recently Issued Accounting PronouncementsIn June 2009, the Financial Accounting Standards Boards (“FASB”) issued Accounting Standards Update No. 2009-01, “Generally Accepted Accounting Principles” (ASC Topic 105), which establishes the FASB Accounting Standards Codification (“Codification” or “ASC”) as the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”). Effective for financial statements issued for interim and annual periods ending after September 15, 2009, the Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents are superseded and all other accounting literature not included in the Codification will be considered non-authoritative. The Codification also includes most, but not necessarily all, relevant Securities and Exchange Commission (“SEC”) guidance organized using the same topical structure in separate sections within the Codification.

 

The Company adopted the Codification, effective July 1, 2009,  requiring references to authoritative U.S. GAAP to refer to the appropriate section of the Codification. The adoption of the Codification does not have an impact on the Company’s financial position, results of operations or cash flows. In order to ease the transition to the Codification, Codification cross-references are provided alongside the references to the Standards issued and adopted prior to the adoption of the Codification.

 

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, which amends Fair Value Measurements and Disclosures — Overall (ASC Topic 820-10) to provide guidance on the fair value measurement of liabilities. This update, among other matters, provides guidance on how to measure fair value in circumstances in which a quoted price in an active market for the identical liability is not available. This update was adopted by the Company in 2009.

 

In June 2009, the FASB issued (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46(R)” (ASC Topic 810). The guidance is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. This guidance was effective for interim and annual periods ending after November 15, 2009.  The adoption of SFAS 167 did not have a material impact on the consolidated financial statements.

 

60



Table of Contents

 

155 East Tropicana, LLC
(A Nevada Limited-Liability Company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

3. Summary of Significant Accounting Principles (continued)

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets” (ASC Topic 860) which required more information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosure. This standard was effective for annual periods ending after November 15, 2009. The adoption of SFAS 166 did not have an impact on the consolidated financial statements.

 

A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, that the implementation of such proposed standards would have on our consolidated financial statements.

 

4.  Property and Equipment

 

Property and equipment consists of the following at December 31, 2009 and 2008 (dollars in thousands):

 

 

 

2009

 

2008

 

Land

 

$

38,932

 

$

38,932

 

Buildings and improvements

 

74,858

 

72,465

 

Furniture, fixtures and equipment

 

22,616

 

20,201

 

Construction in progress

 

57

 

39

 

Subtotal

 

136,464

 

131,637

 

Less: accumulated depreciation

 

(26,995

)

(20,383

)

Property and equipment, net

 

$

109,469

 

$

111,254

 

 

61



Table of Contents

 

155 East Tropicana, LLC
(A Nevada Limited-Liability Company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

5. Intangible Assets

 

Intangible assets consist of the following at December 31, 2009 and 2008 (dollars in thousands):

 

 

 

2009

 

2008

 

Licensing, trade name

 

$

2,300

 

$

2,900

 

Slot customer list

 

260

 

260

 

Subtotal

 

2,560

 

3,160

 

Less: accumulated amortization (slot customer list)

 

(217

)

(165

)

Intangible assets, net

 

$

2,343

 

$

2,995

 

 

Goodwill.  As part of the allocation of the purchase price of the Hôtel San Rémo, the Company recorded goodwill from the acquisition of Hôtel San Rémo, representing the excess of the purchase price over the fair market value of assets acquired.

 

As a result of the Company’s annual impairment test of the goodwill, the Company recognized a non-cash impairment charge to goodwill of $2,158,000 in the fourth quarter of 2008.  This resulted in the write-off of all goodwill.  The charge is included in “Intangible assets impairment charge” in the accompanying consolidated statements of operations.  Such charge was impacted by current market conditions including: (1) current cash flow forecasts reflecting lower expectations; (2) higher discount rates resulting from turmoil in the credit and equity markets; and (3) lower valuation multiples for gaming assets.

 

Licensing, trade name.  The Hooters licensing agreement, which pertains to the usage of the Hooters name for casino, restaurant and hotel operations was originally valued at $4.2 million.  The fair value of the licensing agreement was determined using the relief-from-royalty method and was negatively impacted by the factors discussed above relating to the impairment of goodwill.  The Company