<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1998
-----------------------------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
COMMISSION FILE NUMBER: 1-9481
-----------------------------------------
SANTA FE GAMING CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 88-0304348
- --------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4949 N. RANCHO DRIVE, LAS VEGAS, NEVADA 89130
- ------------------------------------------------------------------------------
(Address of principal executive office and zip code)
(702) 658-4300
----------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by a 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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
6,195,356 as of August 11, 1998
- ------------------------------------------- ------------------
Amount Outstanding Date
<PAGE>
SANTA FE GAMING CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Balance Sheets at June 30, 1998
(unaudited) and September 30, 1997.......................... 2
Statements of Operations for the three and nine months
ended June 30, 1998 and 1997 (unaudited).................... 3
Statement of Changes in Stockholders' Equity
for the nine months ended June 30, 1998
(unaudited)................................................. 4
Statements of Cash Flows for the nine months
ended June 30, 1998 and 1997 (unaudited).................... 5
Notes to Consolidated Condensed Financial
Statements (unaudited)...................................... 6
Independent Accountants' Review Report.....................14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................................15
PART II. OTHER INFORMATION...................................................32
</TABLE>
1
<PAGE>
SANTA FE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 1998 1997
- ------------------------------------- ------------ -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and short-term investments $ 19,589,403 $ 15,146,217
Accounts receivable, net 1,458,058 910,867
Inventories 1,315,325 1,248,199
Prepaid expenses & other 4,234,859 3,546,812
Assets held for sale 1,605,000 1,605,000
------------- -------------
Total current assets 28,202,645 22,457,095
Land held for development 36,589,065 36,589,065
Property and equipment, net 111,521,502 104,161,796
Goodwill, net 43,567,032 44,641,391
Other assets 15,254,987 8,446,931
------------- -------------
Total assets $235,135,231 $216,296,278
------------- -------------
------------- -------------
LIABILITIES and STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 65,748,087 $ 6,644,979
Accounts payable 4,055,852 5,117,059
Interest payable 1,838,689 6,612,750
Accrued and other liabilities 7,405,327 6,525,215
Debt due upon sale of assets 1,559,000 1,559,000
------------- -------------
Total current liabilities 80,606,955 26,459,003
Long-term debt - less current portion 146,055,438 168,978,838
Commitments
Stockholders' equity:
Common stock, $.01 par value; authorized-100,000,000
shares; issued and outstanding-6,195,356 shares 61,954 61,954
Preferred stock, exchangeable, redeemable 8%
cumulative, stated at $2.14 liquidation value,
authorized-10,000,000 shares; issued and
outstanding-8,856,651 shares 21,606,686 20,469,492
Additional paid-in capital 51,513,504 51,513,504
Accumulated deficit (64,621,532) (51,098,739)
------------- -------------
Total 8,560,612 20,946,211
Less treasury stock - 4,875 shares, at cost (87,774) (87,774)
------------- -------------
Total stockholders' equity 8,472,838 20,858,437
------------- -------------
Total liabilities and stockholders' equity $235,135,231 $216,296,278
------------- -------------
------------- -------------
</TABLE>
See the accompanying Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
SANTA FE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
June 30,1998 June 30, 1997 June 30,1998 June 30, 1997
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Casino $ 23,245,496 $ 22,283,530 $ 68,498,207 $ 63,609,645
Hotel 1,514,863 1,473,738 4,365,919 4,491,981
Food and beverage 5,272,872 5,298,440 15,982,561 15,842,213
Other revenues 1,865,316 1,543,309 5,623,729 5,950,245
------------ ------------ ------------ ------------
Gross revenues 31,898,547 30,599,017 94,470,416 89,894,084
Less casino promotional allowances (3,059,300) (3,083,029) (9,601,003) (9,487,966)
------------ ------------ ------------ ------------
Net operating revenues 28,839,247 27,515,988 84,869,413 80,406,118
------------ ------------ ------------ ------------
Operating expenses:
Casino 11,045,685 10,720,016 33,651,682 31,749,544
Hotel 486,518 457,155 1,438,826 1,319,149
Food and beverage 3,659,557 3,438,509 10,611,243 10,898,320
Other operating expenses 749,976 738,779 2,248,672 2,212,925
Selling, general & administrative 3,297,015 2,809,993 9,496,518 8,171,455
Corporate expenses 856,035 743,419 2,635,176 2,430,542
Utilities & property expenses 2,478,629 3,111,085 8,668,057 9,083,909
Depreciation & amortization 3,575,007 2,753,904 9,713,604 8,241,501
------------ ------------ ------------ ------------
Total operating expenses 26,148,422 24,772,860 78,463,778 74,107,345
------------ ------------ ------------ ------------
Operating income 2,690,825 2,743,128 6,405,635 6,298,773
Interest expense 6,721,120 5,585,080 18,791,234 16,948,978
------------ ------------ ------------ ------------
Loss before income tax benefit and
extraordinary item (4,030,295) (2,841,952) (12,385,599) (10,650,205)
Federal income tax benefit 0 (491,055) 0 (2,902,340)
------------ ------------ ------------ ------------
Loss before extraordinary item (4,030,295) (2,350,897) (12,385,599) (7,747,865)
Extraordinary item-gain on early
extinguishment of debt, net of tax
provision of $200,482 in 1997 0 372,323 0 372,323
------------ ------------ ------------ ------------
Net loss (4,030,295) (1,978,574) (12,385,599) (7,375,542)
Dividends paid or accrued on preferred shares 379,065 379,065 1,137,194 1,137,194
------------ ------------ ------------ ------------
Net loss applicable to common shares ($ 4,409,360) ($ 2,357,639) ($13,522,793) ($ 8,512,736)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Average common shares outstanding 6,195,356 6,195,356 6,195,356 6,195,356
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss per common share:
net loss ($ 0.65) ($ 0.32) ($ 2.00) ($ 1.19)
dividends paid or accrued on preferred shares ($ 0.06) ($ 0.06) ($ 0.18) ($ 0.18)
------------ ------------ ------------ ------------
Loss per common share ($ 0.71) ($ 0.38) ($ 2.18) ($ 1.37)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See the accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
SANTA FE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common Preferred Paid-in Accumulated Treasury
Stock Stock Capital Deficit Stock Total
------------ ------------- -------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, October 1, 1997 $61,954 $20,469,492 $51,513,504 ($51,098,739) ($87,774) $20,858,437
Net loss (12,385,599) (12,385,599)
Preferred stock dividend accrued 1,137,194 (1,137,194) 0
------------ -------------- --------------- --------------- -------------- -------------
Balances, June 30, 1998 $61,954 $21,606,686 $51,513,504 ($64,621,532) ($87,774) $8,472,838
------------ -------------- --------------- --------------- -------------- -------------
------------ -------------- --------------- --------------- -------------- -------------
</TABLE>
See the accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
SANTA FE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
June 30, 1998 June 30, 1997
- --------------------------------------------------------------- ----------------- ---------------
<S> <C>
Cash flows from operating activities:
Cash and short-term investments provided by
(used in) operations ($1,461,095) $2,164,108
Gain on sale of land held for development 0 (725,179)
Gain on early extinguishment of debt 0 (372,323)
Decrease (increase) in accounts receivable, net (547,191) 114,870
Increase in accounts receivable, officer 0 (38,372)
Increase (decrease) in inventories (67,126) 48,379
Increase in prepaid expenses & other (688,045) (1,156,066)
Decrease in deferred income taxes 0 (2,888,233)
Increase in other assets (7,782,042) (1,614,350)
Decrease in accounts payable (696,189) (927,975)
Decrease in interest payable (4,774,061) (5,283,987)
Increase (decrease) in accrued and other liabilities 1,120,748 (47,591)
----------------- -------------
Net cash used in operating activities (14,895,001) (10,726,719)
----------------- -------------
Cash flows from investing activities:
Proceeds from sale of land held for development 0 3,150,000
Capital expenditures (4,538,718) (1,551,270)
----------------- -------------
Net cash provided by (used in) investing activities (4,538,718) 1,598,730
----------------- -------------
Cash flows from financing activities:
Cash proceeds of long-term debt 81,439,996 6,675,658
Cash paid on long-term debt (57,563,091) (4,840,355)
----------------- -------------
Net cash provided by financing activities 23,876,905 1,835,303
----------------- -------------
Increase (decrease) in cash and short-term investments 4,443,186 (7,292,686)
Cash and short-term investments,
beginning of period 15,146,217 17,497,824
----------------- -------------
Cash and short-term investments,
end of period $19,589,403 $10,205,138
----------------- -------------
----------------- -------------
</TABLE>
See the accompanying Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
SANTA FE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION AND GENERAL INFORMATION
Santa Fe Gaming Corporation, formerly known as Sahara Gaming Corporation,
(the "Company" or "Santa Fe Gaming"), a publicly traded Nevada corporation,
is the successor corporation of two affiliates, Sahara Resorts and Sahara
Casino Partners, L.P., which combined in a business combination in September,
1993. The Company's primary business operations are conducted through two
wholly owned subsidiary corporations, Santa Fe Hotel Inc. ("SFHI") and
Pioneer Hotel Inc. ("PHI") (the "Operating Companies"). SFHI owns and
operates the Santa Fe Hotel and Casino (the "Santa Fe"), located in Las
Vegas, Nevada, and PHI owns and operates the Pioneer Hotel & Gambling Hall
(the "Pioneer") in Laughlin, Nevada. The Company owns real estate adjacent to
the Santa Fe, and through an indirect wholly-owned subsidiary of the Company,
Sahara Las Vegas Corp. ("SLVC"), on Las Vegas Boulevard South and in
Henderson, Nevada, for possible development opportunities.
These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report to stockholders for the year ended
September 30, 1997. The results of operations for the nine month period ended
June 30, 1998 are not necessarily indicative of the results to be expected
for the entire year.
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of only
normal accruals) necessary to present fairly the financial position of the
Company at June 30, 1998, the results of its operations for the three and
nine month periods ended June 30, 1998 and 1997, the changes in stockholders'
equity for the nine month period ended June 30, 1998, and cash flows for the
nine month periods ended June 30, 1998 and 1997.
Certain reclassifications have been made in the 1997 consolidated financial
statements in order to conform to the presentation used in 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 of revenues and expenses during the reporting period.
Significant estimates used by the Company include estimated useful lives for
depreciable and amortizable assets, certain other estimated liabilities and
valuation reserves, and estimated cash flows in assessing the recoverability
of long-lived assets. Actual results may differ from estimates.
6
<PAGE>
Recently Issued Accounting Standards
During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share." SFAS
No. 128 requires the presentation of basic net income (loss) per share and
diluted net income (loss) per share. Basic per share amounts are computed by
dividing net income (loss) by average shares outstanding during the period.
Diluted per share amounts are computed by dividing net income (loss) by
average shares outstanding plus the dilutive net income (loss) by average
shares outstanding plus the dilutive effect of common share equivalents. The
effect of options outstanding was not included in diluted calculations during
the quarter ended June 30, 1998 since the Company incurred a net loss during
the three-month and nine-month periods ended June 30, 1998.
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial accounting standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), which is effective for fiscal years beginning after
December 15, 1997. This statement requires companies to classify items of
other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
balance sheet. Management does not believe that SFAS No. 130 will have a
material impact on the Company's financial statements.
The FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
No. 131"), which is effective for fiscal years beginning after December 15,
1997. This statement redefines how operating segments are determined and
requires qualitative disclosure of certain financial and descriptive
information about a company's operating segments. The Company will adopt SFAS
No. 131 in the year ending September 30, 1999. Management has not yet
completed its analysis of which operating segments it will report on to
comply with SFAS No. 131.
The American Institute of Certified Public Accountants' Accounting Standards
Executive Committee issued Statement of Position ("SOP") 98-5 "Reporting on
the Costs of Start-up Activities." This standard provides guidance on the
financial reporting for start-up costs and organization costs. This standard
requires costs of start-up activities and organization costs to be expensed
as incurred. This standard is effective for fiscal years beginning after
December 15, 1998, though earlier application is encouraged. Management
believes that this SOP could have a material impact on the consolidated
financial statements depending on the status of the Company's current and
future expansion projects at the time of adoption of this standard.
NOTE 2 - CASH AND SHORT-TERM INVESTMENTS
At June 30, 1998, approximately $8.6 million of the Company's consolidated
cash and short term investments was held by SFHI and was subject to certain
restrictions and
7
<PAGE>
limitations on its use, including restrictions on its availability for
distribution to the Company, by the terms of an indenture pursuant to which
$115 million principal amount of 11% First Mortgage Notes due 2000 ("11%
Notes") of SFHI was issued. As of June 30, 1998, SFHI did not meet the
conditions precedent to making a distribution to the Company.
At June 30, 1998, approximately $9.3 million of the Company's consolidated
cash and short-term investments was held by PHI and was subject to certain
restrictions, including restrictions on its availability for distribution to
the Company, by the terms of an indenture pursuant to which the 13 1/2% First
Mortgage Notes due 1998 ("13 1/2% Notes") of Pioneer Finance Corp. were
issued. Santa Fe Valley, Inc. ("SFVI") a wholly-owned subsidiary of the
Pioneer, held approximately $6.4 million of the cash and short-term
investments which could be distributed to PHI. As of June 30, 1998, PHI did
not meet the conditions precedent to making a distribution to the Company.
At June 30, 1998, approximately $1.1 million of the Company's consolidated
cash and short-term investments was held by SLVC and was subject to certain
restrictions and limitations on its use by the terms of $57.5 million
principal amount of notes due 1999 ("SLVC Notes") of SLVC.
NOTE 3 - ASSETS HELD FOR SALE
In November 1997, the Company entered into an agreement to sell the 22 acre
parcel of land next to the Santa Fe for approximately $3.6 million. The
agreement is subject to certain contingencies and, pursuant to an amendment
entered into on May 12, 1998, will terminate if closing does not occur before
August 13, 1998. Pursuant to the amendment, the buyer must pay the purchase
price in cash.
NOTE 4 - PROPERTY AND EQUIPMENT, NET
In March 1998, the Company acquired, for approximately $10.7 million, gaming
equipment and furniture and fixtures previously under lease at the Santa Fe.
In June 1998, the Santa Fe acquired additional gaming equipment for $1.2
million. The Company funded the acquisition with proceeds from a $14 million
note placement in April 1998. (See Note 6)
In December 1997, the Company acquired, for approximately $1.2 million,
gaming equipment previously under lease at the Pioneer. In January 1998, the
Pioneer acquired, for approximately $500,000, an additional 108 gaming
machines from available working capital.
NOTE 5 - CURRENT PORTION OF LONG-TERM DEBT
As of June 30, 1998, the Company's current liabilities exceeded current
assets by $52.4 million. The Company has approximately $65.7 million in
current maturities of long term debt due to third parties during the
twelve-month period ending June 30, 1999, comprised primarily of $60.0
million principal amount of 13 1/2% Notes issued by Pioneer Finance Corp. and
guaranteed by the Company, a $4.8 million balloon payment due in December
8
<PAGE>
1998 on the note payable by the Company to Sierra Construction Corp. ("Sierra
Construction") and principal amortization payments under other notes payable
and capital leases.
Although management has in the past and is currently exploring refinancing or
debt modification alternatives, as well as possible dispositions or financing
of certain assets, in order to satisfy the current maturities of long-term
debt obligations as they become due in the twelve month period ending June
30, 1999, no assurance can be given that the Company will be able to
refinance or modify some or all of its indebtedness or dispose of, or obtain
financing with respect to any assets. Any such refinancing or modification
would be subject to the Company's future operations and the prevailing market
conditions at the time of such proposed transaction and may require the
approval of the Nevada Gaming Authorities for such financings or asset sales.
If the Company is ultimately unable to refinance or modify any such debt
prior to maturity, and/or obtain sufficient proceeds from asset dispositions
or financings to repay such debt, events of default would occur which would
lead to cross-defaults in other material agreements of the Company including,
without limitation, agreements relating to substantially all of the
outstanding long-term debt of the Company and its subsidiaries.
NOTE 6 - LONG-TERM DEBT
In November 1997, the Company entered into an amended and restated agreement
with respect to the SLVC Notes pursuant to which the principal amount of
notes was increased from $35 million to $57.5 million. SLVC issued two
tranches of promissory notes, $37 million principal amount with an interest
rate of 9.75% and $20.5 million with an interest rate of 13.25%. Certain
other provisions of the loan agreement were amended, including the
elimination of any sinking fund principal payments prior to maturity in
December 1999. The additional proceeds were used by SLVC primarily to acquire
the 39 acre parcel of land in Henderson, Nevada from its affiliate SFVI for
cash consideration of $20 million. At closing, SFVI used approximately $5
million to repay the outstanding first mortgage indebtedness and paid a
dividend of $5 million to PHI. The balance of the proceeds of approximately
$10 million was retained by SFVI.
In March 1998, holders of a majority of the 11% Notes consented to three
proposals to amend the Indenture under which the 11% Notes were issued and,
as a result, all three proposals became effective. Pursuant to the
amendments, SFHI was permitted to (a) incur $14 million of senior secured
indebtedness; (b) grant a security interest in certain gaming equipment to
secure two promissory notes in the aggregate principal amount of
approximately $10 million to obtain an extension of the maturity of the two
promissory notes from May 1998 until April 2001 and a reduction in the
interest rate to 11% and (c) is permitted to lease 3 acres for development of
a non-gaming hotel.
In April 1998, SFHI consummated the issuance of $14 million principal amount
of 9.5% senior secured indebtedness (the "9.5% Notes") contemplated by the
consent solicitation relating to its 11% Notes. The 9.5% Notes require
quarterly interest only payments, and mature December 15, 2000. SFHI used
approximately $10.7 million of proceeds to
9
<PAGE>
purchase gaming and other equipment under lease and approximately $1.2
million of the proceeds toward the purchase of additional gaming equipment.
(See Note 4) SFHI expects to use the balance of the loan proceeds to acquire
two new pylon signs and to fund in part the construction of a parking
structure at the Santa Fe.
In addition, in April 1998, SFHI modified the terms of outstanding promissory
notes aggregating approximately $10 million (the "Equipment Notes") in
connection with a sale by the Company of the Equipment Notes to a third party
to reduce the interest rate to 11% and to extend the maturity date from May
1998 to April 2001. SFHI also granted a security interest in gaming and other
equipment to secure the modified notes. In April 1998, the Company
consummated the sale of the Equipment Notes for cash proceeds of
approximately $9 million. The Company utilized approximately $5.2 million of
such proceeds to retire the 10.25% Subdebentures, upon maturity in June 1998
and expects to use the remaining cash proceeds for working capital purposes.
NOTE 7 - LEASES
In November 1997, SFHI amended the terms of operating leases for gaming and
other equipment to extend the term of the leases from up to 36 months to 48
months, to defer payment on the leases until August 1998 and to replace older
gaming equipment with new equipment. In January 1998, the Company entered
into operating leases for an additional 200 slot and video poker machines
with terms between 36 and 48 months. In March 1998, the Company acquired the
equipment subject to lease. (See Notes 4 and 6)
In December 1997, the Pioneer purchased gaming equipment previously subject
to lease for approximately $1.2 million, as a result of which monthly rental
expense for gaming equipment decreased by $44,000.
NOTE 8 - SUPPLEMENTAL INFORMATION
Supplemental statement of cash flows information for the nine month periods
ended June 30, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
(dollars in thousands)
Operating Activities: 1998 1997
------- -------
<S> <C> <C>
Cash paid during the period for interest,
net of amount capitalized of $108,337 and
$ -0- for 1998 and 1997, respectively $22,456 $21,139
------- -------
------- -------
Cash paid during the period for
income taxes $ -0- $ 100
------- -------
------- -------
Investing and Financing Activities:
Debt incurred in connection with the
acquisition of machinery and equipment $ 9,431 $ 634
------- -------
------- -------
</TABLE>
10
<PAGE>
NOTE 9 - CONTINGENCIES
In February 1998, the Company amended its agreement with the owner of a
recreational vehicle park, which purchased the rights and obligations under
contracts with members of Camperland, a recreational vehicle park previously
owned and operated by the Company. In accordance with the amendment, the
Company (i) reconveyed a first deed of trust on 14 acres of vacant land owned
by the existing park, which secured performance by the existing park's
operators in connection with the assumption of the Camperland contracts, and
(ii) was relieved of its obligation, in certain situations, to make payment
of $750,000 under certain circumstances and of all performance obligations
with regard to the Camperland contract.
11
<PAGE>
10. SUPPLEMENTAL STATEMENT OF SUBSIDIARY INFORMATION -
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997
THE COMPANY'S PRIMARY OPERATIONS ARE IN THE HOTEL/CASINO INDUSTRY AND IN
FISCAL YEARS 1998 AND 1997 WERE CONDUCTED THROUGH PHI AND SFHI. "OTHER" BELOW
INCLUDES FINANCIAL INFORMATION FOR THE COMPANY'S OTHER OPERATIONS BEFORE
ELIMINATING ENTRIES. IN ADDITION TO THE FINANCIAL INFORMATION FOR THE NINE
MONTHS ENDED JUNE 30, 1998 AND 1997, AS SET FORTH IN THE TABLE BELOW, SEE
NOTES 2, 4, AND 7 FOR ADDITIONAL DISCUSSION OF SUBSIDIARY OPERATIONS.
<TABLE>
<CAPTION>
(dollars in thousands) YEAR PHI SFHI OTHER ELIMINATIONS TOTAL
- ---------------------- ----------- ---------- ---------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES 1998 $ 30,741 $53,408 $ 1,578 ($ 858) $ 84,869
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
1997 $ 31,688 $47,334 $ 2,524 ($ 1,140) $ 80,406
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
OPERATING INCOME (LOSS) 1998 ($ 387) $ 9,288 ($1,845) ($ 650) $ 6,406
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
1997 $ 1,302 $ 4,877 $ 834 ($ 714) $ 6,299
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
INTEREST EXPENSE 1998 $ 6,098 $10,400 $ 2,943 ($ 650) $ 18,791
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
1997 $ 6,046 $ 9,911 $ 1,706 ($ 714) $ 16,949
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
DEPRECIATION AND AMORTIZATION 1998 $ 4,255 $ 3,983 $ 1,476 $ 9,714
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
1997 $ 4,186 $ 3,918 $ 138 $ 8,242
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
RENTS 1998 $ 661 $ 1,244 $ 1,905
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
1997 $ 735 $ 2,243 $ 2,978
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
CAPITAL EXPENDITURES 1998 $ 2,329 $11,574 $ 66 $ 13,969
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
1997 $ 726 $ 1,266 $ 193 $ 2,185
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
IDENTIFIABLE ASSETS 1998 $ 92,516 $85,653 $58,211 ($ 1,245) $235,135
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
1997 $ 111,012 $77,326 $28,075 ($ 1,245) $215,168
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
</TABLE>
<PAGE>
11. SUPPLEMENTAL STATEMENT OF SUBSIDIARY INFORMATION -
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
THE COMPANY'S PRIMARY OPERATIONS ARE IN THE HOTEL/CASINO INDUSTRY AND IN
FISCAL YEARS 1998 AND 1997 WERE CONDUCTED THROUGH PHI AND SFHI. "OTHER" BELOW
INCLUDES FINANCIAL INFORMATION FOR THE COMPANY'S OTHER OPERATIONS BEFORE
ELIMINATING ENTRIES. IN ADDITION TO THE FINANCIAL INFORMATION FOR THE THREE
MONTHS ENDED JUNE 30, 1998 AND 1997, AS SET FORTH IN THE TABLE BELOW, SEE
NOTES 2, 4 AND 7 FOR ADDITIONAL DISCUSSION OF SUBSIDIARY OPERATIONS.
<TABLE>
<CAPTION>
(dollars in thousands) YEAR PHI SFHI OTHER ELIMINATIONS TOTAL
- ---------------------- ------------ ---------- ---------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES 1998 $10,387 $18,272 $ 310 ($ 130) $28,839
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
1997 $10,582 $16,767 $ 663 ($ 496) $27,516
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
OPERATING INCOME 1998 $ 157 $ 3,434 ($ 857) ($ 43) $ 2,691
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
1997 $ 360 $ 2,701 $ 95 ($ 413) $ 2,743
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
INTEREST EXPENSE 1998 $ 2,027 $ 3,690 $ 1,047 ($ 43) $ 6,721
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
1997 $ 2,039 $ 3,465 $ 494 ($ 413) $ 5,585
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
DEPRECIATION AND AMORTIZATION 1998 $ 1,470 $ 1,464 $ 641 $ 3,575
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
1997 $ 1,394 $ 1,316 $ 44 $ 2,754
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
RENTS 1998 $ 179 $ 30 $ 209
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
1997 $ 246 $ 789 $ 1,035
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
CAPITAL EXPENDITURES 1998 $ 187 $ 1,686 $ 26 $ 1,899
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
1997 $ 271 $ 754 $ 66 $ 1,091
--------- ------- ------- --------- --------
--------- ------- ------- --------- --------
</TABLE>
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Santa Fe Gaming Corporation:
We have reviewed the accompanying consolidated condensed balance sheet of
Santa Fe Gaming Corporation and subsidiaries as of June 30, 1998, the related
consolidated condensed statements of operations for the three-month and
nine-month periods ended June 30, 1998 and 1997, stockholders' equity for the
nine-month period ended June 30, 1998 and cash flows for the nine-month
periods ended June 30, 1998 and 1997, in accordance with Statements on
Standards for Accounting and Review Services issued by the American Institute
of Certified Public Accountants. All information included in these financial
statements is the representation of the Company's management.
A review of interim financial information consists principally of inquiries
of Company personnel and analytical procedures applied to financial data. It
is substantially less in scope than an audit in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated condensed financial statements in order
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Santa Fe Gaming Corporation and
subsidiaries as of September 30, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year
then ended (not presented herein); and in our report dated December 8, 1997
we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated condensed balance sheet as of September 30, 1997 is fairly
stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
As discussed in Note 5 to the consolidated condensed financial statements, as
of June 30, 1998 the Company's current liabilities exceeded current assets by
$52.4 million, which is due to $65.7 million in current maturities of long
term debt due to third parties during the twelve-months ended June 30, 1999.
Management of the Company is exploring alternatives to address the $65.7
million current maturities of long term debt, which consist primarily of the
Pioneer Hotel, Inc. 13 1/2% Notes of $60 million, including, but not limited
to, disposition of assets, modifications to existing lease agreements,
possible reduction of indebtedness and/or refinancing or modification of the
13 1/2% Notes. If the Company is ultimately unable to refinance or modify any
such debt prior to maturity, and/or obtain sufficient proceeds from asset
dispositions or financings to repay such debt, events of default would occur
which would lead to cross-defaults in other material agreements of the
Company including, without limitation, agreements relating to substantially
all of the outstanding long-term debt of the Company and its subsidiaries. No
assurance can be given that the Company will be able to refinance or modify
some or all of its indebtedness or dispose of, or obtain financing with
respect to any assets.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
August 7, 1998
14
<PAGE>
SANTA FE GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Santa Fe Gaming Corporation, formerly known as Sahara Gaming
Corporation, (the "Company" or Santa Fe Gaming"), a publicly traded Nevada
corporation, is the successor corporation of two affiliates, Sahara Resorts
and Sahara Casino Partners, L.P., which combined in a business combination in
September, 1993. The Company's primary business operations are currently
conducted through two wholly owned subsidiary corporations, Santa Fe Hotel,
Inc. ("SFHI") and Pioneer Hotel, Inc. ("PHI") (the "Operating Companies").
SFHI owns and operated the Santa Fe hotel and Casino (the "Santa Fe"),
located in Las Vegas, Nevada, and Pioneer Inc. owns and operates the Pioneer
Hotel & Gambling Hall (the "Pioneer") in Laughlin, Nevada. In addition, the
Company, through its wholly owned subsidiaries, Hacienda Hotel, Inc. ("HHI")
and Sahara Nevada Corp., ("SNC"), previously owned and operated the Hacienda
Resort Hotel and Casino (the "Hacienda") and the Sahara Hotel and Casino (the
"Sahara"), but sold substantially all of the assets related to those
hotel-casinos in August 1995 and October 1995, respectively.
In the first nine months of fiscal 1998 the Company's revenues were
derived 80.7% from casino operations, 18.8% from food and beverage
operations, 5.2% from hotel operations and 6.6% from other operations such as
bowling and ice skating ("other revenues") less promotional allowances of
11.3%. The Company's business strategy emphasizes slot and video poker
machine play. For the first nine months of fiscal 1998, approximately 87.8%
of gaming revenues was derived from slot and video poker machines, while 8.4%
of such revenues was from table games and 3.8% from other gaming activities
such as the race and sports book, poker, bingo and keno. For the first nine
months of fiscal 1997, approximately 86.1% of gaming revenues was derived
from slot and video poker machines, while 10.3% of such revenues was from
table games and 3.6% from other gaming activities such as the race and sports
book, poker, bingo and keno.
The Company's earnings from operations before interest, taxes,
depreciation and amortization, rents and corporate expenses ("EBITDA") were
$20.7 million for the nine months ended June 30, 1998, as compared to $20.0
million for the nine months ended June 30, 1997. EBITDA should not be
construed as a substitute for operating income or a better indicator of
liquidity than cash flow from operating activities, which are determined in
accordance with Generally accepted Accounting Principles ("GAAP"). It is
included herein to provide additional information with respect to the ability
of the Company to meet its future debt service, capital expenditure and
working capital requirements. Although EBITDA is not necessarily a measure of
the Company's ability to fund its cash needs, management believes that
certain investors find EBITDA to be a useful tool for measuring the ability
of the Company to service its debt. The Company's definition of EBITDA may
not be the same as that of similarly captioned measures used by other
companies.
15
<PAGE>
The following discussion sets forth certain of the Company's results
from operations for the nine and three months ended June 30, 1998 and 1997 on
a consolidated basis and by property for the Santa Fe and Pioneer.
RESULTS OF OPERATIONS - NINE MONTHS ENDED JUNE 30, 1998 AND 1997
CONSOLIDATED
NET OPERATING REVENUES. Consolidated revenues for the nine month period
ended June 30, 1998 were $84.9 million, a $4.5 million, or 5.6%, increase
from $80.4 million for the same period in fiscal 1997. Revenues increased by
$6.1 million at the Santa Fe Hotel and Casino (the "Santa Fe") and decreased
by $1.0 million at the Pioneer Hotel and Gambling Hall (the "Pioneer"). The
prior period's revenues included a $700,000 gain on the sale of real property
by Santa Fe Gaming.
OPERATING EXPENSES. Total operating expenses increased $4.4 million, or
5.9%, from $74.1 million in the nine months ended June 30, 1997 to $78.5
million in the nine months ended June 30, 1998. Total operating expenses as a
percentage of revenue increased from 92.2% in the nine months ended June 30,
1997 to 92.5% in the nine months ended June 30, 1998. Operating expenses
increased by $1.7 million or 3.9% at the Santa Fe and $700,000 or 2.4% at the
Pioneer. Operating expense of Sahara Las Vegas Corp. ("SLVC") increased by
$1.9 million, primarily due to the amortization of debt issue costs
associated with the issuance of an additional $37.5 million in principal
amount of notes (the "SLVC Notes") in August and November 1997.
OPERATING INCOME. Consolidated operating income for the nine month
period ended June 30, 1998 was $6.4 million, a $100,000, or 1.7%, increase
from $6.3 million for the same period in fiscal 1997. Operating income
increased by $4.4 million at the Santa Fe and decreased by $1.7 million at
the Pioneer and $1.7 million at SLVC. The prior period included a $700,000
gain on sale of real property by Santa Fe Gaming.
OTHER EXPENSE. Consolidated interest expense for the nine month period
ended June 30, 1998 was $18.8 million, a $1.9 million increase compared to
$16.9 million for the same period in fiscal 1997. Interest expense of SLVC
increased by $1.5 million in the 1998 period due to the issuance of the
additional SLVC Notes in August and November 1997.
NET LOSS. Consolidated loss before income tax and extraordinary item for
the nine month period ended June 30, 1998 was $12.4 million, a $1.7 million
increase compared to net loss of $10.7 million in the same period in the
prior year. Loss before income tax decreased by $3.9 million in the 1998
period at the Santa Fe and increased by $1.7 million at the Pioneer and $3.2
million at SLVC. The prior period included a $700,000 gain on sale of real
property by Santa Fe Gaming.
16
<PAGE>
The Company did not record an income tax benefit in the current fiscal
year due to the uncertainty of the Company's ability to recognize a benefit
of the net operating loss. Consolidated net loss, applicable to common
shares, was $13.5 million in the 1998 period compared to $8.5 million in the
prior year period.
EBITDA. EBITDA increased $700,000, or 3.6%, from $20.0 million in the
nine months ended June 30, 1997 to $20.7 million in the nine months ended
June 30, 1998. EBITDA for the 1998 nine month period represents 1.0 times
rent and interest expense, respectively, compared to 1.0 times rent and
interest expense in the prior year nine month period. The Company will incur
less rent expense in future periods, offset by increased interest expense as
a result of the $14 million note placement by SFHI in April 1998 and $22.5
million note placement by SLVC in November 1997 and the application of net
proceeds therefrom.
SANTA FE
NET OPERATING REVENUES. Revenues at the Santa Fe increased 12.8%, or
$6.1 million, in the nine months ended June 30, 1998 to $53.4 million
compared to $47.3 million in the same period in the prior year. The
completion of the first phase of road construction near the Santa Fe in
September 1997 alleviated the access restriction to the Santa Fe, which
management believes resulted in increased customer traffic reflected in the
increased revenues. Completion of remaining construction in the immediate
area, which commenced in September 1997, was completed in February 1998.
Casino revenues increased 16.2%, or $5.9 million, to $42.5 million from
$36.6 million when compared to the same nine month period of 1997, due to the
increase in customers and the introduction of new slot equipment. Hotel
revenues remained unchanged at $2.5 million from the nine months ended June
30, 1997 to the nine months ended June 30, 1998, as a drop in occupancy rate
from 86.1% to 84.2% was offset by a 2.7% increase in average daily room rate.
Food and beverage revenues increased $200,000 to $9.1 million in the nine
months ended June 30, 1998 compared to $8.9 million in the nine months ended
June 30, 1997, due to the increase in business volume. Other revenues
increased $300,000 from $3.5 million in the nine months ended June 30, 1997
to $3.8 million in the nine months ended June 30, 1998, primarily due to
proceeds received on disputed matters.
OPERATING EXPENSE. Operating expenses increased by 3.9%, or $1.7
million. Casino expenses increased $1.7 million, or 9.8%, from $17.7 million
in the nine months ended June 30, 1997 to $19.4 million in the nine months
ended June 30, 1998, related to a corresponding increase in casino revenues.
However, casino expenses as a percentage of casino revenues decreased from
48.3 % in the nine months ended June 30, 1997 to 45.7% in the nine months
ended June 30, 1998 due to spreading of fixed costs over a larger revenue
base. Hotel expenses remained unchanged at $800,000 from the nine
17
<PAGE>
months ended June 30, 1997 to the nine months ended June 30, 1998. Food and
beverage expenses decreased $400,000, or 6.2%, from $7.0 million in the nine
months ended June 30, 1997 to $6.6 million in the nine months ended June 30,
1998 despite the increase in food and beverage revenues due to cost-of-sales
control measures. Food and beverage expenses as a percentage of food and
beverage revenues decreased from 79.0% in the nine months ended June 30, 1997
to 71.9% in the nine months ended June 30, 1998. Other expenses remained
unchanged at $1.6 million from the nine months ended June 30, 1997 to the
nine months ended June 30, 1998.
Selling, general and administrative expenses increased $1.0 million, or
16.9%, from $5.7 million in the nine months ended June 30, 1997 to $6.7
million in the nine months ended June 30, 1998 due to increased advertising
costs. The Santa Fe increased advertising expenditures to enhance awareness
levels of its current brand marketing message. Selling, general and
administrative expenses as a percentage of revenues increased from 12.1% in
the nine months ended June 30, 1997 to 12.5% in the nine months ended June
30, 1998. Utilities and property expenses decreased $700,000 from $5.7
million in the nine months ended June 30, 1997 to $5.0 million in the nine
months ended June 30, 1998, due to a decrease in rent expense. Utilities and
property expenses as a percentage of revenues decreased from 12.1% in the
nine months ended June 30, 1997 to 9.4% in the nine months ended June 30,
1998. Depreciation and amortization expenses were substantially unchanged at
$3.9 million in the nine months ended June 30, 1997 versus $4.0 million in
the nine months ended June 30, 1998.
SFHI is negotiating with the Teamsters, Operating Engineers, Culinary
and Bartenders Unions ("Unions") with respect to collective bargaining
agreements covering certain employees at the Santa Fe. If negotiations result
in agreements between the SFHI and the Unions, operating expenses are
expected to increase. In the event negotiations fail to result in agreements,
the Unions may call a strike, which would result in operating revenues being
adversely affected. In either event, there would be a material adverse effect
on the results of operations and financial condition of the Santa Fe and the
Company.
EBITDA. EBITDA increased $3.7 million, or 31.3%, from $11.7 million in
the nine months ended June 30, 1997 to $15.4 million in the nine months ended
June 30, 1998. EBITDA margin increased from 24.7% in the nine months ended
June 30, 1997 to 28.7% in the nine months ended June 30, 1998. EBITDA for the
1998 nine month period represents 1.32 times rent and interest expense
compared to .96 times rent and interest expense in the prior year nine month
period. The Company will incur less rent expense in future periods, offset in
part, by increased interest expense as a result of the $14 million note
placement by SFHI in April 1998 and the application of net proceeds
therefrom. (See Liquidity - SFHI below)
18
<PAGE>
PIONEER
NET OPERATING REVENUES. Revenues at the Pioneer decreased 3.0%, or $1.0
million, to $30.7 million as compared to $31.7 million in the prior year. The
decrease in the current period's revenues is believed to be primarily due to the
competitive gaming market environment in and around Laughlin, including Indian
gaming facilities opened in Arizona and Southern California, and new casinos
opened in Las Vegas.
Casino revenues were $26.0 million in 1998, representing a decrease of
3.9%, or $1.0 million, from $27.0 million when compared to the 1997 period.
Hotel revenues decreased $200,000 to $1.8 million from the nine months ended
June 30, 1997 to the nine months ended June 30, 1998, as a result of a drop
in occupancy rate from 80.9% to 79.4% and a 4.4% decrease in average daily
room rate. Food and beverage revenues decreased to $6.8 million in the nine
months ended June 30, 1998 compared to $7.0 million in the nine months ended
June 30, 1997, due to a decrease in customers and incentive programs and
giveaways intended to increase business. Other revenues remained
substantially unchanged at $1.1 million in the nine months periods ended June
30, 1997 and June 30, 1998. Casino promotional allowances decreased $400,000,
or 7.1%, from $5.4 million in the 1997 period to $5.0 million in the 1998
period.
OPERATING EXPENSE. Total operating expenses increased $700,000, or 2.4%,
from $30.4 million in the nine months ended June 30, 1997 to $31.1 million in
the nine months ended June 30, 1998. Total operating expenses as a percentage
of revenue increased from 95.9% in the nine months ended June 30, 1997 to
101.3% in the nine months ended June 30, 1998.
Casino expenses increased $100,000, or 1.2%, from $14.1 million in the
nine months ended June 30, 1997 to $14.2 million in the nine months ended
June 30, 1998, primarily due to an increase in contributions paid for wide
area progressive slots. Casino expenses as a percentage of casino revenues
increased from 52.1 % in the nine months ended June 30, 1997 to 54.8% in the
nine months ended June 30, 1998. Hotel expenses increased $100,000, or 25.5%,
from the nine months ended June 30, 1997 to the nine months ended June 30,
1998, primarily due to increases in payroll costs and costs to upgrade the
hotel rooms. Food and beverage expenses increased $100,000, or 3.9%, from
$3.9 million in the nine months ended June 30, 1997 to $4.0 million in the
nine months ended June 30, 1998, despite the decrease in food and beverage
revenues, due to increases in payroll costs and cost of sales. The cost of
sales was impacted by the incentive programs. Food and beverage expenses as a
percentage of food and beverage revenues increased from 55.8% in the nine
months ended June 30, 1997 to 59.0% in the nine months ended June 30, 1998.
Other expenses remained unchanged at $600,000 from the nine months ended June
30, 1997 to the nine months ended June 30, 1998.
Selling, general and administrative expenses increased $300,000, or 7.0 %,
from
19
<PAGE>
$4.0 million in the nine months ended June 30, 1997 to $4.3 million in the
nine months ended June 30, 1998 due to increased advertising costs. The
Pioneer altered its marketing strategy during fiscal year 1998 to include
television advertising as part of its communications mix in order to reach
out to the regional market to encourage new visits. Selling, general and
administrative expenses as a percentage of revenues increased from 12.8% in
the nine months ended June 30, 1997 to 14.1% in the nine months ended June
30, 1998. Utilities and property expenses were nearly unchanged at $3.1
million in the nine months ended June 30, 1997 versus $3.0 million in the
nine months ended June 30, 1998. Depreciation and amortization expenses were
substantially unchanged at $4.2 million in the nine months ended June 30,
1997 versus $4.3 million in the nine months ended June 30, 1998.
EBITDA. EBITDA decreased $1.5 million, or 22.0%, from $6.9 million in
the nine months ended June 30, 1997 to $5.4 million in the nine months ended
June 30, 1998. EBITDA margin decreased from 21.7 % in the nine months ended
June 30, 1997 to 17.5% in the nine months ended June 30, 1998. EBITDA for the
1998 nine month period represents .79 times rent and interest expense,
respectively, compared to 1.01 times rent and interest expense in the prior
year nine month period. The Company will incur less rent expense in future
periods as a result of the purchase of $1.2 million gaming equipment in
December 1997 previously under lease. During the nine month period ended June
30, 1998, a wholly-owned subsidiary of the Pioneer made cash dividends to the
Pioneer of $5.0 million in November 1997 and $3.4 million in June 1998, to
provide, in part, liquidity to meet debt service payments.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 AND 1997
CONSOLIDATED
NET OPERATING REVENUES. Consolidated revenues for the three month period
ended June 30, 1998 were $28.8 million, a $1.3 million, or 4.8%, increase
from $27.5 million for the same period in fiscal 1997. Revenues increased by
$1.5 million at the Santa Fe and decreased by $200,000 at the Pioneer.
OPERATING EXPENSE. Total operating expenses increased $1.3 million, or
5.6%, from $24.8 million in the three months ended June 30, 1997 to $26.1
million in the three months ended June 30, 1998. Total operating expenses as
a percentage of revenue increased from 90.0% in the three months ended June
30, 1997 to 90.7% in the three months ended June 30, 1998. Operating expenses
increased by $800,000 at the Santa Fe and $700,000 at SLVC and was unchanged
at the Pioneer. The increase at SLVC is primarily due to the amortization of
debt issue costs associated with the issuance of the additional SLVC Notes in
November 1997.
OPERATING INCOME. Consolidated operating income for the three month
period
20
<PAGE>
ended June 30, 1998 was unchanged at $2.7 million compared to the same period
in fiscal 1997. Operating income increased by $700,000 at the Santa Fe and
decreased by $200,000 at the Pioneer and $700,000 at SLVC.
OTHER EXPENSE. Consolidated interest expense for the three month period
ended June 30, 1998 was $6.7 million, a $1.1 million increase compared to
$5.6 million for the same period in fiscal 1997. Interest expense of SLVC
increased by $600,000 in the 1998 period due to the issuance the additional
SLVC Notes in August and November 1997.
NET LOSS. Consolidated loss before income tax and extraordinary item for
the three month period ended June 30, 1998 was $4.0 million, a $1.2 million
increase compared to $2.8 million in the same period in the prior year. Net
loss before income tax decreased by $500,000 at the Santa Fe and increased by
$200,000 at the Pioneer and $1.3 million at SLVC.
The Company did not record an income tax benefit in the current quarter
due to the uncertainty of the Company's ability to recognize a benefit of the
net operating loss. Consolidated net loss applicable to common shares was
$4.4 million compared to $2.4 million in the prior year period.
EBITDA. EBITDA was unchanged at $7.3 million in the three months ended
June 30, 1998 compared to June 30, 1997. EBITDA for the 1998 three month
period represents 1.06 times rent and interest expense, compared to 1.10
times rent and interest expense in the prior year three month period. The
Company will incur less rent expense in future periods, offset in part, by
increased interest expense as a result of the $14 million note placement by
SFHI in April 1998 and the application of net proceeds therefrom. (See
Liquidity - SFHI below)
SANTA FE
NET OPERATING REVENUES. Revenues at the Santa Fe increased 9.0%, or $1.5
million, in the three months ended June 30, 1998 to $18.3 million as compared
to $16.8 million in the same period in the prior year. The completion of the
first phase of road construction near the Santa Fe in September 1997
alleviated the access restriction to the Santa Fe, which management believes
resulted in increased customer traffic reflected in the increased revenues.
Completion of remaining construction in the immediate area, which commenced
in September 1997, was completed in February 1998.
Casino revenues increased 9.9%, or $1.3 million, to $14.7 million from
$13.4 million when compared to the same three month period of 1997, due to
the increase in customers and the introduction of new slot equipment. Hotel
revenues remained unchanged at $800,000 from the three months ended June 30,
1997 to the three months ended June 30, 1998, as an increase in occupancy
rate from 82.5% to 87.3% was offset by a 2.3%
21
<PAGE>
decrease in average daily room rate. Food and beverage revenues remained
relatively stable at $3.0 million in the three months ended June 30, 1998
compared to $2.9 million in the three months ended June 30, 1997. Other
revenues increased $300,000 to $1.3 million in the three months ended June
30, 1998 from $1.0 million in the three months ended June 30, 1997, primarily
due to proceeds received on disputed matters.
OPERATING EXPENSE. Operating expenses increased by 5.5%, or $800,000.
Casino expenses increased $600,000, or 9.1%, from $6.0 million in the three
months ended June 30, 1997 to $6.6 million in the three months ended June 30,
1998, related to a corresponding increase in casino revenues. However, casino
expenses as a percentage of casino revenues decreased from 45.1 % in the
three months ended June 30, 1997 to 44.7% in the three months ended June 30,
1998 due to spreading of fixed costs over a larger revenue base. Hotel
expenses remained unchanged at $300,000 from the three months ended June 30,
1997 to the three months ended June 30, 1998. Food and beverage expenses
remained relatively stable at $2.2 million in the three months ended June 30,
1998 compared to $2.1 million in the three months ended June 30, 1997. Food
and beverage expenses as a percentage of food and beverage revenues increased
from 73.3% in the three months ended June 30, 1997 to 74.5% in the three
months ended June 30, 1998, due to an increase in the cost of food sales for
the 1998 quarter compared to the 1997 quarter. Other expenses remained
unchanged from the three months ended June 30, 1997 to the three months ended
June 30, 1998.
Selling, general and administrative expenses increased $500,000, or
28.9%, from $1.9 million in the three months ended June 30, 1997 to $2.4
million in the three months ended June 30, 1998 due to increased advertising
costs. The Santa Fe increased advertising expenditures to enhance awareness
levels of its current brand marketing message. Selling, general and
administrative expenses as a percentage of revenues increased from 11.2% in
the three months ended June 30, 1997 to 13.3% in the three months needed June
30, 1998. Utilities and property expenses decreased $500,000 from $1.9
million in the three months ended June 30, 1997 to $1.4 million in the three
months ended June 30, 1998, due to a decrease in rent expense. Utilities and
property expenses as a percentage of revenues decreased from 11.6% in the
three months ended June 30, 1997 to 7.6% in the three months ended June 30,
1998. Depreciation and amortization expenses increased $200,000 from $1.3
million in the three months ended June 30, 1997 to $1.5 million in the three
months ended June 30, 1998.
EBITDA. EBITDA increased $200,000, or 4.0%, from $5.0 million in the
three months ended June 30, 1997 to $5.2 million in the three months ended
June 30, 1998. EBITDA margin decreased from 29.9% in the three months ended
June 30, 1997 to 28.5% in the three months ended June 30, 1998. EBITDA for
the 1998 three month period represents 1.40 times rent and interest expense
compared to 1.18 times rent and interest expense in the prior year three
month period. The Company will incur less rent expense
22
<PAGE>
in future periods, offset in part, by increased interest expense as a result
of the $14 million note placement by SFHI in April 1998 and the application
of net proceeds therefrom. (See Liquidity - SFHI below)
PIONEER
NET OPERATING REVENUES. Revenues at the Pioneer decreased 1.8%, or
$200,000, to $10.4 million in the June 1998 quarter as compared to $10.6
million in the prior year. The decrease in the current period's revenues is
believed to be primarily due to the competitive gaming market environment in
and around Laughlin, including Indian gaming facilities opened in Arizona and
Southern California, and new casinos opened in Las Vegas.
Casino revenues were $8.6 million in 1998, representing a decrease of
4.0%, or $300,000, from $8.9 million when compared to the 1997 period. Hotel
revenues remained unchanged at $600,000 from the three months ended June 30,
1997 to the three months ended June 30, 1998, as a drop in occupancy rate
from 81.3% to 79.1% was offset by a 9.4% increase in average daily room rate.
Food and beverage revenues remained relatively stable at $2.3 million in the
three months ended June 30, 1998 compared to $2.4 million in the three months
ended June 30, 1997. Other revenues remained substantially unchanged in the
three months ended June 30, 1997 compared to the three months ended June 30,
1998.
OPERATING EXPENSE. Operating expense was unchanged in the quarter ended
June 30, 1998.
Casino expenses decreased $200,000, or 4.7%, from $4.7 million, in the
three months ended June 30, 1997 to $4.5 million in the three months ended
June 30, 1998, related to a corresponding decrease in casino revenues. Casino
expenses as a percentage of casino revenues decreased from 52.7 % in the
three months ended June 30, 1997 to 52.3% in the three months ended June 30,
1998. Hotel expenses remained unchanged at $200,000 from the three months
ended June 30, 1997 to the three months ended June 30, 1998. Food and
beverage expenses increased $200,000, or 10.1%, from $1.3 million in the
three months ended June 30, 1997 to $1.5 million in the three months ended
June 30, 1998 despite the slight decrease in food and beverage revenues, due
to increases in payroll costs and cost of sales. The cost of sales was
impacted by the incentive programs. Food and beverage expenses as a
percentage of food and beverage revenues increased from 54.8% in the three
months ended June 30, 1997 to 62.8% in the three months ended June 30, 1998.
Other expenses remained unchanged from the three months ended June 30, 1997
compared to the three months ended June 30, 1998.
23
<PAGE>
Selling, general and administrative expenses increased $100,000, or
5.4%, from $1.3 million in the three months ended June 30, 1997 to $1.4
million in the three months ended June 30, 1998 due to increased advertising
costs. The Pioneer altered its marketing strategy during fiscal year 1998 to
include television advertising as part of its communications mix in order to
reach out to the regional market to encourage new visits. Selling, general
and administrative expenses as a percentage of revenues increased from 12.5%
in the three months ended June 30, 1997 to 13.4% in the three months needed
June 30, 1998. Utilities and property expenses were nearly unchanged at $1.1
million in the three months ended June 30, 1997 versus $1.0 million in the
three months ended June 30, 1998. Depreciation and amortization expenses were
substantially unchanged at $1.4 million in the three months ended June 30,
1997 versus $1.5 million in the three months ended June 30, 1998.
EBITDA. EBITDA decreased $100,000, or 5.1%, from $2.2 million in the
three months ended June 30, 1997 to $2.1 million in the three months ended
June 30, 1998. EBITDA margin decreased from 20.8% in the three months ended
June 30, 1997 to 20.1% in the three months ended June 30, 1998. EBITDA for
the 1998 three month period represents .95 times rent and interest expense,
respectively, compared to .96 times rent and interest expense in the prior
year three month period. The Company will incur less rent expense in future
periods as a result of the purchase of $1.0 million gaming equipment in
December 1997 previously under lease. In June 1998, the wholly-owned
subsidiary of the Pioneer issued cash dividends of approximately $3.4
million, to provide, in part, liquidity to meet debt service payments.
LIQUIDITY AND CAPITAL RESOURCES; TRENDS AND FACTORS RELEVANT TO FUTURE
OPERATIONS
LIQUIDITY. As of June 30, 1998, the Company ("SFGC") held cash and
short-term investments of $19.6 million compared to $15.1 million at
September 30, 1997. Management believes that, based on operations for the
nine month period ended June 30, 1998, the Company will have sufficient cash
resources to meet its operating and debt service requirements excluding debt
maturities through the twelve month period ending June 30, 1999, although no
assurance can be given to that effect.
Debt agreements restrict the distribution of cash from certain of the
Company's subsidiaries to the Company. Cash flow from SFHI, PHI and SLVC is
not currently, and is not expected in the foreseeable future to be, available
for distribution to the Company. In addition, debt agreements limit
additional indebtedness of such subsidiaries. Therefore, the Company and its
subsidiaries other than SLVC, PHI and SFHI, (collectively "Corporate") must
rely on existing cash and available resources, including the 22 acre parcel
of real property subject to a sale agreement, or cause subsidiaries to
dispose of or refinance assets, to provide liquidity to fund Corporate cash
requirements including obligations that may arise as a result of the
Company's guarantee of subsidiary debt. See more detailed discussion of
Liquidity and Capital Resources for SLVC, PHI, SFHI and Corporate, below.
24
<PAGE>
The Company has approximately $65.7 million in current maturities of
long term debt due to third parties during the twelve-month period ending
June 30, 1999, comprised primarily of $60.0 million principal amount of 13
1/2% Notes due December 1998 issued by Pioneer Finance Corp. and guaranteed
by the Company (the "13 1/2% Notes"), a $4.8 million balloon payment due in
December 1998 on a note payable by the Company to Sierra Construction Corp.
("Sierra Note") and principal amortization payments under other notes
payable and capital leases. The scheduled maturities applicable to third
party debt under notes payable and capital leases at SFHI and PHI during the
twelve month period ending June 30, 1999 are $600,000 and $30,000,
respectively.
The Company had $146.1 million in long-term debt, net of current
maturities and debt discount, as of June 30, 1998. Of such amounts,
approximately $57.5 million and $80.3 million mature in December 1999 and
December 2000, respectively, comprised primarily of $57.5 million principal
amount of SLVC Notes issued by SLVC and guaranteed by the Company, $99.4
million principal amount of 11% Notes due December 2000 (the "11% Notes")
issued by SFHI and guaranteed by the Company, of which $33.0 million is held
by SLVC, and $14.0 million of 9.5% Notes due December 2000 (the "9.5% Notes")
issued by SFHI and guaranteed by the Company.
Although management has in the past and is currently exploring
refinancing or debt modifications alternatives, as well as possible
dispositions or financing of certain assets, in order to satisfy the current
maturities of long-term debt obligations as they become due in the twelve
month period ending June 30, 1999, including the approximately $65 million of
indebtedness that matures in December 1998, no assurance can be given that
the Company will be able to refinance or modify some or all of its
indebtedness or dispose of, or obtain financing with respect to any assets.
Any such refinancing or modification would be subject to the Company's future
operations and the prevailing market conditions at the time of such proposed
transaction and may require the approval of the Nevada Gaming Authorities for
such financings or asset sales. If the Company is ultimately unable to
refinance or modify any such debt prior to maturity, and/or obtain sufficient
proceeds from asset dispositions or financings to repay such debt, events of
default would occur which would lead to cross-defaults in other material
agreements of the Company including, without limitation, agreements relating
to substantially all of the outstanding long-term debt of the Company and its
subsidiaries.
CASH FLOW FROM OPERATIONS. The Company's cash used for operations was
$14.9 million for the nine months ended June 30, 1998 as compared to $10.7
million for the prior year period. The increase in cash used for operations
was primarily due to increased interest expense at SLVC and development costs
for the Henderson project offset by improved cash flow from the Santa Fe. The
Company's principal uses of cash from operations are for rents, for gaming
equipment (until the purchase of substantially all such equipment in March
1998), corporate expenses, interest payments on indebtedness and capital
expenditures including development cost for proposed projects. Management
25
<PAGE>
believes that cash flow from operations in the prior period was adversely
impacted by restricted access to the Santa Fe due to road construction that
was ongoing from April 1996 through February 1998 and increased competition
in the Las Vegas locals market.
CASH USED FOR INVESTING ACTIVITIES. Cash used for investing activities
was $4.5 million during the nine month period ended June 1998, as compared to
cash provided by investing activities of $1.6 million during the nine month
period ended June 1997. The current period use represents the acquisition of
gaming equipment at the Santa Fe and Pioneer. SFHI expects to spend
approximately $4.0 million for improvements through the remainder of 1998,
including the acquisition of new pylon signs and the construction of a
parking structure. The Company owns, through an indirect wholly owned
subsidiary, an approximately 39 acre parcel of real property in Henderson,
Nevada, located in the southeast Las Vegas Valley. The Company is evaluating
the potential development of a hotel/casino and entertainment complex on this
property. The Company has completed preliminary engineering and architectural
drawings for the project. Any future development is subject to, among other
things, the Company's ability to obtain necessary financing. No assurance can
be given that the Company will obtain development financing or develop
successfully the Henderson property. (See Corporate and SLVC below)
CASH FLOW FROM FINANCING ACTIVITIES. Cash provided from financing
activities was $23.9 million in the 1998 nine month period compared to $1.8
million during the same period in 1997. This represents primarily the
application of the net proceeds resulting from the placement of the
additional $22.5 million principal amount of SLVC Notes and the placement by
SFHI of $14 million principal amount of senior notes. Additionally, in April
1998 SFGC sold promissory notes issued by SFHI with an aggregate principal
amount of approximately $10 million for approximately $9 million in cash.
(See Corporate and SFHI below)
CORPORATE - Approximately $2.7 million of the Company's current assets at
June 30, 1998, including approximately $600,000 of cash and short-term
investments, was held by Corporate.
Corporate consists primarily of non-operating entities which do not
generate cash flow from operations. Corporate's principal uses of cash are
for debt service, administrative and professional expenses of the parent
company and costs associated with the evaluation and development of proposed
projects. Additional potential uses of cash by Corporate include the payment
of a guaranteed tenant loan if the Company terminates the lease to which the
parcel on Las Vegas Boulevard South is subject (which loan had an outstanding
balance of $4.9 million as of June 30, 1998).
Prior to fiscal 1997, the Company satisfied the semi-annual dividend
payments on its preferred stock through the issuance of paid in kind
dividends. Commencing in fiscal 1997, dividends paid on the preferred stock,
to the extent declared, are required to be paid in cash. The Company is a
party to financing arrangements that restrict the Company's
26
<PAGE>
ability to exchange the preferred stock to subordinated notes commencing in
September 1998 and to declare and pay dividends or make distributions with
respect to the Company's capital stock, which currently prohibit the payment
of cash dividends on the preferred stock. In the event not declared,
dividends will accrue on the preferred stock. The Company accrued the
semi-annual preferred stock dividends due in March and September 1997 and
March 1998. To the extent dividends in an amount equal to dividend payments
for one dividend period have accrued and remain unpaid for two years, the
preferred stockholders will have the right to appoint two members to the
Board of Directors at the next annual meeting of shareholders. In March 1999,
the dividend rate increases to 11.0% from 8.0% and increases by 50 basis
points each semi-annual period thereafter, up to a maximum of 16%.
The Company has guaranteed the debt of its subsidiaries, PHI, SLVC and
SFHI, including $60 million principal amount of 13 1/2% Notes due December
1998. Furthermore, in the event that cash at SLVC, SFHI or PHI is
insufficient to meet liquidity requirements, Corporate may make
contributions, or, to the extent permitted by financing arrangements, loans
to SLVC, SFHI or PHI to prevent an event of default under debt instruments to
which SLVC, SFHI or PHI is a party and which loans have been guaranteed by
Corporate. In order to generate necessary liquidity, the Company may cause
its subsidiaries to dispose of, pledge or refinance certain assets to
generate sufficient liquidity to meet the cash requirements. No assurance can
be given that Corporate would have available resources to make such
contributions or loans. (See SFHI, PHI and SLVC)
Management believes that Corporate has sufficient working capital and
available resources to meet its operating and debt service requirements
through the twelve month period ending June 30, 1999, excluding the $4.8
million note due Sierra Construction in December 1998 ("Sierra Note"). The
Company is exploring alternatives to modify the Sierra Note to extend the
maturity date. Although no assurance can be given to that effect that an
agreement will be consummated with regard to the Sierra Note.
SFHI - At June 30, 1998, approximately $11.9 million of the Company's current
assets, including approximately $8.6 million of cash and short term
investments, was held by SFHI.
Results of operations at the Santa Fe for the three and nine months
ended June 30, 1998 generated EBITDA of $5.2 million and $15.4 million,
approximately 1.40 and 1.32 times rent and interest expense, respectively,
compared to $5.0 and $11.7 million of EBITDA in 1997, or approximately 1.18
and .96 times rent and interest expense, respectively. In the fiscal 1998
nine month period, the Santa Fe reported approximately $1.2 million in rent
expense compared to $2.2 million in the fiscal 1997 period. Management
believes that Santa Fe's EBITDA in prior periods was adversely impacted as a
result of increased competition in its market area and restricted access to
the property due to road construction. The completion of the first phase of
road construction near the
27
<PAGE>
Santa Fe in September 1997 alleviated the access restriction to the Santa Fe,
which management believes resulted in increased customer traffic reflected in
the increased revenues. Completion of remaining construction in the immediate
area, which commenced in September 1997, was completed in February 1998.
SFHI's principal uses of cash from operations are for operating lease
payments, corporate expenses, interest payments on indebtedness and capital
expenditures to maintain the facility. SFHI's lease payments in future
periods will be decreased, offset in part, by increased interest expense, as
a result of the issuance of the 9.5% Notes in April 1998 and the use of net
proceeds therefrom, as discussed above. Capital expenditures to maintain the
facility in fiscal 1998 are expected to be approximately the same that was
expended in fiscal 1997, excluding the purchase of approximately $9.7 million
in gaming equipment. SFHI expects to spend approximately $4.0 million for
improvements, including new pylon signs and a parking structure, through the
remainder of 1998.
Management believes that, based on operations for the nine month period
ended June 30, 1998, SFHI will have sufficient cash resources to meet its
operating and debt service requirements through the twelve month period
ending June 30, 1999, although no assurance can be given to that effect.
Results for the 1998 first, second and third quarters improved compared to
the same quarters in the prior year. However, results for the 1998 periods to
date are not necessarily indicative of results for the entire fiscal year.
SFHI is exploring alternatives to improve liquidity, including, but not
limited to, possible refinancings or modification of the 9.5% Notes and 11%
Notes. The Company has no arrangements for any refinancings, dispositions or
other financings. To the extent that SFHI is unable to generate sufficient
cash to meet its debt service requirements, Corporate may, to the extent of
available funds, make capital contributions or make advances to SFHI. No
assurance can be given that Corporate would have available resources to make
contributions or advances. (See Liquidity - Corporate)
PHI - At June 30, 1998, approximately $11.0 million of the Company's current
assets, including approximately $9.3 million of cash and short term
investments, was held by PHI. A wholly-owned subsidiary (the "Pioneer
Subsidiary") held $6.4 million of the cash and short-term investments held by
the Pioneer.
Results of operations at the Pioneer for the three and nine months ended
June 30, 1998, generated EBITDA of $2.1 million and $5.4 million,
approximately .95 and .79 times rent and interest expense, respectively,
compared to $2.2 million and $6.9 million of EBITDA in 1997, or approximately
.96 and 1.01 times rent and interest expense, respectively. Pioneer reported
rent expense of approximately $700,000 in both the 1997 and 1998 nine month
periods. Rent in future periods will be less compared to the current nine
month ended June 30, 1998 due to the purchase of gaming equipment previously
under lease in December 1997.
28
<PAGE>
PHI's principal uses of cash are for operating lease payments, corporate
expenses, interest payments on indebtedness and capital expenditures to
maintain the facility. Capital expenditures to maintain the facility in
fiscal 1998 are expected to be approximately the same as was expended in
fiscal 1997, excluding approximately $1.9 million to purchase gaming
equipment in the 1998 period.
Management believes that, based on operations for the nine month period
ended June 30, 1998, PHI will have sufficient cash and available resources to
meet its operating requirements excluding maturity of the 13.5% Notes in
December 1998 through the twelve months ending June 30, 1999, although no
assurance can be given to that effect. Results for the 1998 three and nine
month periods ended June 30, 1998 were down compared to the same periods in
the prior year. PHI is exploring alternatives to improve liquidity and to
address the maturity of the 13 1/2% Notes, including, but not limited to,
modifications to existing lease agreements and a possible reduction of
indebtedness or refinancing or modification of the 13 1/2% Notes.
Approximately $6.4 million of cash is held by the Pioneer Subsidiary and
could be available to satisfy in part the obligations under the 13 1/2%
Notes. The Company has no arrangements for any such refinancings,
modifications, dispositions or other financings and no assurance can be given
that PHI will successfully make such arrangements. To the extent that PHI is
unable to generate sufficient cash to meet its debt service requirements,
Corporate may, to the extent of available funds, make capital contributions
or make advances to PHI. No assurance can be given that Corporate would have
available resources to make contributions or advances. (See Liquidity -
Corporate)
SLVC - At June 30, 1998, approximately $1.1 million of the Company's cash and
short-term investments was held by SLVC.
SLVC owns a 27 acre parcel of real estate on Las Vegas Boulevard South
which is subject to a lease with a water theme park operator. SLVC generates
minimal cash from the lease agreement after payment of property costs. SLVC
receives interest income on $33.1 million principal amount of 11% Notes which
are held as collateral for the SLVC Notes. SLVC's principal use of cash on
hand, cash generated under the lease agreement and interest income on the 11%
Notes is to satisfy principal and interest obligations on the SLVC Notes.
SLVC holds a 39 acre parcel of real property in Henderson, Nevada and is
evaluating the development of a casino entertainment complex on the site.
Corporate has completed preliminary engineering and architectural drawings.
Due to restrictions in the SLVC Notes, any future development costs will be
the responsibility of Corporate and any future development is subject to,
among other things, the Company's ability to obtain necessary financing. No
assurance can be given that the Company will obtain development financing or
develop successfully the Henderson property.
29
<PAGE>
Additional potential required uses of cash by SLVC include the
redemption of $7.0 million principal amount of SLVC Notes or, alternatively,
the purchase of $7.0 million principal amount of 11% Notes, if SFHI cash flow
(as defined in the agreement relating to the SLVC Notes), before a maximum
$2.4 million in lease obligations at the Santa Fe, is less than $13.5 million
for any four quarter period.
Management believes that SLVC has available resources, consisting
primarily of restricted working capital and interest income on the 11% Notes
held as collateral, to meet operating and debt service requirements through
the twelve months ending June 30, 1999, although no assurance can be given to
that effect.
RELATED PARTIES In November 1993, Mr. Lowden, Chairman of the Board, Chief
Executive Officer and 53% stockholder of the Company, and Bank of America
(the "bank") entered into a personal loan agreement, secured by a pledge of
substantially all the common shares of the Company owned by Mr. Lowden. Mr.
Lowden has advised the Company he has repaid the entire loan balance in July
1998.
From 1991 through 1993 LICO, a company wholly-owned by Mr. Lowden,
borrowed an aggregate of $476,000 from a subsidiary of the Company, pursuant
to an unsecured demand loan which bore interest at 2% over the prime rate.
The outstanding balance of the loan including accrued interest was $700,000
as of December 31, 1997. In January 1998, the amount outstanding under the
loan was satisfied in full through the offset of amounts due Mr. Lowden under
compensation arrangements.
COMPUTERIZED OPERATIONS AND THE YEAR 2000
During recent years, there has been significant global awareness raised
regarding the potential disruption to business operations worldwide resulting
form the inability of current technology to process properly the change from
the year 1999 to 2000. Although, based on a review of its data processing,
operating and other computer-based systems, the Company does not currently
anticipate any material disruption in its operations as a result of any
failure by the Company to achieve year 2000 compliance, there can be no
assurance to that effect.
EFFECTS OF INFLATION
The Company has been generally successful in recovering costs associated
with inflation through price adjustments in its hotel operations. Any such
increases in costs associated with casino operations and maintenance of
properties may not be completely recovered by the Company.
30
<PAGE>
PRIVATE SECURITIES LITIGATION REFORM ACT
Certain statements in this Quarterly Report on Form 10-Q which are not
historical facts are forward looking statements, such as statements relating
to future operating results, existing and expected competition, financing and
refinancing sources and availability and plans for future development or
expansion activities and capital expenditures. Such forward looking
statements involve a number of risks and uncertainties that may significantly
affect the Company's liquidity and results in the future and, accordingly,
actual results may differ materially from those expressed in any forward
looking statements. Such risks and uncertainties include, but are not limited
to, those related to effects of competition, leverage and debt service,
financing and refinancing efforts, general economic conditions, changes in
gaming laws or regulations (including the legalization of gaming in various
jurisdictions) and risks related to development and construction activities.
31
<PAGE>
SANTA FE GAMING CORPORATION
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Other Information
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
SANTA FE GAMING CORPORATION, Registrant
By: /s/ Thomas K. Land
---------------------------------------
Thomas K. Land, Chief Financial Officer
Dated: August __, 1998
32
<PAGE>
Santa Fe Gaming Corporation
Las Vegas, Nevada
We have made a review, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants, of the unaudited interim financial information of Santa
Fe Gaming Corporation and subsidiaries for the periods ended June 30, 1998
and 1997, as indicated in our report dated August 7, 1998; because we did not
perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 is
incorporated by reference in Registration Statement No. 33-44700 on Form S-8
and in post-effective Amendment No. 1 to Registration Statement No. 33-7053
on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, is not considered a part of the
Registration Statement prepared or certified by an accountant or a report
prepared or certified by an accountant within the meaning of Sections 7 and
11 of that act.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
August 7, 1998
33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 19,589,403
<SECURITIES> 0
<RECEIVABLES> 1,458,058
<ALLOWANCES> 0
<INVENTORY> 1,315,325
<CURRENT-ASSETS> 28,202,645
<PP&E> 206,094,877
<DEPRECIATION> 56,379,310
<TOTAL-ASSETS> 235,135,231
<CURRENT-LIABILITIES> 80,606,955
<BONDS> 146,055,438
0
21,606,686
<COMMON> 61,954
<OTHER-SE> (13,108,028)
<TOTAL-LIABILITY-AND-EQUITY> 235,135,231
<SALES> 0
<TOTAL-REVENUES> 84,869,413
<CGS> 0
<TOTAL-COSTS> 47,950,423
<OTHER-EXPENSES> 30,513,355
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,791,234
<INCOME-PRETAX> (12,385,599)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,385,599)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,385,599)
<EPS-PRIMARY> 2.18
<EPS-DILUTED> 2.18
</TABLE>
