<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: DECEMBER 31, 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 Identification Number)
incorporation or organization)
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 FEBRUARY 12, 1999
- ------------------------------------- ----------------------------------
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 December 31, 1998 (unaudited)
and September 30, 1998.............................. 2
Statement of Operations for the three months
ended December 31, 1998 and 1997 (unaudited)........ 3
Consolidated Condensed Statements of
Stockholders' Deficiency (unaudited)................ 4
Statements of Cash Flows for the three months
ended December 31, 1998 and 1997 (unaudited)........ 5
Notes to Consolidated Condensed Financial
Statements (unaudited).............................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operation........................................... 13
PART II. OTHER INFORMATION...................................... 31
</TABLE>
1
<PAGE>
SANTA FE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1998 1998
- ------------------------------------------------------- -------------------- ------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and short-term investments $14,606,946 $22,650,882
Accounts receivable, net 1,087,413 1,617,762
Inventories 1,443,082 1,339,796
Prepaid expenses & other 3,262,152 3,243,415
-------------------- ------------------
Total current assets 20,399,593 28,851,855
Land held for development 38,194,065 38,194,065
Property and equipment, net 109,243,266 110,655,085
Other assets 14,851,144 14,465,409
-------------------- ------------------
Total assets $182,688,068 $192,166,414
-------------------- ------------------
-------------------- ------------------
LIABILITIES and STOCKHOLDERS' DEFICIENCY
- -------------------------------------------------------
Current liabilities:
Accounts payable $4,122,042 $3,864,000
Interest payable 1,037,027 4,497,420
Accrued and other liabilities 8,259,401 7,656,644
-------------------- ------------------
13,418,470 16,018,064
Current portion of long-term debt 61,862,371 1,785,716
Debt not paid at maturity 59,360,661 62,700,000
-------------------- ------------------
Total current liabilities 134,641,502 80,503,780
Long-term debt - less current portion 92,869,298 153,146,836
Commitments
Stockholders' deficiency (44,822,732) (41,484,202)
-------------------- ------------------
Total liabilities and stockholders' deficiency $182,688,068 $192,166,414
-------------------- ------------------
-------------------- ------------------
</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
Ended Ended
December 31, 1998 December 31, 1997
------------------- -------------------
<S> <C> <C>
Revenues:
Casino $24,315,664 $21,979,911
Hotel 1,395,846 1,433,934
Food and beverage 5,434,995 5,327,218
Other 2,314,133 1,868,478
------------------ ------------------
Gross revenues 33,460,638 30,609,541
Less casino promotional allowances (3,306,724) (3,250,295)
------------------ ------------------
Net operating revenues 30,153,914 27,359,246
------------------ ------------------
Operating expenses:
Casino 11,319,525 10,880,832
Hotel 467,044 449,023
Food and beverage 3,545,683 3,377,624
Other 1,332,858 767,182
Selling, general and administrative 3,107,536 3,043,168
Corporate expenses 890,567 816,117
Utilities and property expenses 2,519,328 3,285,940
Depreciation and amortization 3,254,541 3,132,762
------------------ ------------------
Total operating expenses 26,437,082 25,752,648
------------------ ------------------
Operating income 3,716,832 1,606,598
Interest expense 6,522,865 6,076,270
Other expenses 532,497 0
------------------ ------------------
Loss before income tax expense (3,338,530) (4,469,672)
Federal income tax benefit 0 0
------------------ ------------------
Net loss (3,338,530) (4,469,672)
Dividends accrued on preferred shares 521,214 379,065
------------------ ------------------
Net loss applicable to common shares ($3,859,744) ($4,848,737)
------------------ ------------------
------------------ ------------------
Average common shares outstanding 6,195,356 6,195,356
------------------ ------------------
------------------ ------------------
Loss per common share:
net loss ($0.54) ($0.72)
dividends accrued on preferred shares ($0.08) ($0.06)
------------------ ------------------
Loss per common share ($0.62) ($0.78)
------------------ ------------------
------------------ ------------------
</TABLE>
See the accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
SANTA FE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(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, 1998 $61,954 $21,985,750 $51,513,504 ($114,957,636) ($87,774) ($41,484,202)
Net loss (3,338,530) (3,338,530)
Preferred stock dividend accrued 521,214 (521,214) 0
--------- ------------- ------------- --------------- ---------- --------------
Balances, December 31, 1998 $61,954 $22,506,964 $51,513,504 ($118,817,380) ($87,774) ($44,822,732)
--------- ------------- ------------- --------------- ---------- --------------
--------- ------------- ------------- --------------- ---------- --------------
</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>
Three Months Three Months
Ended Ended
December 31,1998 December 31,1997
- ------------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Cash and short-tem investments provided by
(used in) operations $238,761 ($930,398)
Decrease (increase) in accounts receivable, net 530,349 (27,846)
Increase in inventories (103,286) (162,273)
Decrease (increase) in prepaid expenses & other (18,737) 39,880
Decrease (increase) in other assets (860,315) 262,276
Increase in accounts payable 258,042 371,040
Decrease in interest payable (1,815,992) (4,752,073)
Increase in accrued and other liabilities 602,756 1,411,637
----------------- -----------------
Net cash used in operating activities (1,168,422) (3,787,757)
----------------- -----------------
Cash flows from investing activities:
Capital expenditures (752,368) (1,428,031)
Development costs (407,190) (634,610)
----------------- -----------------
Net cash used in investing activities (1,159,558) (2,062,641)
----------------- -----------------
Cash flows from financing activities:
Cash proceeds of long-term debt 0 57,500,000
Cash paid on long-term debt (5,616,718) (40,728,211)
Debt issue cost (99,238) (3,004,046)
----------------- -----------------
Net cash provided by (used in) financing activities (5,715,956) 13,767,743
----------------- -----------------
Increase (decrease) in cash and short-term investments (8,043,936) 7,917,345
Cash and short-term investments,
beginning of period 22,650,882 15,146,217
----------------- -----------------
Cash and short-term investments,
end of period $14,606,946 $23,063,562
----------------- -----------------
----------------- -----------------
</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 (the "Company" or "Santa Fe Gaming"), a publicly
traded Nevada corporation, is the successor corporation of two affiliates,
Sahara Resorts ("SR") 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"). 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") located in Laughlin, Nevada. The Company owns through an
indirect wholly-owned subsidiary of the Company, Sahara Las Vegas Corp.
("SLVC"), real estate 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, 1998. The results of operations for the three month period
ended December 31, 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 December 31, 1998, the results of its operations for the three
month periods ended December 31, 1998 and 1997, the changes in stockholders'
equity for the three month period ended December 31, 1998, and cash flows for
the three month periods ended December 31, 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>
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, current liabilities exceed current assets in the accompanying
balance sheet by $114.2 million, which is attributable (i) to the remaining
$59.4 million of principal and accrued interest on the 13 1/2% First Mortgage
Bonds issued by Pioneer Finance Corp. ("PFC") which matured December 1, 1998
(the "13 1/2% Notes") but was not paid and (ii) $57.5 million of notes issued
by SLVC which mature in December 1999 (the "SLVC Notes"). Furthermore, at
December 31, 1998, there is a stockholders' deficiency of $44.8 million. The
Company's inability to repay the 13 1/2% Notes, its net losses, and its
stockholders' deficiency raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding these matters
include seeking confirmation of a plan of reorganization for PFC under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"),
pursuant to the terms of consents of holders (the "Consenting Holders") of
approximately 75% of the outstanding 13 1/2% Notes to forbear until December
15, 2000 from exercising their rights or remedies as a result of, among other
things, failure to pay the principal and interest on the 13 1/2% Notes at
maturity and their agreement to vote to accept the PFC plan of reorganization
under Chapter 11 of the Bankruptcy Code. The Consents were solicited pursuant
to PFC's Offering Circular and Consent Solicitation Statement dated October
23, 1998, as amended (the "Consent Solicitation"). On January 14, 1999,
holders of 13 1/2% Notes who did not consent pursuant to the Consent
Solicitation filed involuntary bankruptcy petitions against PFC and the
Company. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties. See Notes 3, 4 and 7
NOTE 2 - CASH AND SHORT-TERM INVESTMENTS
As of December 31, 1998, the Company held cash and short-term investments of
$14.6 million compared to $22.7 million at September 30, 1998. Substantially
all of the cash and short-term investments were held by SFHI and PHI, and
were subject to restrictions which prohibit distribution of this cash to the
Company.
At December 31, 1998, approximately $9.7 million of the Company's
consolidated cash and short term investments was held by SFHI and was subject
to certain restrictions and 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 December 31,
1998, SFHI did not meet the conditions precedent to making a distribution to
the Company.
At December 31, 1998, approximately $4.6 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% Notes of PFC were issued. As of December 31, 1998, PHI did not
meet the conditions precedent to making a distribution to the Company.
NOTE 3 - DEBT NOT PAID AT MATURITY
The 13 1/2% Notes were issued by PFC. The proceeds from such issuance were
loaned to PHI to acquire the Pioneer, are secured by an assignment of a first
priority deed of trust on the Pioneer and are guaranteed by the Company. The
Company had $55 million of principal and approximately $4.3 million accrued
interest due on the 13 1/2% Notes as of December 31, 1998.
7
<PAGE>
In November 1998, the Company received and accepted consents from holders of
approximately 75%, or $45.8 million, of principal amount of the outstanding
13 1/2% Notes pursuant to which (i) PFC agreed to file for relief under
Chapter 11 of the Bankruptcy Code and to submit for confirmation a plan of
reorganization that provides for issuance of new notes in satisfaction of the
13 1/2% Notes pursuant to the terms set forth in the Consent Solicitation,
and (ii) the Consenting Holders agreed (a) to forbear until December 15, 2000
from exercising rights or remedies arising as a result of the failure to pay
principal and interest on the 13 1/2% Notes at the December 1, 1998 maturity
date, or the failure by PHI to pay principal and interest on the intercompany
mirror note from PHI to PFC at the December 1, 1998 maturity date and (b) to
vote to accept a plan of reorganization in a Chapter 11 bankruptcy case that
provides for treatment of the 13 1/2% Notes substantially as set forth in the
Consent Solicitation. No assurance can be given that the plan of
reorganization that PFC intends to submit will be confirmed. PFC did not pay
the principal and accrued interest on the 13 1/2% Notes at the December 1,
1998 maturity.
Pursuant to the Consent Solicitation, in December 1998 PFC purchased on a
pro-rata basis from all Consenting Holders, an aggregate of $5.0 million
principal amount of 13 1/2% Notes, plus accrued interest. PFC also expects to
repurchase from non-consenting holders their pro-rata amount of 13 1/2% Notes
(approximately $1.5 million) plus accrued interest through December 1, 1998
upon confirmation of the plan of reorganization contemplated by the Consent
Solicitation that PFC intends to submit for confirmation in its anticipated
Chapter 11 case. In addition, the Company provided collateral for its
previously unsecured guarantee of the 13 1/2% Notes, through the pledge of
stock of its subsidiaries SFHI, SR, Hacienda Hotel Inc., Sahara Nevada Corp.
and Santa Fe Coffee Company, and by the grant of liens on certain of its
other assets.
On January 14, 1999 holders of 13 1/2% Notes who did not consent pursuant to
the Consent Solicitation filed involuntary bankruptcy petitions against PFC
and the Company. Additionally, such holders made demands on Santa Fe
Gaming under its guarantee of the 13 1/2% Notes. See Notes 4 and 7
NOTE 4 - CURRENT PORTION OF LONG-TERM DEBT
As of December 31, 1998, the Company had approximately $61.9 million in
current maturities of long term debt due to third parties during the
twelve-month period ending December 31, 1999, comprised primarily of $57.5
million principal amount of SLVC Notes.
Pursuant to the terms of the SLVC Notes, the default by PFC in payment of the
13 1/2% Notes at maturity and the demand under the Company's guarantee
created an event of default under the SLVC Notes. Additionally, if the
involuntary petitions under the Bankruptcy Code with respect to PFC and the
Company continue for 60 days without dismissal, bonding or discharge, the
anticipated voluntary filing by PFC for relief under Chapter 11 of the
Bankruptcy Code or the possible voluntary filing by the Company for relief
under Chapter 11 of the Bankruptcy Code will be events of default under the
SLVC Notes that will cause the SLVC Notes to automatically become due and
payable. Management is currently negotiating with holders of the SLVC Notes
to waive such defaults and anticipated acceleration, although no assurance
can be given that such negotiations will be successful.
8
<PAGE>
The Company is also exploring refinancing alternatives for the SLVC Notes. If
the holders of the SLVC Notes were not to waive defaults and acceleration and
were to demand payment under the SLVC Notes and the Company guarantee and the
Company were unable to refinance the SLVC Notes, or sell all or a portion of
its assets to satisfy the debt it is likely that SLVC and the Company would
file for relief under Chapter 11 of the Bankruptcy Code. If the Company were
to file for relief under Chapter 11 of the Bankruptcy Code or if an order for
relief is entered in the Company's involuntary bankruptcy case, an event of
default would occur under the 11% Notes Indenture, resulting in automatic
acceleration of the 11% Notes. Additionally, the demand on the Company's
guarantee of the 13 1/2% Notes and the Company's non-payment of that demand
created a default under the agreement pursuant to which SFHI issued $14
million principal amount of 9 1/2% Notes due 2000 (the "9 1/2% Notes"). The
Company expects to negotiate with the holders of the 9 1/2% Notes regarding a
waiver of the default, although no assurance can be given that such
negotiations will be successful. If the holders of the 9 1/2% Notes were to
demand payment of the 9 1/2% Notes as a result of the default an event of
default would occur under the 11% Note Indenture.
NOTE 5 - RELATED PARTIES
In fiscal years 1993 and 1992 Hacienda Hotel Inc.'s predecessor made loans to
LICO, a Nevada corporation wholly owned by Paul W. Lowden, which provided
entertainment services to the Hacienda Resort Hotel and Casino and the Sahara
Hotel and Casino, in the aggregate amount of $476,000. In January 1998, the
loans to LICO were satisfied through an offset against Mr. Lowden's bonus for
fiscal year 1998 in the amount of $600,000 (the "Fiscal Year 1998 Bonus") and
a fee in the amount of $100,000 due to Mr. Lowden for personal guarantees he
issued for certain Company financing arrangements (the "Personal Guarantee
Fee"). In December 1998, at the request of Mr. Lowden, the Company's payment
of $350,000 of the Fiscal Year 1998 Bonus and the Personal Guarantee Fee
which satisfied, in part, the loan to LICO, was rescinded, and LICO's
obligation to pay the Company $350,000, together with interest thereon from
January 1998, was reinstated. See Note 7
NOTE 6 - SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
Supplemental statement of cash flows information for the three month periods
ended December 31, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
(dollars in thousands)
1998 1997
--------- ----------
<S> <C> <C>
Operating Activities:
Cash paid during the period for interest,
net of amount capitalized of $-0- and
$108 for 1998 and 1997, respectively $8,016 $10,287
--------- ----------
--------- ----------
Investing and Financing Activities:
Debt incurred in connection with the
acquisition of machinery and equipment $ 109 $ 157
--------- ----------
--------- ----------
</TABLE>
9
<PAGE>
NOTE 7 - SUBSEQUENT EVENTS
13 1/2% NOTES:
In January 1999 a purported holder of approximately $4.7 million of the 13
1/2% Notes (the "Holder") who did not deliver consents pursuant to the
Consent Solicitation delivered to the Company a proposal for treatment of its
13 1/2% Notes in a manner that is inconsistent with the terms agreed to by
the Consenting Holders. The Company advised the Holder that it was reviewing
its alternatives and would not take action with respect to the Holder's
proposal at that time. Thereafter, the Holder and two other holders who
purportedly hold in the aggregate $3.1 million in principal amount of 13 1/2%
Notes and who did not provide consents pursuant to the Consent Solicitation
delivered demand notices for payment from the Company under its guarantee of
the 13 1/2% Notes and filed involuntary bankruptcy petitions against PFC and
the Company with the United States Bankruptcy Court for the District of
Nevada. The Company does not believe that the Holder and the other two
holders of 13 1/2% Notes complied with the requirements of the Bankruptcy
Code for the commencement of an involuntary case and both the Company and PFC
filed motions to dismiss the involuntary petitions in February 1999 and
intend to seek such damages as provided by the Bankruptcy Code. These may
include costs or reasonable attorneys fees and, in the event the petitions
were filed in bad faith, for all damages caused by such filings or punitive
damages. PFC intends to file a voluntary petition for relief under Chapter 11
of the Bankruptcy Code pursuant to the terms of the Consent Solicitation.
Pursuant to the terms of the SLVC Notes, the default by PFC in payment of the
13 1/2% Notes at maturity and the demand under the Company's guarantee
created an event of default under the SLVC Notes. Additionally, if the
involuntary petitions under the Bankruptcy Code with respect to PFC and the
Company continue for 60 days without dismissal, bonding or discharge, the
anticipated voluntary filing by PFC for relief under Chapter 11 of the
Bankruptcy Code or the possible voluntary filing by the Company for relief
under Chapter 11 of the Bankruptcy Code will be events of default under the
SLVC Notes that will cause the SLVC Notes to automatically become due and
payable. Management is currently negotiating with holders of the SLVC Notes
to waive such defaults and anticipated acceleration, although no assurance
can be given that such negotiations will be successful.
The Company is also exploring refinancing alternatives for the SLVC Notes. If
the holders of the SLVC Notes were not to waive defaults and acceleration and
were to demand payment under the SLVC Notes and the Company guarantee and the
Company were unable to refinance the SLVC Notes, or sell all or a portion of
its assets to satisfy the debt it is likely that SLVC and the Company would
file for relief under Chapter 11 of the Bankruptcy Code. If the Company were
to file for relief under Chapter 11 of the Bankruptcy Code or if an order for
relief is entered in the Company's involuntary bankruptcy case, an event of
default would occur under the 11% Notes Indenture, resulting in automatic
acceleration of the 11% Notes. Additionally, the demand on the Company's
guarantee of the 13 1/2% Notes and the Company's non-payment of that demand
created a default under the agreement pursuant to which SFHI issued $14
million principal amount of 9 1/2% Notes due 2000 (the "9 1/2% Notes"). The
Company expects to negotiate with the holders of the 9 1/2% Notes regarding a
waiver of the default, although no assurance can be given that such
negotiations will be successful. If the holders of the 9 1/2% Notes were to
demand payment of the 9 1/2% Notes as a result of the default an event of
default would occur under the 11% Note Indenture.
10
<PAGE>
LAND NOTE:
In January 1999, SFHI acquired for $3.6 million the approximate 22-acre
parcel of undeveloped real property adjacent to the Santa Fe from Santa Fe
Gaming. In connection with the closing of the transaction, the $1.6 million
Land Note was repaid. Management believes the cash consideration paid
represents that which could have been negotiated between third parties in an
arms length transaction.
RELATED PARTIES:
In February 1999, the Company offset the remaining $350,000 payment to Mr.
Lowden, payable in connection with the 1998 Fiscal Year Bonus, against the
outstanding obligation of LICO to the Company.
11
<PAGE>
9. SUPPLEMENTAL STATEMENT OF SUBSIDIARY INFORMATION -
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 (Unaudited)
The Company's primary operations are in the hotel/casino industry and in
fiscal years 1999 and 1998 were conducted through PHI and SFHI. "Other" below
includes financial information for the Company's other operations before
eliminating entries.
<TABLE>
<CAPTION>
Fiscal
(dollars in thousands) Year PHI SFHI Other Eliminations TOTAL
- ---------------------- -------- ------------ ------------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues 1999 $10,618 $19,400 $220 ($84) $30,154
------------ ------------- ------------ --------------- -----------
------------ ------------- ------------ --------------- -----------
1998 $9,910 $17,143 $457 ($151) $27,359
------------ ------------- ------------ --------------- -----------
------------ ------------- ------------ --------------- -----------
Operating income (loss) 1999 $917 $3,968 ($1,168) $0 $3,717
------------ ------------- ------------ --------------- -----------
------------ ------------- ------------ --------------- -----------
1998 ($320) $2,711 ($684) ($100) $1,607
------------ ------------- ------------ --------------- -----------
------------ ------------- ------------ --------------- -----------
Interest expense 1999 $1,982 $3,684 $857 $0 $6,523
------------ ------------- ------------ --------------- -----------
------------ ------------- ------------ --------------- -----------
1998 $2,045 $3,336 $795 ($100) $6,076
------------ ------------- ------------ --------------- -----------
------------ ------------- ------------ --------------- -----------
Depreciation and amortization 1999 $671 $1,752 $832 $3,255
------------ ------------- ------------ --------------- -----------
------------ ------------- ------------ --------------- -----------
1998 $1,433 $1,443 $257 $3,133
------------ ------------- ------------ --------------- -----------
------------ ------------- ------------ --------------- -----------
Rents 1999 $179 $0 $179
------------ ------------- ------------ --------------- -----------
------------ ------------- ------------ --------------- -----------
1998 $307 $604 $911
------------ ------------- ------------ --------------- -----------
------------ ------------- ------------ --------------- -----------
Capital expenditures 1999 $334 $514 $14 $862
------------ ------------- ------------ --------------- -----------
------------ ------------- ------------ --------------- -----------
1998 $1,278 $290 $17 $1,585
------------ ------------- ------------ --------------- -----------
------------ ------------- ------------ --------------- -----------
Identifiable assets 1999 $42,510 $86,618 $54,805 ($1,245) $182,688
------------ ------------- ------------ --------------- -----------
------------ ------------- ------------ --------------- -----------
1998 $97,525 $74,522 $55,270 ($1,245) $226,072
------------ ------------- ------------ --------------- -----------
------------ ------------- ------------ --------------- -----------
</TABLE>
12
<PAGE>
SANTA FE GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Santa Fe Gaming Corporation (the "Company" or "Santa Fe Gaming"), a publicly
traded Nevada corporation, is the successor corporation of two affiliates,
Sahara Resorts ("SR") 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").
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") located in Laughlin, Nevada. The company owns
through an indirect wholly-owned subsidiary of the Company, Sahara Las Vegas
Corp. ("SLVC"), real estate on Las Vegas Boulevard South and in Henderson,
Nevada, for possible development opportunities.
In November 1998 Pioneer Finance Corp. ("PFC") received and accepted consents
from holders of approximately 75%, or $45.8 million principal amount of the
outstanding 13 1/2% First Mortgage Bonds issued by PFC (the "13 1/2% Notes")
and guaranteed by the Company pursuant to which (i) PFC agreed to file for
relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Code") and to submit for confirmation a plan of reorganization that provides
for issuance of new notes in satisfaction of the 13 1/2% Notes pursuant to
the terms set forth in PFC's Offering Circular and Consent Solicitation dated
October 23, 1998, as amended (the "Consent Solicitation"), (ii) the Consenting
Holders agreed (a) to forbear until December 15, 2000 from exercising rights
or remedies arising as a result of the failure to pay principal and interest
on the 13 1/2% Notes at the December 1, 1998 maturity date, or the failure by
PHI to pay principal and interest on the intercompany mirror note from PHI to
PFC at the December 1, 1998 maturity date and (b) to vote to accept a plan of
reorganization in a Chapter 11 bankruptcy case that provides for treatment of
the 13 1/2% Notes substantially as set forth in the Consent Solicitation. No
assurance can be given that the plan of reorganization that PFC intends to
submit will be confirmed. PFC did not pay the principal and accrued interest
on the 13 1/2% Notes at the December 1, 1998 maturity. In January 1999 three
purported holders of approximately $7.8 million of the 13 1/2% Notes (the
"Holder") who did not deliver consents pursuant to the Consent Solicitation
delivered demand notices for payment from the Company under its guarantee and
filed involuntary bankruptcy petitions against PFC and the Company before the
United States Bankruptcy Court for the District of Nevada. The events related
to the 13 1/2% Notes have created events of default under other indebtedness
of the Company. (See below Liquidity - SFHI, SLVC and Pioneer)
In the first three months of fiscal 1999, 80.6% of the Company's revenues was
derived from casino operations, 18.0% from food and beverage operations, 4.6%
from hotel operations and 7.7% from other operations such as bowling and ice
skating ("other revenues"), less promotional allowances of 10.9%. The
Company's business strategy emphasizes slot and video poker machine play. For
the first three months of fiscal 1999, approximately 86.8% of gaming revenues
was derived from slot and video poker machines, while 8.7% of such revenues
was from table games and 4.5% from other gaming activities such as the race
and sports book, poker, bingo and keno.
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The Company's earnings from operations before interest, taxes, depreciation
and amortization, rents and corporate charges ("EBITDA") were $8.0 million
for the three months ended December 31, 1998, as compared to $6.5 million for
the three months ended December 31, 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 Company's ability to meet
its future debt service, capital expenditures 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 Company's ability 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.
The following discussion sets forth certain of the Company's results from
operations for the three months ended December 31, 1998 and 1997 on a
consolidated basis and by property for each of the Santa Fe and Pioneer.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
CONSOLIDATED
NET OPERATING REVENUES. Consolidated revenues for the three month period
ended December 31, 1998 were $30.2 million, representing a $2.8 million, or
10.2%, increase from $27.4 million for the same period in the prior year.
Revenues increased by $2.3 million at the Santa Fe and $700,000 at the
Pioneer.
OPERATING EXPENSE. Total operating expenses increased $600,000, or 2.7%, to
$26.4 million in the three months ended December 31, 1998 from $25.8 million
in the three months ended December 31, 1997. Total operating expenses as a
percentage of revenue decreased to 87.7% in the three months ended December
31, 1998 from 94.1% in the three months ended December 31, 1997. Operating
expenses increased by $1.0 million, or 6.9%, at the Santa Fe and $300,000 at
SLVC and decreased by $500,000, or 5.2%, at the Pioneer.
OPERATING INCOME. Consolidated operating income for the three month period
ended December 31, 1998 was $3.7 million, representing a $2.1 million, or
131.4%, increase from $1.6 million for the same period in the prior year.
Operating income increased by $1.3 million at the Santa Fe and $1.2 million
at the Pioneer and decreased by $300,000 at SLVC.
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OTHER EXPENSE. Consolidated interest expense for the three month period ended
December 31, 1998 was $6.5 million, representing a $400,000, or 7.4%,
increase compared to $6.1 million for the same period in the prior year.
Interest expense of SLVC increased by $300,000 in the current period due to
the issuance of the additional SLVC Notes in November 1997. During the
quarter ended December 31, 1998, PHI incurred costs and expenses in
connection with an offering of debt securities. The offering was not
consummated. Accordingly, PHI has recorded an approximate $532,000 charge to
earnings for expenses of the proposed offering.
NET LOSS. Consolidated loss for the three month period ended December 31,
1998 was $3.3 million, representing a $1.2 million, or 25.3%, decrease
compared to $4.5 million in the same period in the prior year. Net income
(loss) before income tax improved by $900,000 at the Santa Fe and $800,000
million at the Pioneer offset by an increased net loss of $600,000 at SLVC.
The Company did not record an income tax benefit in the current quarter or
the prior year's quarter due to the uncertainty of the Company's ability to
recognize a benefit of the net operating loss. The preferred stock accrued
dividend rate increased to 11% in the current period compared to an 8%
dividend rate in the prior year. Consolidated net loss applicable to common
shares was $3.9 million compared to $4.8 million in the prior year period.
EBITDA, AS DEFINED. EBITDA increased $1.5 million, or 24.4%, to $8.0 million
in the three months ended December 31, 1998 compared to $6.5 million at
December 31, 1997. EBITDA for the 1998 three month period represents 1.20
times rent and interest expense, compared to .93 times rent and interest
expense in the prior year three month period. The Company incurred less rent
expense in the current period, offset in part by increased interest expense
as a result of a note placement by SFHI in April 1998 and the application of
net proceeds therefrom.
SANTA FE
NET OPERATING REVENUES. Revenues at the Santa Fe increased $2.3 million, or
13.2%, in the three months ended December 31, 1998 to $19.4 million as
compared to $17.1 million in the same period in the prior year. Management
believes that 1998 results were positively impacted by the (i) completion of
construction, which began in September 1997, on the highway adjacent to the
Santa Fe, (ii) installation of new gaming equipment in fiscal 1998 and 1997
and (iii) the growth in the number of residents in northwest Las Vegas, which
offset the competitive pressures resulting from expansions at competing
facilities during fiscal 1996.
Casino revenues increased $2.3 million, or 16.7%, to $15.7 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. The
increase in casino revenues was primarily due to an increase of $2.0 million,
or 16.6%, in slot and video poker revenues to $13.6 million in the 1998
quarter from $11.6 million in the 1997 quarter. Other gaming revenues,
including table game revenues, increased $300,000, or 29.4%, primarily due to
improved hold percentages in sports book, bingo and table games. Casino
promotional allowances increased $100,000, or 10.7%, to $1.7 million in the
1998 quarter from $1.6 million in the 1997 quarter due to the increase in
customer volume.
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Hotel revenues remained unchanged at $900,000 for the three months ended
December 31, 1998 compared to the three months ended December 31, 1997, as an
increase in occupancy rate to 88.6% from 83.7% was offset by a 9.1% decrease
in average daily room rate. Food and beverage revenues increased $200,000, or
6.5%, to $3.3 million in the three months ended December 31, 1998 from $3.1
million in the three months ended December 31, 1997 due to the increase in
customers. Other revenues were substantially unchanged at $1.3 million in the
three months ended December 31, 1998 compared to $1.2 million in the three
months ended December 31, 1997.
OPERATING EXPENSE. Operating expenses increased $1.0 million, or 6.9%, to
$15.4 million in the quarter ended December 31, 1998 from $14.4 million in
the quarter ended December 31, 1997. Casino expenses increased $700,000, or
11.2%, to $6.9 million in the three months ended December 31, 1998 from $6.2
million in the three months ended December 31, 1997, related to a
corresponding increase in casino revenues. However, casino expenses as a
percentage of casino revenues decreased to 43.9% in the three months ended
December 31, 1998 from 46.0% in the three months ended December 31, 1997 due
to spreading of fixed costs over a larger revenue base. Hotel expenses
remained unchanged at $300,000 for the three month periods ended December 31,
1998 and December 31, 1997. Food and beverage expenses increased $200,000, or
10.2%, to $2.4 million in the three months ended December 31, 1998 from $2.2
million in the three months ended December 31, 1997. Food and beverage
expenses as a percentage of food and beverage revenues increased to 71.4% in
the three months ended December 31, 1998 from 69.0% in the three months ended
December 31, 1997, due to an increase in the cost of food sales for the 1998
quarter compared to the 1997 quarter partially offset by a decrease in the
cost of beverage sales. Other expenses were substantially unchanged at
$500,000 for the three months ended December 31, 1998 compared to $600,000
for the three months ended December 31, 1997.
Selling, general and administrative expenses increased $100,000, or 6.1%, to
$2.1 million in the three months ended December 31, 1998 from $2.0 million in
the three months ended December 31, 1997 due to increased advertising costs.
Rate increases for television and print advertising forced the Company to
increase advertising expenditures in order to maintain the same level of
advertising as in the prior year. Selling, general and administrative
expenses as a percentage of revenues decreased to 11.0% in the three months
ended December 31, 1998 from 11.8% in the three months ended December 31,
1997. Utilities and property expenses decreased $300,000, or 18.5%, to $1.5
million in the three months ended December 31, 1998 from $1.8 million in the
three months ended December 31, 1997, due to decreased rent expense for
gaming and other equipment resulting from the purchase of equipment
previously under lease. Utilities and property expenses as a percentage of
revenues decreased to 7.5% in the three months ended December 31, 1998 from
10.4% in the three months ended December 31, 1997. Depreciation and
amortization expenses increased $300,000, or 21.4%, to $1.7 million in the
three months ended December 31, 1998 from $1.4 million in the three months
ended December 31, 1997 due to the purchase of equipment which was previously
under lease.
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Interest Expense. Interest expense increased $400,000, or 10.4%, to $3.7
million in the 1998 quarter from $3.3 million in the 1997 quarter due to an
additional $14 million principal amount of debt incurred in April 1998 to
purchase gaming and other equipment previously under lease and for other
capital improvements.
Net Income (Loss). As a result of the factors discussed above, the Santa Fe
recorded net income of $300,000 for the quarter ended December 31, 1998, an
improvement of $900,000, or 145.5%, from a net loss of $600,000 in the
quarter ended December 31, 1997.
EBITDA AS DEFINED. EBITDA increased $1.0 million, or 20.3%, to $6.0 million
in the three months ended December 31, 1998 from $5.0 million in the three
months ended December 31, 1997. EBITDA margin increased to 31.0% in the three
months ended December 31, 1998 from 29.2% in the three months ended December
31, 1997. EBITDA for the 1998 three month period represents 1.63 times rent
and interest expense compared to 1.27 times rent and interest expense in the
prior year three month period. The Company incurred less rent expense in the
current period, offset in part, by increased interest expense as a result of
a note placement by SFHI in April 1998 and the application of net proceeds
therefrom. The Santa Fe incurred rent expense of $-0- and $600,000 and
corporate charges of $300,000 and $200,000 in the three month periods ended
December 31, 1998 and December 31, 1997, respectively.
PIONEER
NET OPERATING REVENUES. Revenues at the Pioneer increased $700,000, or 7.1%,
to $10.6 million in the December 1998 quarter as compared to $9.9 million in
the same period in the prior year. Management believes that 1998 results were
positively impacted by an improvement in the Laughlin market compared to
prior periods.
Casino revenues were substantially unchanged at $8.6 million in the 1998 and
1997 quarters. A decrease in slot coin-in volume of 7.7% was offset by a
slight increase in hold percentage. Casino promotional allowances decreased
$100,000, or 6.6%, to $1.6 million in the 1998 quarter from $1.7 million in
the 1997 quarter. Hotel revenues remained unchanged at $500,000 for the three
months ended December 31, 1998 compared to the three months ended December
31, 1997, as a drop in occupancy rate to 61.7% from 75.9% was offset by a
20.5% increase in average daily room rate. Total visitor volume in Laughlin
declined in the 1998 quarter from the 1997 quarter, although total revenues
in the Laughlin market have increased. Food and beverage revenues remained
relatively stable at $2.1 million in the three months ended December 31, 1998
compared to $2.2 million in the three months ended December 31, 1997. Other
revenues increased $600,000, or 186.6%, to $900,000 in the three months ended
December 31, 1998 compared to $300,000 in the three months ended December 31,
1997 due to the opening in August 1998 of the Smoke Shop.
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OPERATING EXPENSE. Operating expense decreased $500,000, or 5.2%, to $9.7
million in the quarter ended December 31, 1998 from $10.2 million in the
quarter ended December 31, 1997.
Casino expenses decreased $300,000, or 5.4%, to $4.4 million, in the three
months ended December 31, 1998 from $4.7 million in the three months ended
December 31, 1997. Casino expenses as a percentage of casino revenues
decreased to 51.4% in the three months ended December 31, 1998 from 55.0% in
the three months ended December 31, 1997. Hotel expenses remained unchanged
at $200,000 for the three months ended December 31, 1998 compared to the
three months ended December 31, 1997. Food and beverage expenses were
substantially unchanged at $1.2 million in the three months ended December
31, 1998 and December 31, 1997 despite the slight decrease in food and
beverage revenues due to decreases in cost of sales. Food and beverage
expenses as a percentage of food and beverage revenues decreased to 55.3% in
the three months ended December 31, 1998 from 55.4% in the three months ended
December 31, 1997. Other expenses increased $600,000, or 290.9%, to $800,000
for the three months ended December 31, 1998 compared to $200,000 for the
three months ended December 31, 1997 due to the cost of sales associated with
the opening of the Smoke Shop. Other expenses as a percentage of other
revenues increased to 84.8% in the 1998 quarter from 62.1% in the 1997
quarter.
Selling, general and administrative expenses increased $100,000, or 6.2%, to
$1.5 million in the three months ended December 31, 1998 from $1.4 million in
the three months ended December 31, 1997. Selling, general and administrative
expenses as a percentage of revenues decreased to 14.1% in the three months
ended December 31, 1998 from 14.2% in the three months ended December 31,
1997. Utilities and property expenses decreased $100,000, or 13.2%, to $1.0
million in the three months ended December 31, 1998 from $1.1 million in the
three months ended December 31, 1997. Depreciation and amortization expenses
decreased $700,000, or 53.2%, to $700,000 in the three months ended December
31, 1998 from $1.4 million in the three months ended December 31, 1997 due to
the write-down of the carrying value of the Pioneer's fixed and intangible
assets in the fourth quarter of fiscal 1998, which was previously being
depreciated or amortized.
Other Expense. Interest expense was substantially unchanged at $2.0 million
for the 1998 and 1997 quarters.
During the quarter ended December 31, 1998, PHI incurred costs and expenses
in connection with an offering of debt securities. The offering was not
consummated. Accordingly, PHI has recorded an approximate $532,000 charge to
earnings for expenses of the proposed offering.
Net Loss. As a result of the factors discussed above, net loss decreased
$800,000, or 32.5%, to $1.6 million in the quarter ended December 31, 1998
from $2.4 million in the quarter ended December 31, 1997.
EBITDA AS DEFINED. EBITDA increased $400,000, or 24.0%, to $2.1 million in
the three months ended December 31, 1998 from $1.7 million in the three
months ended December 31, 1997. EBITDA margin increased to 19.5% in the three
months ended December 31, 1998 from 16.8% in the three months ended December
31, 1997. EBITDA for the 1998 three month period represents .96 times rent
and interest expense, compared to .71 times
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rent and interest expense in the prior year three month period. The Pioneer
incurred less rent expense in the current period as a result of the purchase
of $1.0 million of gaming equipment in December 1997 which was previously
under lease. In December 1998, the Company retired approximately $5.4 million
principal amount of 13 1/2% Notes which will reduce interest expense in
future periods. The Pioneer incurred rent expense of $200,000 and $300,000
and corporate charges of $300,000 and $200,000 in the three month periods
ended December 31, 1998 and December 31, 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES; TRENDS AND FACTORS RELEVANT TO FUTURE
OPERATIONS
LIQUIDITY. As of December 31, 1998, the Company held cash and short-term
investments of $14.6 million compared to $22.7 million at September 30, 1998.
Substantially all of the cash and short-term investments were held by SFHI
and PHI, and were subject to restrictions which prohibit distribution of this
cash to the Company.
CASH FLOW FROM OPERATIONS. The Company's cash used in operations was $1.2
million for the three months ended December 31, 1998 as compared to $3.8
million for the prior year period. The decrease in cash used for operations
was primarily due to improved cash flow at the Santa Fe and the Pioneer
offset by increased interest expense at SLVC. The Company's principal uses of
cash from operations are for corporate expenses, interest payments on
indebtedness and capital expenditures, including development cost, for
proposed projects.
CASH USED FOR INVESTING ACTIVITIES. Cash used in investing activities was
$1.2 million during the three month period ended December 31, 1998, as
compared to $2.1 million during the three month period ended December 31,
1997. The Company owns, through SLVC, 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 used in financing activities was
$5.7 million in the 1998 three month period compared to $13.8 million
provided by financing activities during the same period in 1997. Cash used in
financing activities in the current year period represents primarily a
principal payment to repurchase $5 million of the 13 1/2% Notes pursuant to
the terms of the PFC Consent Solicitation. Cash provided by financing
activities in the prior year period represents primarily the net proceeds
resulting from the issuance by SLVC of $22.5 of additional SLVC Notes.
DEBT NOT PAID AT MATURITY. The Company's subsidiary, PFC, had $55 million of
principal and approximately $4.3 million accrued interest due on the 13 1/2%
Notes as of December 31, 1998, which is presented as Debt Not Paid At
Maturity in the consolidated Condensed Balance Sheet contained herein. In
November 1998 PFC received and
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accepted consents from holders (the "Consenting Holders") of approximately
75%, or $45.8 million principal amount, of the outstanding 13 1/2% Notes in
the Consent Solicitation. (See - General Above and Liquidity Pioneer, below)
CURRENT PORTION OF LONG TERM DEBT. The Company has approximately $61.9
million in current maturities of long term debt due to third parties during
the twelve-month period ending December 31, 1999, comprised primarily of
$57.5 million principal amount of SLVC Notes issued by SLVC and guaranteed by
the Company.
Pursuant to the terms of the SLVC Notes, the default by PFC in payment of the
13 1/2% Notes at maturity and the demand under the Company's guarantee
created an event of default under the SLVC Notes. Additionally, if the
involuntary petitions under the Bankruptcy Code with respect to PFC and the
Company continue for 60 days without dismissal, bonding or discharge, the
anticipated voluntary filing by PFC for relief under Chapter 11 of the
Bankruptcy Code or the possible voluntary filing by the Company for relief
under Chapter 11 of the Bankruptcy Code will be events of default under the
SLVC Notes that will cause the SLVC Notes to automatically become due and
payable. Management is currently negotiating with holders of the SLVC Notes
to waive such defaults and anticipated acceleration, although no assurance
can be given that such negotiations will be successful.
The Company is also exploring refinancing alternatives for the SLVC Notes. If
the holders of the SLVC Notes were not to waive defaults and acceleration and
were to demand payment under the SLVC Notes and the Company guarantee and the
Company were unable to refinance the SLVC Notes, or sell all or a portion of
its assets to satisfy the debt it is likely that SLVC and the Company would
file for relief under Chapter 11 of the Bankruptcy Code. If the Company were
to file for relief under Chapter 11 of the Bankruptcy Code or if an order for
relief is entered in the Company's involuntary bankruptcy case, an event of
default would occur under the 11% Notes Indenture, resulting in automatic
acceleration of the 11% Notes. Additionally, the demand on the Company's
guarantee of the 13 1/2% Notes and the Company's non-payment of that demand
created a default under the agreement pursuant to which SFHI issued $14
million principal amount of 9 1/2% Notes due 2000 (the "9 1/2% Notes"). The
Company expects to negotiate with the holders of the 9 1/2% Notes regarding a
waiver of the default, although no assurance can be given that such
negotiations will be successful. If the holders of the 9 1/2% Notes were to
demand payment of the 9 1/2% Notes as a result of the default an event of
default would occur under the 11% Note Indenture.
LONG TERM DEBT, NET. As of December 31, 1998 the Company had $92.9 million in
long-term debt, net of (i) current maturities of $61.9 million, (ii) debt
discount of $2.6 million, (iii) the 13 1/2% Notes not paid at maturity and
(iv) debt obligations owned but not retired of $33.1 million of 11% Notes due
2000 issued by SFHI and guaranteed by the Company (the "11% Notes). The
majority of such amounts mature in December 2000, comprised primarily of
$99.4 million principal amount of 11% Notes of which $33.1 million is held
by SLVC, and $14.0 million of 9 1/2% Notes issued by SFHI and guaranteed by
the Company.
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The Company is also exploring refinancing alternatives for the SLVC Notes. If
the holders of the SLVC Notes were not to waive defaults and acceleration and
were to demand payment under the SLVC Notes and the Company guarantee and the
Company were unable to refinance the SLVC Notes, or sell all or a portion of
its assets to satisfy the debt it is likely that SLVC and the Company would
file for relief under Chapter 11 of the Bankruptcy Code. If the Company were
to file for relief under Chapter 11 of the Bankruptcy Code or if an order for
relief is entered in the Company's involuntary bankruptcy case, an event of
default would occur under the 11% Notes Indenture, resulting in automatic
acceleration of the 11% Notes. Additionally, the demand on the Company's
guarantee of the 13 1/2% Notes and the Company's non-payment of that demand
created a default under the agreement pursuant to which SFHI issued $14
million principal amount of 9 1/2% Notes due 2000 (the "9 1/2% Notes"). The
Company expects to negotiate with the holders of the 9 1/2% Notes regarding a
waiver of the default, although no assurance can be given that such
negotiations will be successful. If the holders of the 9 1/2% Notes were to
demand payment of the 9 1/2% Notes as a result of the default an event of
default would occur under the 11% Note Indenture.
The Company's debt agreements restrict the distribution of cash from SFHI,
PHI and SLVC. Cash flows from these subsidiaries are not currently, and are
not expected in the foreseeable future to be, available for distribution to
the Company. In addition, debt agreements limit additional indebtedness by
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 assets that may be disposed of or refinanced,
to provide liquidity to fund Corporate cash requirements including
obligations that may arise as a result of the Company's guarantee of
subsidiary debt.
Management believes that, based on operations for the three month period
ended December 31, 1998, the Company will have sufficient cash resources,
including asset sales, to meet its operating requirements excluding debt
service obligations through the twelve month period ending December 31, 1999,
although no assurance can be given to that effect. See more detailed
discussion of Liquidity and Capital Resources for SLVC, PHI, SFHI and
Corporate, below.
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SFHI - At December 31, 1998, approximately $12.6 million of the Company's
current assets, including approximately $9.7 million of cash and short term
investments, was held by SFHI. In January 1999, SFHI purchased from the
Company for cash consideration of $3.6 million an approximate 22-acre parcel
of undeveloped real property located next to the Santa Fe.
Results of operations at the Santa Fe for the three months ended December 31,
1998 generated EBITDA as defined, of $6.0 million, approximately 1.63 times
rent and interest expense, compared to $5.0 million of EBITDA in 1997, or
approximately 1.27 times rent and interest expense. In the 1998 three month
period, the Santa Fe reported approximately no rent expense compared to
$600,000 in the 1997 period. In the 1998 three month period, the Santa Fe
reported approximately $300,000 in corporate charges compared to $200,000 in
the 1997 period. Management believes that 1998 results were positively
impacted by the (i) completion of construction, which began in September
1997, on the highway adjacent to the Santa Fe, (ii) installation of two new
pylon signs in September 1998 and new gaming equipment in fiscal 1998 and
1997 and (iii) the growth in the number of residents in northwest Las Vegas,
which offset the competitive pressures resulting from expansions at competing
facilities during fiscal 1996.
SFHI's principal uses of cash from operations are for corporate charges,
interest payments on indebtedness and capital expenditures to maintain the
Santa Fe. SFHI's interest payments in future periods will be increased as a
result of the issuance of the 9 1/2% Notes in April 1998. Capital
expenditures to maintain the Santa Fe in fiscal 1999 are expected to be
approximately $1.0 million excluding the purchase of real property.
The Company is also exploring refinancing alternatives for the SLVC Notes. If
the holders of the SLVC Notes were not to waive defaults and acceleration and
were to demand payment under the SLVC Notes and the Company guarantee and the
Company were unable to refinance the SLVC Notes, or sell all or a portion of
its assets to satisfy the debt it is likely that SLVC and the Company would
file for relief under Chapter 11 of the Bankruptcy Code. If the Company were
to file for relief under Chapter 11 of the Bankruptcy Code or if an order for
relief is entered in the Company's involuntary bankruptcy case, an event of
default would occur under the 11% Notes Indenture, resulting in automatic
acceleration of the 11% Notes. Additionally, the demand on the Company's
guarantee of the 13 1/2% Notes and the Company's non-payment of that demand
created a default under the agreement pursuant to which SFHI issued $14
million principal amount of 9 1/2% Notes due 2000 (the "9 1/2% Notes"). The
Company expects to negotiate with the holders of the 9 1/2% Notes regarding a
waiver of the default, although no assurance can be given that such
negotiations will be successful. If the holders of the 9 1/2% Notes were to
demand payment of the 9 1/2% Notes as a result of the default an event of
default would occur under the 11% Note Indenture.
Management believes that, based on operations for the three month period
ended December 31, 1998, SFHI will have sufficient cash resources to meet its
operating and debt service requirements through the twelve month period
ending December 31, 1999, although no assurance can be given to that effect.
Results for the quarter ended December 31, 1998 improved compared to the same
quarter in the prior year. However, results for the first quarter period
ended December 31,1998 are not necessarily indicative of results for the
entire fiscal year.
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SLVC - At December 31, 1998, a minimal amount of cash and short-term
investments was held by SLVC.
SLVC's principal use of cash is to satisfy principal and interest obligations
on the SLVC Notes. 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. Based on
cash received from interest payments on the $33.1 million of 11% Notes, it is
expected that there will be a deficit of approximately $1.3 million in cash
available to satisfy the SLVC Note interest payment due in June 1999.
SLVC also owns an approximately 39-acre parcel of real property in Henderson,
Nevada and is evaluating the potential development of a hotel/casino and
entertainment complex on the site. Corporate has completed preliminary
engineering and architectural drawings and received certain construction
related permits. Due to restrictions in the agreements governing the SLVC
Notes, any development costs are 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.
Pursuant to the terms of the SLVC Notes, the default by PFC in payment of the
13 1/2% Notes at maturity created an event of default under the SLVC Notes.
Additionally, if the involuntary petitions under the Bankruptcy Code with
respect to PFC and the Company continue for 60 days without dismissal,
bonding or discharge or the anticipated voluntary filing by PFC for relief
under Chapter 11 of the Bankruptcy Code or the possible voluntary filing by
the Company for relief under Chapter 11 of the Bankruptcy Code will be events
of default under the SLVC Notes that will cause the SLVC Notes to
automatically become due and payable. Management is currently negotiating
with holders of the SLVC Notes to waive such defaults and acceleration.
(See - Current Portion of Long-Term Debt)
Management believes that SLVC has available resources, consisting primarily
of the real property that may be sold and interest income on the 11% Notes
held as collateral, to meet the 1999 interest payment obligations and
maturity in December 1999 on the SLVC Notes and other operating requirements
through December 31, 1999, although no assurance can be given to that effect.
SLVC is exploring alternatives to improve liquidity and to satisfy the 1999
interest payments and December 1999 maturity of the SLVC Notes, including
but not limited to the sale of either the 27-acre parcel on Las Vegas
Boulevard South or the Henderson property and refinancing or modification of
the SLVC Notes. (See - Current Portion of Long-Term Debt)
23
<PAGE>
The Company has no arrangements for any refinancings, modifications,
dispositions or other financings, to satisfy the principal and interest
obligations on the SLVC Notes, and no assurance can be given that SLVC will
successfully make such arrangements.
PHI - At December 31, 1998, approximately $6.2 million of the Company's
current assets, including approximately $4.6 million of cash and short term
investments, was held by PHI.
Results of operations at the Pioneer for the three months ended December 31,
1998, generated EBITDA as defined of $2.1 million, approximately .96 times
rent and interest expense, compared to $1.7 million of EBITDA in 1997, or
approximately .71 times rent and interest expense. Pioneer reported rent
expense of approximately $200,000 in the 1998 three month period compared to
$300,000 in the 1997 three month period. Rent in future periods will be
approximately the same as in the current quarter. Pioneer reported corporate
charges of $300,000 in 1998 quarter compared to $200,000 in the 1997 quarter.
Interest expense in future periods will be less as a result of the repurchase
of $5.0 million principal amount of $13.5% Notes in December 1998.
PHI's principal uses of cash are for lease payments, corporate charges,
interest payments on the 13 1/2% Notes and capital expenditures to maintain
the Pioneer. Capital expenditures to maintain the Pioneer in fiscal 1999 are
expected to be approximately $700,000.
Management believes that, based on operations for the three month period
ended December 31, 1998, PHI will have sufficient cash and available
resources to meet its operating requirements through the twelve months
ending December 31, 1999, although no assurance can be given to that effect.
Results for the quarter improved compared to the same quarter in the prior
year. However, results for the first quarter period ended December 31, 1998
are not necessarily indicative of results for the entire fiscal year.
PFC had $55 million of principal and approximately $4.3 million accrued
interest due on the 13 1/2% Notes as of December 31, 1998 which is presented
as Debt Not Paid At Maturity in the consolidated Condensed Balance Sheet
contained elsewhere herein. PFC did not pay the 13 1/2% Notes at maturity.
See "General" and "Debt Not Paid at Maturity" above for a discussion of
bankruptcy proceedings involving PFC and the Company.
24
<PAGE>
If PFC's plan of reorganization is confirmed, PFC will issue a principal
amount of 13 1/2% First Mortgage Notes due 2006 (together with the PIK Notes,
as defined below, the "New Notes") equal to the principal amount of all
outstanding 13 1/2% Notes plus accrued interest as of December 1, 1998. The
New Notes will bear interest at a rate equal to 13 1/2% per annum. Interest
on the New Notes will be payable semiannually, on June 1 and December 1 of
each year, and will accrue from the date following the Issue Date. The New
Notes will mature on December 1, 2006. PFC will have the right to pay in kind
up to 50% of the interest payable on each interest payment date through the
fourth interest payment date following issuance through the issuance of
additional New Notes with a principal amount equal to 50% of the interest
payable on such Interest Payment Date (the "PIK Notes"). The terms of the PIK
Notes will be identical to those of the New Notes, including without
limitation that interest on the PIK Notes will be payable 50% in cash and 50%
through the fourth interest payment date following issuance through the
issuance of additional PIK Notes. PFC expects to satisfy 50% of each interest
payment obligation through the fourth interest payment date following
issuance through the issuance of PIK Notes, as a result of which there would
be $65.2 million principal amount of New Notes outstanding at maturity,
assuming no repurchase and retirement of New Notes. The New Notes will be
redeemable at 100% of the principal amount plus accrued interest thereon, and
unpaid to the date of purchase by PFC at any time. Upon the occurrence of
certain events, PFC will be required to redeem all outstanding New Notes or
make an offer to repurchase all or a portion of the outstanding New Notes, in
each case at 100% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the date of purchase. Moreover, one of
the provisions of the New Notes will require that, on or before the later of
December 31, 1999 and the date that is six months from the date a plan of
reorganization is confirmed, (a) PFC must complete an offer to repurchase
$7.5 million principal amount of New Notes or purchase in the open market or
otherwise and retire at least $7.5 million principal amount of New Notes, and
(b) SLVC must grant liens (subject to prior liens securing not more than $35
million of debt) for the benefit of the
25
<PAGE>
holders of the New Notes on substantially all of its assets. If such
requirements are not satisfied by the specified date, an event of default
will occur under the New Notes. The Company will guaranty the payment of
principal of, and premium, if any, and interest on, the New Notes, and the
guaranty will be secured by a pledge of the common stock of its Pledged
Companies and by liens on certain of its other assets.
The plan of reorganization will be subject to the approval of the bankruptcy
court and the approval of certain classes of creditors. No assurance can be
given that the plan of reorganization to be submitted by PFC will be
confirmed. Giving effect to the issuance of New Notes as of the beginning of
the period and assuming that PFC elects to pay 50% of the interest payment
obligations through the fourth interest payment date following issuance of
New Notes through the issuance of PIK Notes, the ratio of EBITDA less rent
for real property to cash interest expense would have been 1.63-to-one for
the twelve months ended December 31, 1998. EBITDA less rent for real property
and corporate charges would have been 1.32-to-one for the twelve months ended
December 31, 1998. Upon commencement of the requirement that all interest be
paid in cash on the fifth interest payment date, the ratio of EBITDA to cash
interest expense on the New Notes is expected to be less than one-to-one
(assuming no offers to repurchase New Notes have been made). Therefore, it is
expected that PFC would not be able to make the cash interest payment on the
fifth interest payment date, which would be an event of default under the
indenture under which the New Notes will be issued.
Although results of operations of the Pioneer have not been materially
adversely impacted since the commencement of the Consent Solicitation in
October 1998 or the filing of the involuntary petition in January 1999, no
assurance can be given that the involuntary petition or the anticipated
filing for relief under Chapter 11 by PFC, and potentially by PHI, the
Company and other subsidiaries of the Company, will not have a material
adverse effect on the operations and financial condition of the Pioneer and
the Company.
26
<PAGE>
CORPORATE - Approximately $1.6 million of the Company's current assets at
December 31, 1998, including approximately $300,000 of cash and short-term
investments, was held by Corporate. In January 1999 Corporate sold for $3.6
million in cash an approximate 22-acre parcel of undeveloped real property
to SFHI. Corporate received net proceeds of $2.0 million after payment of the
$1.6 million first mortgage note secured by the property.
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 obligations that may
arise as a result of the Company's guarantee of subsidiary debt, including
the 13 1/2% Notes not paid at maturity, and the guarantee of the tenant loan
if the Company terminates the lease subject to the parcel on Las Vegas
Boulevard South owned by SLVC.
The Company has guaranteed the debt of its subsidiaries, PHI, SLVC and SFHI,
including the remaining $55 million principal amount of 13 1/2% Notes that
matured in December 1998 but was not paid. Demand has been made for payment
under the Company's guarantee of the 13 1/2% Notes. 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. (See SFHI, PHI and SLVC)
27
<PAGE>
Management believes that Corporate has sufficient working capital and
available resources, primarily proceeds which may be available to Corporate
from Subsidiaries pursuant to possible modifications of subsidiary debt
obligations, and to meet its operating requirements through the period ending
December 31, 1999, excluding debt service obligations and obligations which
may arise from the Company's guarantee of the debt of its subsidiaries,
although no assurance can be given to that effect.
PREFERRED STOCK
The terms of the Company's preferred stock provide that dividends accrue on a
semi-annual basis, to the extent not declared. The Company is a party to
financing arrangements that restrict the Company's ability to exchange the
preferred stock for 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. The Company accrued the semi-annual preferred stock
dividends due in fiscal years 1998 and 1997. 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 have the right to
elect two members to the Company's Board of Directors at the next annual
meeting of shareholders. Because such dividends have accrued and remained
unpaid for two years, preferred stockholders, voting as a class, will be
entitled to elect two directors, in addition to the six directors to be
elected by the common stockholders, at the 1999 annual meeting. In September
1998 the dividend rate increased to 11.0% from 8.0% and will increase by 50
basis points each semi-annual period thereafter, up to a maximum of 16%,
until the preferred stock is redeemed or exchanged.
RELATED PARTIES
In fiscal years 1993 and 1992 Hacienda Hotel Inc.'s predecessor made loans to
LICO, a Nevada corporation wholly owned by Paul W. Lowden, which provided
entertainment services to the Hacienda Resort Hotel and Casino and the Sahara
Hotel and Casino, in the aggregate amount of $476,000. In January 1998, the
loans to LICO were satisfied through an offset against Mr. Lowden's bonus for
fiscal year 1998 in the amount of $600,000 ("Fiscal Year 1998 Bonus") and a
fee in the amount of $100,000 due to Mr. Lowden for personal guarantees he
issued for certain Company financing arrangements (the "Personal Guarantee
Fee"). In December 1998, at the request of Mr. Lowden, the Company's payment
of $350,000 of the Fiscal Year 1998 Bonus and the Personal Guarantee Fee
which satisfied, in part, the loan to LICO, was rescinded, and LICO's
obligation to pay the Company $350,000, together with interest thereon from
January 1998, was reinstated. The Company remained obligated to pay Mr.
Lowden the additional $350,000 of the fiscal year 1998 bonus. In February
1999, the Company offset the remaining $350,000 payment to Mr. Lowden,
payable in connection with the 1998 Fiscal Year Bonus, against the
outstanding obligation of LICO to the Company.
COMPUTERIZED OPERATIONS AND THE YEAR 2000
INTRODUCTION. In an effort to adequately address and prepare for the impact
and to prevent potential disruption of business operations at the Company's
properties, the Company's Management Information Systems ("MIS") department
has been working to identify areas of risk related to the Company's current
technology's potential inability to process properly the change from the year
1999 to 2000.
STATE OF READINESS. Since 1997, the MIS department, which oversees and has
accountability for the operation of the Company's technology systems, has
been charged with assessing, evaluating and monitoring the actions the
Company will need to take to become year 2000 compliant. The MIS department
has made an assessment of most of the information technology ("IT") and
non-IT systems of both the Santa Fe and the Pioneer. Examples of IT systems
include the hotel-reservation system, billing system, inventory and
purchasing system, property management system and point of sale system (cash
registers). Examples of non-IT systems include slot machines, video poker
machines, elevators to guest rooms and executive offices, the telephone
system, the in-room movie program and the bingo system. Generally, the
Company's non-IT systems appear to be Year 2000 compliant, i.e., they have
the ability to process properly the change from the year 1999 to 2000. Most
of the Company's IT systems need upgrading and/or replacing to become Year
2000 compliant. The Company is currently in the process of upgrading
28
<PAGE>
and/or replacing such IT systems and expects to complete the process by
September 30, 1999. There is a small number of both IT and non-IT
applications for which the Company has not completed assessment for potential
Year 2000 problems. An example is the accounting program for guest telephone
calls at the Santa Fe. The MIS department is currently actively working with
the vendors of each application to make an assessment as to their Year 2000
compliance, and, if necessary, any corrective action it should take with
respect to such applications. The Company does not expect that the year 2000
issue will pose significant operational problems for either the IT or non-IT
assets.
The Company from time to time exchanges electronic information with suppliers
and other third parties. The Company has distributed written questionnaires
to its significant suppliers to determine the extent to which the Company's
interface systems are vulnerable to such persons' failure to remediate their
own year 2000 issues. All of the significant suppliers who have responded to
date have represented to the Company either that their systems are currently
year 2000 compliant or that they are taking steps to make their systems year
2000 compliant. There can be no assurance that such suppliers or third
parties will not suffer a year 2000 business disruption. Such failures could
have a material adverse effect on the Company's financial condition and
results of operation.
COSTS TO ADDRESS THE YEAR 2000 ISSUE. The Company estimates that it will
spend approximately $300,000 on system upgrades and/or replacements. The
Company believes that such amount, as well as remaining costs to address the
Year 2000 issue, will not have a material effect on the liquidity or
financial condition of the Company. The Company intends to fund from
operations the costs of becoming year 2000 compliant.
RISKS PRESENTED BY THE YEAR 2000 ISSUE. To date, the Company has not
identified any IT systems that present a material risk of not being year 2000
ready or for which a suitable alternative cannot be implemented. However, as
the Company's assessment of the year 2000 issue continues, it is possible
that the Company may identify IT assets that do present a risk of year
2000-related disruption. In addition, if any suppliers or third parties who
provide goods or services that are critical to the Company's activities fail
to address their year 2000 issues appropriately, there could be a material
adverse effect on the Company's financial condition and results of
operations. Finally, the Company cannot assure that it will complete
successfully its assessment and corrective actions in a timely manner. The
failure to be year 2000 compliant in a timely manner could have a material
adverse effect on the Company's financial condition and results of operations.
CONTINGENCY PLANS. Because the Company has not fully completed its assessment
of the risks from year 2000 failures, the Company has not developed year 2000
specific contingency plans. The Company will develop such plans if it
identifies a business function at risk.
29
<PAGE>
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.
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.
30
<PAGE>
SANTA FE GAMING CORPORATION
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
In January 1999 a purported holder of approximately $4.7 million of the
13 1/2% Notes (the "Holder") who did not deliver consents pursuant to
the Consent Solicitation delivered to the Company a proposal for
treatment of its 13 1/2% Notes in a manner that is inconsistent with the
terms agreed to by the Consenting Holders. The Company advised the
Holder that it was reviewing its alternatives and would not take action
with respect to the Holder's proposal at that time. Thereafter, the
Holder and two other holders who purportedly hold in the aggregate $3.1
million in principal amount of 13 1/2% Notes and who did not provide
consents pursuant to the Consent Solicitation delivered demand notices
for payment from the Company and filed involuntary bankruptcy petitions
against PFC and the Company before the United States Bankruptcy Court
for the District of Nevada. The Company does not believe that the Holder
and the other two holders of 13 1/2% Notes complied with the
requirements of the Bankruptcy Code for the commencement of an
involuntary case and both the Company and PFC filed motions to dismiss
the involuntary petitions in February 1999 and intend to seek such
damages as provided by the Bankruptcy Code. These may include costs or
reasonable attorneys fees and, in the event the petitions were filed in
bad faith, for all damages caused by such filings or punitive damages.
PFC intends to file for relief under Chapter 11 of the Bankruptcy Code
pursuant to the terms of the Consent Solicitation.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
PFC had $55 million of principal and approximately $4.3 million accrued
interest due on the 13 1/2% Notes as of December 31, 1998 which is
presented as Debt Not Paid At Maturity in the consolidated Condensed
Balance Sheet contained elsewhere herein. In November 1998 PFC received
and accepted consents from holders of approximately 75%, or $45.8
million principal amount of the outstanding 13 1/2% Notes pursuant to
which (i) PFC agreed to file for relief under Chapter 11 of the United
States Bankruptcy Code and to submit for confirmation a plan of
reorganization that provides for issuance of new notes in satisfaction
of the 13 1/2% Notes pursuant to the terms set forth in the Consent
Solicitation, and (ii) the Consenting Holders agreed (a) to forbear
until December 2000 from exercising rights or remedies arising as a
result of the failure by PFC to pay principal and interest on the
13 1/2% Notes at the December 1, 1998 maturity date, or the failure by
PHI to pay principal and interest on the intercompany mirror note from
PHI to PFC at the December 1, 1998 maturity date and (b) to vote to
accept a plan of reorganization in a Chapter 11 bankruptcy case that
provides for treatment of the 13 1/2% Notes substantially as set forth
in the Offering Circular/ Consent Solicitation Statement. No assurance
can be given that the plan of reorganization will be confirmed.
Pursuant to the terms of the SLVC Notes, the default by PFC in payment of
the 13 1/2% Notes at maturity and the demand under the Company's
guarantee created an event of default under the SLVC Notes. Additionally,
if the involuntary petitions under the Bankruptcy Code with respect to PFC
and the Company continue for 60 days without dismissal, bonding or
discharge, the anticipated voluntary filing by PFC for relief under
Chapter 11 of the Bankruptcy Code or the possible voluntary filing by the
Company for relief under Chapter 11 of the Bankruptcy Code will be events
of default under the SLVC Notes that will cause the SLVC Notes to
automatically become due and payable. Management is currently negotiating
with holders of the SLVC Notes to waive such defaults and anticipated
acceleration, although no assurance can be given that such negotiations
will be successful.
The Company is also exploring refinancing alternatives for the SLVC
Notes. If the holders of the SLVC Notes were not to waive defaults and
acceleration and were to demand payment under the SLVC Notes and the
Company guarantee and the Company were unable to refinance the SLVC
Notes, or sell all or a portion of its assets to satisfy the debt it is
likely that SLVC and the Company would file for relief under Chapter 11
of the Bankruptcy Code. If the Company were to file for relief under
Chapter 11 of the Bankruptcy Code or if an order for relief is entered
in the Company's involuntary bankruptcy case, an event of default would
occur under the 11% Notes Indenture, resulting in automatic acceleration
of the 11% Notes. Additionally, the demand on the Company's guarantee of
the 13 1/2% Notes and the Company's non-payment of that demand created a
default under the agreement pursuant to which SFHI issued $14 million
principal amount of 9 1/2% Notes due 2000 (the "9 1/2% Notes"). The
Company expects to negotiate with the holders of the 9 1/2% Notes
regarding a waiver of the default, although no assurance can be given
that such negotiations will be successful. If the holders of the 9 1/2%
Notes were to demand payment of the 9 1/2% Notes as a result of the
default an event of default would occur under the 11% Note Indenture.
The terms of the Company's preferred stock provide that dividends accrue
on a semi-annual basis, to the extent not declared. The Company is a
party to financing arrangements that restrict the Company's ability to
exchange the preferred stock for 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. The Company
accrued the semi-annual preferred stock dividends due in fiscal years
1998 and 1997. 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 have the right to elect two members to
the Company's Board of Directors at the next annual meeting of
shareholders. Because such dividends have accrued and remained unpaid
for two years, preferred stockholders, voting as a class, will be
entitled to elect two directors, in addition to the six directors to be
elected by the common stockholders, at the 1999 annual meeting. In
September 1998 the dividend rate increased to 11.0% from 8.0% and will
increase by 50 basis points each semi-annual period thereafter, up to a
maximum of 16%, until the preferred stock is redeemed or exchanged.
31
<PAGE>
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K dated October 23, 1998
under Item 5. Other Events, reporting certain information relating to
the Sierra Construction Corp. Notes; the recognition of an impairment
loss of certain Pioneer Hotel, Inc. assets and the commencement of an
Exchange Offer and Consent Solicitation of Pioneer Finance Corp.
The Registrant filed a Current Report on Form 8-K dated November 16,
1998 under Item 5. Other Events, reporting certain amendments to the
Exchange Offer and Consent Solicitation Statement of Pioneer Finance
Corp.
The Registrant filed a Current Report on Form 8-K dated November 27,
1998 under Item 5. Other Events, reporting certain information relating
to the expiration of the Exchange Offer and Consent Solicitation of
Pioneer Finance Corp. and information relating to the continued listing
of the Company's common and preferred stock on the American Stock
Exchange.
The Registrant filed a Current Report on Form 8-K dated December 1, 1998
under Item 5. Other Events reporting certain information relating to an
event of default under the Pioneer Finance Corp. 13 1/2% First Mortgage
Bonds due December 1, 1998.
The Registrant filed a Current Report on Form 8-K dated January 14, 1999
under Item 5. Other Events reporting certain information relating to the
filing of involuntary petitions under the United States Bankruptcy Code
against the Company and PFC in the United States Bankruptcy Court,
District of Nevada in connection with the 13 1/2% Notes.
32
<PAGE>
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: February 15, 1999
33
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<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
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