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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1999
[ ] 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
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SANTA FE GAMING CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 88-0304348
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4949 N. RANCHO DRIVE, LAS VEGAS, NEVADA 89130
- -------------------------------------------------------------------------------
(Address of principal executive office and zip code)
(702) 658-4300
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(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES_____ NO_____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
6,195,356 as of August 13, 1999
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Amount Outstanding Date
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SANTA FE GAMING CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Balance Sheets at June 30, 1999 (unaudited)
and September 30, 1998.........................................3
Statements of Operations for the three and nine months
ended June 30, 1999 and 1998 (unaudited).......................4
Statement of Changes in Stockholders' Deficiency
for the nine months ended June 30, 1999 (unaudited)............5
Statements of Cash Flows for the nine months
ended June 30, 1999 and 1998 (unaudited).......................6
Notes to Consolidated Condensed Financial
Statements (unaudited).........................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................19
PART II. OTHER INFORMATION................................................41
2
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SANTA FE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 1999 1998
- -------------------------------------------------- ------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $13,742,859 $ 22,650,882
Accounts receivable, net 1,063,489 1,617,762
Inventories 1,191,065 1,339,796
Prepaid expenses and other 3,778,821 3,243,415
------------ -------------
Total current assets 19,776,234 28,851,855
Land held for development 38,194,065 38,194,065
Property and equipment, net 107,228,849 110,655,085
Other assets 14,356,776 14,465,409
------------ ------------
Total assets $179,555,924 $192,166,414
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 3,842,962 $ 3,864,000
Interest payable 1,122,495 4,497,420
Accrued and other liabilities 6,879,913 7,656,644
------------ ------------
11,845,370 16,018,064
Current portion of long-term debt 77,986,327 1,785,716
------------ ------------
Total current liabilities 89,831,697 17,803,780
Long-term debt-less current portion 79,535,226 153,146,836
Liabilities subject to compromise 62,996,315 62,700,000
Commitments
Stockholders' deficiency (52,807,314) (41,484,202)
------------ ------------
Total liabilities and stockholders' deficiency $179,555,924 $192,166,414
============= ============
</TABLE>
See the accompanying Notes to Consolidated Condensed Financial Statements.
3
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SANTA FE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30,1999 June 30,1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Casino $ 25,070,588 $ 23,245,496 $ 74,758,579 $ 68,498,207
Hotel 1,458,599 1, 514,863 4,305,622 4,365,919
Food and beverage 5,291,337 5,272,872 16,047,221 15,982,561
Other revenues 3,572,223 1,865,316 9,257,608 5,623,729
------------- ------------- ------------- -------------
Gross revenues 35,392,747 31,898,547 104,369,030 94,470,416
Less casino promotional allowances (3,141,771) (3,059,300) (9,712,607) (9,601,003)
------------- ------------- ------------- -------------
Net operating revenues 32,250,976 28,839,247 94,656,423 84,869,413
------------- ------------- ------------- -------------
Operating expenses:
Casino 11,595,648 11,045,685 34,443,642 33,651,682
Hotel 586,292 486,518 1,591,871 1,438,826
Food and beverage 3,837,687 3,659,557 10,929,407 10,611,243
Other operating expenses 2,682,469 749,976 6,144,391 2,248,672
Selling, general & administrative 4,110,735 3,297,015 10,479,431 9,496,518
Corporate expenses 946,822 856,035 2,796,569 2,635,176
Utilities & property expenses 2,815,749 2,478,629 7,967,397 8,668,057
Depreciation & amortization 3,477,777 3,575,007 10,151,880 9,713,604
Reorganization expenses 1,413,561 0 1,764,033 0
------------- ------------- ------------- -------------
Total operating expenses 31,466,740 26,148,422 86,268,621 78,463,778
------------- ------------- ------------- -------------
Operating income 784,236 2,690,825 8,387,802 6,405,635
Interest expense 6,344,315 6,721,120 19,178,417 18,791,234
Other expenses 0 0 532,497 0
------------- ------------- ------------- -------------
Net loss (5,560,079) (4,030,295) (11,323,112) (12,385,599)
Dividends accrued
on preferred shares 544,905 379,065 1,587,333 1,137,194
------------- ------------- ------------- -------------
Net loss applicable to common shares ($ 6,104,984) ($ 4,409,360) ($ 12,910,445) ($ 13,522,793)
============= ============= ============= =============
Average common shares outstanding 6,195,356 6,195,356 6,195,356 6,195,356
============= ============= ============= =============
Loss per common share ($ 0.99) ($ 0.71) ($ 2.08) ($ 2.18)
============== ============== ============== =============
</TABLE>
See the accompanying Notes to Consolidated Condensed Financial Statements.
4
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SANTA FE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN 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 ( 11,323,112) (11,323,112)
Accrued stock dividend 1,587,333 ( 1,587,333) 0
--------- ----------- ----------- -------------- --------- -------------
Balances, June 30, 1999 $61,954 $23,573,083 $51,513,504 ($127,868,081) ($ 87,774) ($52,807,314)
========= =========== =========== ============= ========= ============
</TABLE>
See the accompanying Notes to Consolidated Condensed Financial Statements.
5
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SANTA FE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
ended ended
June 30,1999 June 30, 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Cash and cash equivalents provided by
(used in) operations $ 1,561,057 ($ 1,461,095)
Changes in assets and liabilities:
Accounts receivable, net 554,273 ( 547,191)
Inventories 148,731 ( 67,126)
Prepaid expenses & other ( 535,406) ( 688,045)
Other assets (1,399,602) 716,259
Accounts payable (60,240) ( 696,189)
Interest payable 3,292,042 ( 4,774,061)
Accrued and other liabilities 851,853 1,120,748
------------ ------------
Net cash provided by (used in) operating activities
before reorganization items 4,412,709 ( 6,396,700)
Reorganization expenses paid in connection
with Chapter 11 and related legal proceedings (1,414,033) 0
------------ ------------
Net cash provided by (used in) operating activities 2,998,676 ( 6,396,700)
------------ ------------
Cash flows from investing activities:
Capital expenditures (3,053,812) ( 4,538,718)
Development costs (1,158,034) ( 4,967,626)
------------ ------------
Net cash used in investing activities (4,211,846) ( 9,506,344)
------------ ------------
Cash flows from financing activities:
Cash proceeds of long-term debt 0 81,439,996
Cash paid on long-term debt (7,385,512) ( 57,563,091)
Debt issue costs ( 309,341) ( 3,530,675)
------------ ------------
Net cash provided by (used in) financing activities (7,694,853) 20,346,230
------------ ------------
Increase (decrease) in cash and cash equivalents (8,908,023) 4,443,186
Cash and cash equivalents,
beginning of period 22,650,882 15,146,217
------------ ------------
Cash and cash equivalents,
end of period $ 13,742,859 $ 19,589,403
============ ============
</TABLE>
See the accompanying Notes to Consolidated Condensed Financial Statements.
6
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SANTA FE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL INFORMATION AND BASIS OF PRESENTATION
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, Sahara Las Vegas Corp. ("SLVC"), real estate on Las Vegas Boulevard
South and in Henderson, Nevada, for possible development opportunities.
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, Liabilities subject to compromise are $63.0 million which is
attributable to 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 were not paid. (See Note 7). The 13 1/2% Notes are
guaranteed by the Company and the Company is party to legal proceedings in
which holders of the 13 1/2% Notes are suing to enforce payment on the
guarantees. In addition, current liabilities exceed current assets in the
accompanying balance sheet by $70.1 million, which is primarily attributable
to $57.5 million of notes issued by SLVC and guaranteed by the Company, which
mature in December 1999 and are in default but have not been accelerated (the
"SLVC Notes") and $14.0 million of 9 1/2% Notes issued by SFHI and guaranteed
by the Company (the "9 1/2% Notes") which mature in December 2000, but are in
default and have not been accelerated. (See Note 5). The Company has
guaranteed substantially all the debt of its subsidiaries, PHI, SLVC and
SFHI. Furthermore, at June 30, 1999, there is a stockholders' deficiency of
$52.8 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 exploring refinancing
alternatives for substantially all of its debt and seeking confirmation of a
joint plan of reorganization for PFC and PHI under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code"), pursuant to the terms of
consents of holders of approximately 75% of the outstanding 13 1/2% Notes
(the "Consenting Holders"). The Consenting Holders agreed 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 to vote to accept a PFC plan of reorganization under
Chapter 11 of the
7
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Bankruptcy Code that treats the 13 1/2% Notes in a manner consistent with the
terms of the consents. The consents may be terminated by the holders of at
least 75% of the 13 1/2% Notes subject to consents if certain events have not
occurred by December 31, 1999. The financial statements do not include any
adjustments that might result from the consequences of the proceedings under
Chapter 11 or pending litigation, nor all adjustments that might be necessary
should the Company be unable to continue as a going concern. See Notes 3 5, 6
and 7
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 nine month period ended June 30, 1999 are not
necessarily indicative of the results to be expected for the entire year.
In the opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments (consisting of only normal
accruals) necessary to present fairly the financial position of the Company at
June 30, 1999, the results of its operations for the three and nine month
periods ended June 30, 1999 and 1998, the changes in stockholders' deficiency
for the nine month period ended June 30, 1999, and cash flows for the nine month
periods ended June 30, 1999 and 1998.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recently Issued Accounting Statements
The FASB recently issued SFAS No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities, which is effective for financial statements
for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Management has not determined what effect, if
any, adoption of SFAS 133 will have on the Company's future operations or
financial condition.
The American Institute of Certified Public Accountants' Accounting Standards
Executive Committee issued Statement of Position ("SOP") 98-5 "Reporting on the
Costs of Start-up Activities" which is effective for fiscal years beginning
after December 15, 1998. This standard provides guidance on the financial
reporting for start-up costs and organization costs. This standard requires
costs of start-up activities and organization costs to be expensed as incurred.
The initial application of this statement in October 1999 requires the Company
to expense certain previously capitalized items as a cumulative effect of a
8
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change in accounting principle. Management believes that this SOP could have
a material impact on the consolidated financial statements depending on the
status of the Company's current and future expansion projects at the time of
adoption of this standard. See Note 4.
Reclassification
Certain reclassifications have been made in the 1998 consolidated financial
statements in order to conform to the presentation used in 1999.
Estimates and Assumptions
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.
Bankruptcy - Related Accounting
The Company has accounted for all transactions related to the PFC and PHI
Chapter 11 case in accordance with Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code," which was issued by the American Institute of Certified Public
Accountants in November 1990. Accordingly, Liabilities subject to compromise
under the Chapter 11 case have been segregated on the Consolidated Balance
Sheet and are recorded for the amounts that are expected to be allowed under
the Amended Plan (See Note 7(c)). In addition, the Consolidated Statements of
Operations and Consolidated Statements of Cash Flows for the period ended
June 30, 1999 disclose expenses related to the Chapter 11 case and litigation
relating to enforcement of the Company's guarantees of the 13 1/2% Notes
under "Reorganization Expenses."
NOTE 3 - CASH AND CASH EQUIVALENTS
As of June 30, 1999, the Company held cash and cash equivalents of $13.7 million
compared to $22.7 million at September 30, 1998. Substantially all of the cash
and cash equivalents were held by SFHI and PHI, and were subject to restrictions
which prohibit distribution of this cash to the Company.
9
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At June 30, 1999, approximately $6.7 million of the Company's consolidated cash
and cash equivalents 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 the
$115 million principal amount of 11% First Mortgage Notes due 2000 ("11% Notes")
of SFHI was issued. As of June 30, 1999, SFHI did not meet the conditions
precedent to making a distribution to the Company.
At June 30, 1999, approximately $6.7 million of the Company's consolidated
cash and cash equivalents 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 June 30, 1999, PHI did not meet the conditions
precedent to making a distribution to the Company. Approximately, $1.9
million of PHI's cash is reserved for payments to be made to certain holders
of 13 1/2% Notes upon confirmation of the Amended Plan. See Note 7(c)
NOTE 4 - LAND HELD FOR DEVELOPMENT
In March 1994 the Company purchased for approximately $15.1 million a 39-acre
parcel of land located in Henderson, Nevada, for future development of a
proposed casino hotel complex. At June 30, 1999 the cost to acquire the
property is included in Land held for development in the Consolidated
Condensed Balance Sheet. In addition to costs to acquire the property, the
Company has recorded approximately $10.5 million in preliminary
architectural, engineering, permitting and other development costs, which are
included in Other assets in the accompanying Consolidated Condensed Balance
Sheet. See Note 2
NOTE 5 - CURRENT PORTION OF LONG TERM DEBT
As of June 30, 1999, the Company had approximately $78.0 million in current
maturities of long term debt during the twelve-month period ending June 30,
2000, comprised primarily of $57.5 million principal amount of SLVC Notes
guaranteed by the Company that matures in December 1999 and is in default and
$14.0 million of 9 1/2% Notes issued by SFHI and guaranteed by the Company
that matures in December 2000 but are in default. Neither the SLVC Notes nor
the 9 1/2% Notes have been accelerated although no assurance can be given
that the holders will not accelerate the debt.
Pursuant to the terms of the SLVC Notes, the nonpayment of the 13 1/2% Notes
at maturity created an event of default, and filing for relief under Chapter
11 by PFC and PHI created events of default under the SLVC Notes that
caused the SLVC Notes to automatically become due and payable. In June 1999,
the holders of the SLVC Notes rescinded the acceleration and agreed to defer
payment of $1.3 million of interest until maturity, but did not waive other
defaults related to the non-payment by PFC of the 13 1/2% Notes. If the
holders of the SLVC Notes accelerate the SLVC Notes and demand payment
10
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under the SLVC Notes and the Company guarantee and the Company is unable to
refinance the SLVC Notes or sell all or a portion of its assets and realize
proceeds sufficient to satisfy the debt, it is likely that SLVC and the
Company will file for relief under Chapter 11 of the Bankruptcy Code. The
Company is exploring refinancing alternatives for the SLVC Notes.
Pursuant to the terms of the 9 1/2% Notes, certain events related to the
non-payment by PFC of the 13 1/2% Notes at maturity created events of default
under the 9 1/2% Notes. The holders of the 9 1/2% Notes have not accelerated
the 9 1/2% Notes, although no assurance can be given that the 9 1/2% Notes
will not be accelerated. If the holders of the 9 1/2% Notes accelerate the
payment of the 9 1/2% Notes, a default would occur under the 11% Notes which
would permit the holders of the 11% Notes to accelerate that indebtedness. If
the 9 1/2% Notes or the 11% Notes were to be accelerated and the Company is
unable to refinance the indebtedness or sell all or a portion of its assets
and realize sufficient proceeds to satisfy the debt, it is likely that SFHI
and the Company will file for relief under Chapter 11 of the Bankruptcy Code.
The Company is exploring refinancing alternatives for the 9 1/2% Notes. See
Note 6.
In January 1999, SFHI acquired for $3.6 million the approximate 21-acre
parcel of undeveloped real property adjacent to the Santa Fe from Santa Fe
Gaming. In connection with the closing of the transaction, a $1.6 million
first mortgage note due December 1999 secured by the 21-acre parcel of real
property was repaid. Management believes the cash consideration paid
represents that which could have been negotiated between third parties in an
arms length transaction.
NOTE 6 - LONG TERM DEBT, NET
As of June 30, 1999, the Company had $79.5 million in long-term debt, net of
(i) current maturities of $78.0 million, (ii) debt discount of $1.9 million,
and (iii) debt obligations owned but not retired of $33.1 million of 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.
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. See Note
5 and 7(f)
11
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NOTE 7 - PETITION FOR RELIEF UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY
CODE AND LIABILITIES SUBJECT TO COMPROMISE
a. Liabilities Subject to Compromise
Liabilities Subject to Compromise consist of $55 million of principal and
approximately $8.0 million of accrued interest due on the 13 1/2% Notes as of
June 30, 1999. The 13 1/2% Notes were issued in 1988 by PFC. The proceeds
from such issuance were loaned to PHI to acquire the Pioneer. The loan is
secured by a first priority deed of trust on the Pioneer which has been
assigned to the trustee for the benefit of the holders of the 13 1/2% Notes.
The 13 1/2% Notes are guaranteed by the Company. The 13 1/2% Notes matured on
December 1, 1998, but were not paid at maturity.
The Company has continued accruing interest on the 13 1/2% Notes subsequent
to the date the bankruptcy petition was filed in accordance with the terms of
a consent solicitation (as defined in b. below). The outstanding principal
and accrued interest due on the 13 1/2% Notes are the only Liabilities
subject to compromise reported in the Consolidated Balance Sheet. See Note 3
b. Consent Solicitation
In October and November 1998, consents were solicited from holders of 13 1/2%
Notes pursuant to PFC's Offering Circular and Consent Solicitation Statement
dated October 23, 1998 as amended (the "Consent Solicitation"). 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 Amended 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
PFC's 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 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.
In addition, Consenting Holders agreed to be bound by restrictions on the
transfer or the sale of 13 1/2% Notes subject to the consents. Such 13 1/2%
Notes may be transferred only if the transferee agrees to be bound by the
Consent and PFC receives an appropriate opinion of counsel. An event of
default may occur pursuant to the terms of the Consent Solicitation, if
certain events have not occurred by December 31, 1999. Under such
circumstances, holders of at least 75% of the aggregate Consented Bonds may
terminate the consents.
12
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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 Amended Plan (See Note 7(c)). 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.
c. Petition for Relief Under Chapter 11
On February 23, 1999, in accordance with the Consent Solicitation, PFC
voluntarily commenced a Chapter 11 proceeding. On April 12, 1999, PHI
voluntarily commenced its Chapter 11 proceeding to facilitate the
reorganization of the 13 1/2% Notes in accordance with the Consent
Solicitation. Contemporaneously with the filing of PHI's voluntary petition,
PFC and PHI filed with the Bankruptcy Court a proposed joint plan of
reorganization on substantially the same terms as contemplated by the Consent
Solicitation and a proposed Disclosure Statement. On June 4, 1999, PHI and
PFC filed their Amended Plan of Reorganization ("Amended Plan") and
Disclosure Statement based on comments received from the Bankruptcy Court
during hearings held in late May 1999. The Bankruptcy Court has scheduled a
hearing on August 17, 1999 on the Amended Plan of Reorganization and
Disclosure Statement. No assurance can be given that the Amended Plan will be
confirmed.
PFC and PHI have received approval from the Bankruptcy Court to, among other
items, (i) pay or otherwise honor certain of its pre-petition obligations,
including employee wages, (ii) assume the management agreement between PHI
and the Company, (iii) assume the land lease for approximately 6.5 acres on
which a portion of the Pioneer is located and (iv) extend the exclusivity
period for which the Amended Plan may be confirmed.
In addition, the Bankruptcy Court authorized partial payment of interest due
June 1, 1999, in accordance with the Consent Solicitation. In July 1999 PFC
paid in cash $1.4 million, representing 50% of the interest payment due June
1, 1999, to Consenting Holders, and deposited approximately $400,000 in a
segregated account to be used to make payments to nonconsenting holders of
the 50% of the interest accrued from December 1, 1998 to June 1, 1999 upon
confirmation of the Amended Plan.
13
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Upon confirmation, PFC intends to issue additional notes in an aggregate
amount equal to the unpaid interest from June 1, 1998 to December 1, 1998 and
the remaining 50% interest not paid in cash for the interest due from
December 1, 1998 to June 1, 1999 , plus interest on the unpaid interest due
December 1, 1998 and June 1, 1999 (See PIK Notes, discussion below).
In May 1999, the Company was advised that a Consenting Holder attempted to
transfer or did transfer an interest in approximately $3.0 million principal
amount of 13 1/2% Notes without complying with the restrictions on
transfer. In July 1999, PFC commenced an adversary action seeking injunctive
relief preventing the transfer without strict compliance with the terms of
the restrictive legend.
d. Plan of Reorganization
If the Amended Plan (or subsequent amended plans) is confirmed, PFC will
issue a principal amount of 13 1/2% First Mortgage Notes (together with the
PIK Notes, as defined below, the "Amended Notes") equal to the principal
amount of all outstanding 13 1/2% Notes plus (i) accrued interest as of
December 1, 1998 and June 1, 1999 after giving effect to the redemption of
approximately $1.5 million principal amount of 13 1/2% Notes, and (ii)
accrued interest on the deferred interest amounts. The Amended Notes will
bear interest at a rate equal to 13 1/2% per annum. Interest on the Amended
Notes will be payable semiannually. The Amended 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 (December 1, 2000) through the issuance of additional Amended 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 Amended Notes, including without limitation that interest on
the PIK Notes will be payable 50% in cash and 50% through the fourth interest
payment date through the issuance of additional PIK Notes. The Amended 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
Amended Notes or make an offer to repurchase all or a portion of the
outstanding Amended 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 Amended Notes will
require that, on or before the date that is six months from the confirmation
date of a plan of reorganization, PFC must complete an offer to repurchase
$7.5 million principal amount of Amended Notes or purchase in the open market
or otherwise acquire and retire a principal amount of Amended Notes that can
be acquired with at least $7.5 million. If this requirement is not satisfied
by the specified date, an event of default will occur under the Amended
Notes. The Company will guaranty the payment of principal of, and premium, if
any, and interest on, the Amended Notes, and the guaranty will be secured by
a pledge of the common stock of its subsidiaries SFHI, SR, Hacienda Hotel,
Inc., Sahara Nevada Corp. and Santa Fe Coffee Company and by liens on certain
of its other assets.
14
<PAGE>
The Amended Plan is subject to the approval of the Bankruptcy Court and the
approval of certain classes of creditors. No assurance can be given that the
Amended Plan will be confirmed.
e. Involuntary Proceedings
In January 1999 Hudson Bay Partners, LLC, 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 was 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 held 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. On January 14, 1999, the three
holders of 13 1/2% Notes filed involuntary bankruptcy petitions against PFC
and the Company with the United States Bankruptcy Court for the District of
Nevada. The Company did not believe that the three holders of 13 1/2% Notes
complied with the requirements of the Bankruptcy Code for the commencement of
the involuntary cases. On February 4, 1999 the Company and PFC filed motions
to dismiss the involuntary petitions and sought such damages as provided by
the Bankruptcy Code. These included costs and reasonable attorney's fees and,
in the event the petitions were filed in bad faith, for all damages caused by
such filings or punitive damages.
On February 23, 1999, in accordance with the Consent Solicitation, PFC
voluntarily commenced its Chapter 11 proceedings. PFC has reserved its right
to seek damages against the three non-consenting holders for improperly
commencing the involuntary case against it. On March 19, 1999, the bankruptcy
court suspended the involuntary case against the Company pursuant to
Bankruptcy Code Section 305 and further ordered that the involuntary
proceedings would be dismissed upon motion by the Company upon the Company's
obtaining certain waivers of statutes of limitations regarding alleged
avoidance actions. On August 5, 1999, the Company filed a motion for
dismissal of the involuntary case, based on the court order on March 19, 1999.
f. Guarantee Litigation
The Company is the plaintiff in an action titled THE SANTA FE GAMING CORP. V.
HUDSON BAY PARTNERS, ET AL., CV-S-99-00298-JBR (LRL). This action was
instituted on March 11, 1999 in the United States District Court for the
District of Nevada. The defendants are Hudson Bay Partners, LP, and David H.
Lesser. The complaint includes causes of action for violation of Section
13(d) of the Securities and Exchange Act of 1934, breach of contract, fraud,
violation of Nevada's Uniform Trade Secrets Act, and intentional interference
with prospective economic advantage. The Company alleges that the defendants
failed to comply with the requirements of Section 13(d) in connection with
their purchases of the Company's preferred stock, and that defendants
wrongfully obtained and used confidential and proprietary information.
Pursuant to amended Section 13(d) filings, Hudson Bay Partners owns
approximately 3.0 million shares or 33.19% of the Company's outstanding
preferred stock.
The Company seeks all appropriate injunctive relief in connection with its
Section 13(d) claim, specific performance and consequential and compensatory
damages in connection with its breach of contract claim, and compensatory and
punitive damages in connection with its fraud and intentional interference
with prospective economic advantage claims, and injunctive relief and
punitive damages in connection with its claim under Nevada's Uniform Trade
Secrets Act, as well as any other appropriate relief. On April 30, 1999, the
court denied the Company's motion for preliminary injunction with respect to
13(d) claim.
On or about June 18, 1999, defendant Hudson Bay Partners, L.P. who alleges it
holds approximately $4.7 million of the 13 1/2% Notes, filed a counterclaim
against the Company in which it alleges that the Company is in default on its
guarantee of the 13 1/2% Notes and seeks to recover the amounts it claims are
past due on the 13 1/2% Notes. The Company has denied the allegations made by
Hudson Bay Partners, L.P. in all material respects. On or about July 19,
1999, Hudson Bay Partners, L.P. filed a motion for summary judgment on its
counterclaim and a request to have that judgment entered, which the Company
has since opposed. No hearing date has been set on the motion, and no trial
date has been scheduled in the action. Discovery is ongoing.
The Company is the defendant in a pending action titled GMS GROUP, LLC V. THE
SANTA FE GAMING CORP., No. 99/602231. This action initially was instituted on
or about April 9, 1999 by means of a motion for summary judgement in lieu of
complaint filed in the Supreme Court for the State of New York, County of New
York and this action was later reinstituted on or about May 5, 1999. GMS
Group alleges that the Company is in default on its guarantee of the 13 1/2%
Notes and seeks to recover the amounts it claims are past due on the 13 1/2%
Notes. GMS Group alleges that it holds approximately $6.8 million of the 13
1/2% Notes. The Company has responded to GMS Group's motion by filing a
motion to dismiss the action for lack of personal jurisdiction over the
Company, or, in the alternative, to have the action transferred to a Nevada
court. The Company has also responded to GMS Group's motion by asserting that
GMS Group is not entitled to summary relief. Decision on the motions filed by
GMS Group and the Company has been postponed until on or after August 23,
1999.
The Company is defending these lawsuits vigorously. Even if the Amended Plan
is confirmed, any nonconsenting holders who vote to reject the Amended Plan
or who do not vote to accept the Amended Plan would retain their rights with
respect to the Company guarantee of the 13 1/2% Notes. If, despite the
Company's vigorous defense, either GMS Group, LLC, Hudson Bay Partners L.P.
or another 13 1/2% holder prevails in litigation against the Company to
enforce payment on the guaranters of the 13 1/2% Notes, a money judgment
could be entered against the Company in an amount equal to the outstanding
principal amount plus accrued interest of the 13 1/2% Notes held by the
prevailing party, plus fees and expenses. The Company does not have
sufficient liquid assets to satisfy a judgment in favor of either GMS Group,
LLC or Hudson Bay Partners L.P., and there is no assurance that the Company
would be able to obtain any financing to enable the Company to do so. If a
final judgment were to be rendered against the Company, it is likely that the
Company would file for relief under chapter 11 of the Bankruptcy Code.
NOTE 8 - 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, President and
Chairman of the Company, in the aggregate amount of $476,000. LICO provided
entertainment services to the Hacienda Resort Hotel and Casino and the Sahara
Hotel and Casino. In January 1998, the loans to LICO were satisfied through
an offset against Mr. Lowden's bonus for
15
<PAGE>
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. 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.
NOTE 9 - CONTINGENCY
On December 12, 1994 the Company and Santa Fe Gaming Corporation filed a
lawsuit in the United States District Court in Nevada, naming Treasure Bay
officers A. Clay Rankin III, Joe N. Hendrix and Bernie Burkholder, and former
officer Francis L. Miller as defendants in matters involving violations of
Section 10(b) and Rule 10b-5 of the Securities Exchange Act, violation of
Nevada state securities laws, fraud and negligent misrepresentation in
connection with the Company's investment of $10 million in exchange for a 20%
interest in Treasure Bay, and the Company's guarantee of $4.5 million of
Treasure Bay's indebtedness.
On December 15, 1994, Francis L. Miller filed a lawsuit in the Mississippi
Circuit Court, Second Judicial District, against the Company and Santa Fe
Gaming Corporation, as well as Paul W. Lowden and Suzanne Lowden, alleging,
among other things, that Santa Fe Gaming Corporation made certain
misrepresentations which induced Francis Miller to entrust the management of
his investments in Treasure Bay's two Mississippi casinos to Santa Fe Gaming
Corporation and the Company and to sell the Company and Santa Fe Gaming
Corporation a 20% ownership interest in Treasure Bay. The lawsuit was
subsequently amended to remove Suzanne Lowden as a defendant. The Company and
Santa Fe Gaming Corporation filed a successful motion to transfer this case
to the United States District Court in Nevada.
The United States District Court in Nevada dismissed the Francis L. Miller
lawsuit as originally filed in Mississippi Circuit Court. The Court permitted
Mr. Miller to file the claims that he asserted in the dismissed action as
counterclaims to the lawsuit filed by Santa Fe Gaming Corporation against Mr.
Miller et al. on December 12, 1994 in the United States District Court,
District of Nevada.
Extensive discovery has taken place in the consolidated litigation and
limited discovery is continuing at this time. Each party has filed summary
judgement motions in the case asking that the other party's claims be
dismissed and for related relief. A hearing is scheduled for October 18, 1999
on the summary judgement motions. The Court may grant or deny either motion
in whole or in part. Due to the complexity of the issues involved in the
claims, the Company does not expect to receive a ruling on the motions on
October 18, 1999. The Company expects that the Court is likely to take the
motions under advisement after oral arguments and issue a written ruling at
sometime after the hearing. All claims which remain after summary judgement
will be subsequently set for trial.
Management is unable to predict with certainty the outcome of these
proceedings, accordingly no potential recovery or reserve for loss has been
recorded in the accompanying financial statements.
Management believes the lawsuit against the Company is without merit and
intends to contest the suit vigorously. Management believes the ultimate
outcome of these procedures will not have a material adverse effect of the
Company's consolidated financial position. The Company has reported legal
expenses and related costs of approximately $900,000 associated with the
above legal proceedings.
See Note 7(f) - Guarantee Litigation, for a discussion of legal proceedings
seeking to enforce payment by the Company with respect to its guarantee of
the 13 1/2% Notes.
16
<PAGE>
NOTE 10 - SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
Supplemental statement of cash flows information for the nine month periods
ended June 30, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
(dollars in thousands)
Operating Activities: 1999 1998
------- -------
<S> <C> <C>
Cash paid during the period for
interest, net of amount capitalized of
$0 and $108 for 1999 and 1998, respectively $14,918 $22,456
======= =======
Investing and Financing Activities:
Debt incurred in connection with the
acquisition of machinery and equipment $ 696 $ 9,431
======= =======
</TABLE>
17
<PAGE>
NOTE 11 - SEGMENT INFORMATION
The Company's management reviews the results of operations, certain assets,
and additions to property and equipment based on the Company's primary
operations conducted through PHI and SFHI. The subsidiary financial
information is net of intercompany balances and before tax adjustments. In
addition to the financial information set forth below: See Note 3, 4, 5, 6, 7,
and 9 for additional discussion of subsidiary operations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
PIONEER HOTEL
- -------------
Operating revenues $ 11,315 $ 10,387 $ 34,055 $ 30,741
======== ========= ======== ========
Operating income (loss) $ (52) $ 157 $ 2,233 ($ 387)
======== ========= ======== =========
Interest expense $ 1,853 $ 2,027 $ 5,670 $ 6,098
======== ========= ======== ========
Depreciation and amortization $ 668 $ 1,470 $ 1,995 $ 4,255
======== ========= ======== ========
Rents $ 181 $ 179 $ 542 $ 661
======== ========= ======== ========
Capital expenditures $ 217 $ 187 $ 728 $ 2,329
======== ========= ======== ========
Identifiable assets $ 43,774 $ 92,516
======== ========
SANTA FE HOTEL
- --------------
Operating revenues $ 20,851 $ 18,272 $ 59,935 $ 53,408
======== ========= ======== ========
Operating income $ 3,420 $ 3,434 $ 10,799 $ 9,288
======== ========= ======== ========
Interest expense $ 3,680 $ 3,690 $ 11,017 $ 10,400
======== ========= ======== ========
Depreciation and amortization $ 1,988 $ 1,464 $ 5,650 $ 3,983
======== ========= ======== ========
Rents $ 0 $ 30 $ 0 $ 1,244
======== ========= ======== ========
Capital expenditures $ 1,718 $ 1,686 $ 6,846 $ 11,574
======== ========= ======== ========
Identifiable assets $ 86,875 $ 85,653
======== ========
</TABLE>
18
<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 , Sahara Las Vegas Corp.
("SLVC"), real estate on Las Vegas Boulevard South and in Henderson, Nevada,
for possible development opportunities.
In November 1998, the Company's subsidiary 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 the issuance of 13 1/2% First Mortgage
Notes (the "Amended Notes") in satisfaction of the 13 1/2% Notes, which were
not paid at maturity, 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. The consents may be
terminated by the holders of at least 75% of the 13 1/2% Notes subject to
consents if certain events have not occurred by December 31, 1999.
On February 23, 1999, in accordance with the Consent Solicitation, PFC
voluntarily commenced a Chapter 11 proceeding. On April 12, 1999, PHI
voluntarily commenced its Chapter 11 proceeding to facilitate the
reorganization of the 13 1/2% Notes in accordance with the Consent
Solicitation. Contemporaneously with the filing of PHI's voluntary petition,
PFC and PHI filed with the Bankruptcy Court a proposed joint plan of
reorganization substantially on the same terms as contemplated by the
19
<PAGE>
Consent Solicitation and a proposed disclosure statement ("Disclosure
Statement"). On June 4, 1999, PHI and PFC filed their Amended Plan of
Reorganization ("Amended Plan"). No assurance can be given that the Amended
Plan that PFC and PHI filed with the Bankruptcy Court will be confirmed. The
events related to the 13 1/2% Notes have created events of default under
other indebtedness of the Company, and the Company is party to legal
proceedings in which holders of the 13 1/2% Notes are seeking to enforce
payment on the guarantees. (See below Liquidity - Corporate, SFHI, SLVC and
Pioneer) (See part II--Other Information Legal Proceedings).
In the first nine months of fiscal 1999, 79.0% of the Company's net revenues
was derived from casino operations, 17.0% from food and beverage operations,
4.5% from hotel operations and 9.8% from other operations such as bowling and
ice skating ("other revenues"), less promotional allowances of 10.3%. The
Company's business strategy emphasizes slot and video poker machine play. For
the first nine months of fiscal 1999, approximately 87.8% of gaming revenues
was derived from slot and video poker machines, while 8.2% of such revenues
was from table games and 4.0% was from other gaming activities such as the
race and sports book, poker, bingo and keno.
Set forth below is a discussion of the Company's results of operations for
the nine and three months ended June 30, 1999 and 1998 on a consolidated
basis and by property for each of the Santa Fe and Pioneer.
RESULTS OF OPERATIONS - NINE MONTHS ENDED JUNE 30, 1999 AND 1998
CONSOLIDATED
NET OPERATING REVENUES. Consolidated revenues for the nine month period ended
June 30, 1999 were $94.7 million, representing a $9.8 million, or 11.5%,
increase from $84.9 million for the same period in the prior year. Revenues
increased by $6.5 million at the Santa Fe and $3.4 million at the Pioneer.
OPERATING EXPENSE. Total operating expenses increased $7.8 million, or 9.9%,
to $86.3 million in the nine months ended June 30, 1999 from $78.5 million in
the nine months ended June 30, 1998. Total operating expenses as a percentage
of revenue decreased to 91.1% in the nine months ended June 30, 1999 from
92.5% in the nine months ended June 30, 1998. Operating expenses increased by
$6.0 million, or 13.5%, at the Santa Fe, $300,000, or 13.6% at SLVC,
$700,000, or 2.2%, at the Pioneer, including $1.4 million reorganization
expenses and legal described below, and $900,000 at the Company and its
subsidiaries other than SLVC, PHI and SFHI (collectively "Corporate"),
including $400,000 of legal expenses described below. The Company has
recorded approximately a $1.8 million charge to earnings for reorganization
and legal expenses, during the nine months ended June 30, 1999, representing
costs and expenses in connection with the Amended Plan and legal expenses
associated with certain legal proceedings. See Liquidity below.
20
<PAGE>
OPERATING INCOME. Consolidated operating income for the nine month period
ended June 30, 1999 was $8.4 million, representing a $2.0 million, or 30.9%,
increase from $6.4 million for the same period in the prior year. Operating
income increased by $600,000 at the Santa Fe and $2.6 million at the Pioneer
and decreased by $900,000 at Corporate and $200,000 at SLVC.
OTHER EXPENSE. Consolidated interest expense for the nine month period ended
June 30, 1999 was $19.2 million, representing a $400,000, or 2.1%, increase
compared to $18.8 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 an additional $22.5 million for a total of $57.5 million
principal amount of SLVC Notes in November 1997. Interest expense increased
by $600,000 at the Santa Fe due to the issuance of $14.0 million principal
amount of 9 1/2% Senior Secured Notes in April 1998 and decreased by $400,000
at the Pioneer due to the retirement of $5.0 million of 13 1/2% Notes in
December 1998. During the quarter ended December 31, 1998, the Company
reported costs and expenses in connection with an exchange offer and consent
solicitation which was not consummated, resulting in an approximate $530,000
charge to earnings.
NET LOSS. Consolidated net loss for the nine month period ended June 30, 1999
was $11.3 million, representing a $1.1 million, or 8.6%, decrease compared to
$12.4 million in the same period in the prior year. Net loss before income
tax improved by $2.5 million at the Pioneer, offset by an increased net loss
of $500,000 at SLVC. Net loss was unchanged at the Santa Fe. The Company did
not record an income tax benefit in the current nine month period or the
prior year's nine month period 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 11.5% effective April 1, 1999 from 11.0%
beginning on October 1, 1998 and compared to an 8% dividend rate in the prior
year. Consolidated net loss applicable to common shares was $12.9 million
compared to $13.5 million in the prior year period.
SANTA FE
NET OPERATING REVENUES. Revenues at the Santa Fe increased $6.5 million, or
12.2%, in the nine months ended June 30, 1999 to $59.9 million as compared to
$53.4 million in the same period in the prior year. Management believes that
1999 results were positively impacted by the (i) completion of construction
of two new pylon signs in September 1998, (ii) installation of new gaming
equipment in fiscal 1999 and 1998 and (iii) the growth in the number of
residents in northwest Las Vegas. Casino revenues increased $5.1 million, or
12.1%, to $47.6 million from $42.5 million when compared to the same nine
month period of 1998, due to the increase in volume and the introduction of
new slot equipment. The increase in casino revenues was primarily due to an
increase of $4.4 million, or 11.6%, in slot and video poker revenues to $41.8
million in the 1999 period from $37.4 million in the 1998 period. Other
gaming revenues, including table game revenues, increased
21
<PAGE>
$800,000, or 15.8%, primarily due to improved hold percentages in sports
book, bingo and table games. Casino promotional allowances increased
$400,000, or 8.7%, to $5.0 million in the 1999 period from $4.6 million in
the 1998 period due to the increase in customer volume.
Hotel revenues decreased $100,000 or 4.2%, to $2.5 million for the nine
months ended June 30, 1999 compared to $2.6 million for the nine months ended
June 30, 1998, was caused by a 4.2% decrease in average daily room rate. Food
and beverage revenues increased $400,000, or 4.2%, to $9.5 million, in the
nine months ended June 30, 1999 from $9.1 million in the nine months ended
June, 1998 due to an increase in the number of customers. Other revenues
increased $1.5 million, or 39.9%, to $5.3 million in the nine months ended
June 30, 1999 compared to $3.8 million in the nine months ended June 30,
1998, primarily due to the opening in February 1999 of an additional retail
outlet.
OPERATING EXPENSE. Operating expenses increased $6.0 million, or 13.5%, to
$50.1 million in the nine months ended June 30, 1999 from $44.1 million in
the nine months ended June 30, 1998. Casino expenses increased $1.4 million,
or 7.1%, to $20.8 million in the nine months ended June 30, 1999 from $19.4
million in the nine months ended June 30, 1998, related to the increase in
casino revenues. However, casino expenses as a percentage of casino revenues
decreased to 43.6% in the nine months ended June 30, 1999 from 45.7% in the
nine months ended June 30, 1998 due to spreading of fixed costs over a larger
revenue base. Hotel expenses increased $100,000 or 11.3%, to $900,000 for the
nine month periods ended June 30, 1999 from $800,000 for the period ended
June 30, 1998. Food and beverage expenses increased $700,000, or 10.9%, to
$7.3 million in the nine months ended June 30, 1999 from $6.6 million in the
nine months ended June 30, 1998. Food and beverage expenses as a percentage
of food and beverage revenues increased to 76.5% in the nine months ended
June 30, 1999 from 71.9% in the nine months ended June 30, 1998, due to an
increase in the cost of food sales for the 1999 period compared to the 1998
period, partially offset by a decrease in the cost of beverage sales. Other
expenses increased $1.5 million, or 92.9%, to $3.1 million for the nine
months ended June 30, 1999 compared to $1.6 million for the nine months ended
June 30, 1998, primarily due to the costs associated with an additional
retail outlet which opened February 1999.
Selling, general and administrative expenses increased $1.0 million, or 14.7%
to $7.7 million in the nine months ended June 30, 1999 from $6.7 million in
the nine months ended June 30, 1998, primarily due to legal expenses of
$900,000 incurred in connection with proceedings involving the Company's
investment in a minority owned business. Selling, general and administrative
expenses as a percentage of revenues increased to 12.8% in the nine months
ended June 30, 1999 from 12.5% in the nine months ended June 30, 1998 because
of the increase in expenses. Utilities and property expenses decreased
$300,000, or 7.7%, to $4.7 million in the nine months ended June 30, 1999
from $5.0
22
<PAGE>
million in the nine months ended June 30, 1998, due to decreased rent expense
for gaming and other equipment resulting from the purchase of equipment
previously under lease, partially offset by an increase in property
maintenance and utility expense. Utilities and property expenses as a
percentage of revenues decreased to 7.8% in the nine months ended June 30,
1999 from 9.4% in the nine months ended June 30, 1999. Depreciation and
amortization expenses increased $1.6 million, or 41.9%, to $5.6 million in
the nine months ended June 30, 1999 from $4.0 million in the nine months
ended June 30, 1998 due to the purchase of equipment which was previously
under lease.
INTEREST EXPENSE. Interest expense increased $600,000 or 5.9%, to $11.0
million in the 1999 period from $10.4 million in the 1998 period due to an
additional $14.0 million principal amount of debt incurred in April 1998 to
purchase gaming and other equipment previously under lease and for other
capital improvements.
NET LOSS. As a result of the factors discussed above, the Santa Fe recorded a
pre-tax net loss of $1.1 million for the nine months ended June 30, 1999,
unchanged from the nine months ended June 30, 1998.
PIONEER
NET OPERATING REVENUES. Revenues at the Pioneer increased $3.4 million, or
10.8%, to $34.1 million in the nine months ended June 30, 1999 as compared to
$30.7 million in the same period in the prior year. Management believes that
1999 results were positively impacted by an improvement in the current period
in the total gaming market revenues reported in Laughlin compared to prior
periods.
Casino revenues increased $1.1 million, or 4.3%, to $27.1 million from $26.0
million when compared to the same nine month period of 1998. The increase in
casino revenues was due to an increase of $1.2 million, or 5.2%, in slot and
video poker revenues to $23.9 million in the 1999 period from $22.7 million
in the 1998 period. Other gaming revenue, including table games, decreased
$100,000, or 1.9%, due to decreased play in keno. Casino promotional
allowances decreased $300,000, or 5.8%, to $4.7 million in the 1999 period
from $5.0 million in the 1998 period.
Hotel revenues remained unchanged at $1.8 million for the nine months ended
June 30, 1999 compared to the nine months ended June 30, 1998, as a drop in
occupancy rate to 68.2% from 79.4% was offset by a 16.4% increase in average
daily room rate. The Pioneer has sought to obtain a higher room rate rather
than increased occupancy. Food and beverage revenues decreased $300,000, or
4.7%, to $6.5 million in the nine months ended June 30, 1999 from $6.8
million in the nine months ended June 30, 1998, primarily due to a decrease
in the amount of complimentary food and beverage provided to
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customers. Other revenues increased $2.2 million, or 195.3%, to $3.3 million
in the nine months ended June 30, 1999 compared to $1.1 million in the nine
months ended June 30, 1998 due to the opening in August 1998 of an additional
retail outlet.
OPERATING EXPENSE. Operating expense increased $700,000, or 2.2%, to $31.8
million in the nine months ended June 30, 1999 from $31.1 million in the nine
months ended June 30, 1998. Excluding a $1.4 million charge for
reorganization expenses, operating expense decreased $700,000 or 2.2%.
Casino expenses decreased $500,000, or 4.1%, to $13.7 million, in the nine
months ended June 30, 1999 from $14.2 million in the nine months ended June
30, 1998 due to a decrease in complimentary and marketing expenses. Casino
expenses as a percentage of casino revenues decreased to 50.4% in the nine
months ended June 30, 1999 from 54.8% in the nine months ended June 30, 1998.
Hotel expenses remained unchanged at $600,000 for the nine months ended June
30, 1999 compared to the nine months ended June 30, 1998. Food and beverage
expenses decreased $400,000, or 9.8%, to $3.6 million in the nine months
ended June 30, 1999 from $4.0 million in the nine months ended June 30, 1998
due to the decrease in food and beverage revenues and decreases in cost of
sales. Food and beverage expenses as a percentage of food and beverage
revenues decreased to 55.9% in the nine months ended June 30, 1999 from 59.0%
in the nine months ended June 30, 1998. Other expenses increased $2.4
million, or 380.3%, to $3.0 million for the nine months ended June 30, 1999
compared to $600,000 for the nine months ended June 30, 1998 due to the cost
associated with an additional retail outlet which opened in August 1998.
Other expenses as a percentage of other revenues increased to 92.1% in the
1999 period from 56.6% in the 1998 period.
Selling, general and administrative expenses increased $200,000, or 3.0%, to
$4.5 million in the nine months ended June 30, 1999 from $4.3 million in the
nine months ended June 30, 1998. Selling, general and administrative expenses
as a percentage of revenues decreased to 13.1% in the nine months ended June
30, 1999 from 14.1% in the nine months ended June 30, 1998. Utilities and
property expenses remained unchanged at $3.0 million in the nine months ended
June 30, 1999 and June 30,1998. Depreciation and amortization expenses
decreased $2.3 million, or 53.1% to $2.0 million in the nine months ended
June 30, 1999 from $4.3 million in the nine months ended June 30, 1998 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. During the nine months ended June 30, 1999, PHI
incurred costs and expenses in connection with the Amended Plan, resulting in a
$1.4 million charge for reorganization expenses.
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OTHER EXPENSE. Interest expense decreased $400,000, or 7.0%, to $5.7 million
in the 1999 period from $6.1 million in the 1998 period due to the payment of
approximately $5.0 million principal amount of 13 1/2% Notes in December
1998. During the quarter ended December 31, 1998, PHI incurred costs and
expenses in connection with an exchange offer and consent solicitation
relating to the 13 1/2% Notes. The exchange offer was not consummated,
resulting in an approximate $530,000 charge to earnings.
NET LOSS. As a result of the factors discussed above, pre-tax net loss
decreased $2.5 million, or 38.8%, to $4.0 million in the nine months ended
June 30, 1999 from $6.5 million in the nine months ended June 30, 1998.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1999 AND 1998
CONSOLIDATED
NET OPERATING REVENUES. Consolidated revenues for the three month period
ended June 30, 1999 were $32.3 million, representing a $3.5 million, or
11.8%, increase from $28.8 million for the same period in the prior year.
Revenues increased by $2.6 million at the Santa Fe and $900,000 at the
Pioneer.
OPERATING EXPENSE. Total operating expenses increased $5.4 million, or 20.3%,
to $31.5 million in the three months ended June 30, 1999 from $26.1 in the
three months ended June 30, 1998. Total operating expenses as a percentage of
revenue increased to 97.6% in the three months ended June 30, 1999 from 90.7%
in the three months ended June 30, 1998. Operating expenses increased by $3.6
million, or 23.7%, at the Santa Fe, $1.2 million, or 11.1%, at the Pioneer,
including $1.0 million of reorganization expenses described below, $700,000
at Corporate, including $400,000 of reorganization expenses described below,
and were unchanged at SLVC. The Company has recorded a $1.4 million charge to
earnings for reorganization and legal expenses during the three months ended
June 30, 1999, related to incurred costs and expenses in connection with the
Amended Plan. See Liquidity below.
OPERATING INCOME. Consolidated operating income for the three month period
ended June 30, 1999 was $800,000, representing a $1.9 million, or 70.9%,
decrease from $2.7 million for the same period in the prior year. Operating
income decreased by $200,000 at the Pioneer, by $900,000 at the Santa Fe, by
$800,000 at Corporate and $100,000 at SLVC
OTHER EXPENSE. Consolidated interest expense for the three month period ended
June 30, 1999 was $6.3 million, representing a $400,000, or 5.6%, decrease
compared to $6.7 million for the same period in the prior year.
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NET LOSS. Consolidated loss for the three month period ended June 30, 1999
was $5.6 million, representing a $1.6 million, or 38.6%, increase compared to
$4.0 million in the same period in the prior year. Net loss before income tax
increased by $900,000 at the Santa Fe and $100,000 at SLVC. Net loss at the
Pioneer was unchanged.
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 11.5% effective April 1, 1999, from 11.0%
beginning October 1, 1998 as compared to an 8% dividend rate in the prior
year. Consolidated net loss applicable to common shares was $6.1 million
compared to $4.4 million in the prior year period.
SANTA FE
NET OPERATING REVENUES. Revenues at the Santa Fe increased $2.6 million, or
14.1%, in the three months ended June 30, 1999 to $20.9 million as compared
to $18.3 in the same period in the prior year. Management believes that 1999
results were positively impacted by the (i) completion of construction of two
new pylon signs in September 1998, (ii) installation of new gaming equipment
in fiscal 1999 and 1998 and (iii) the growth in the number of residents in
northwest Las Vegas.
Casino revenues increased $1.6 million, or 11.3%, to $16.3 million from $14.7
million when compared to the same three month period of 1998, due to an
increase in the customer volume and the introduction of new slot equipment.
The increase in casino revenues was primarily due to an increase of $1.4
million, or 10.6%, in slot and video poker revenues to $14.5 million in the
1999 quarter from $13.1 million in the 1998 quarter. Other gaming revenues,
including table game revenues, increased $300,000, or 17.5%, primarily due to
improved hold percentages in sports book, bingo and table games. Casino
promotional allowances increased $100,000, or 8.8%, to $1.6 million in the
1999 quarter from $1.5 million in the 1998 quarter due to the increase in
customer volume.
Hotel revenues decreased $100,000, or 10.3%, to $800,000 for the three months
ended June 30, 1999 compared to $900,000 for the three months ended June 30,
1998, due to a decrease in occupied rooms. Food and beverage revenues
increased $100,000, or 4.6%, to $3.1 million in the three months ended June
30, 1999 compared to $3.0 million in the three months ended June 30, 1998.
Other revenues increased $1.0 million, or 79.3% to $2.3 million in the three
months ended June 30, 1999 from $1.3 million in the three months ended June
30, 1998, primarily due to the opening in February 1999 of an additional
retail outlet.
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OPERATING EXPENSE. Operating expenses increased $3.6 million, or 23.7%, to
$18.4 million in the quarter ended June 30, 1999 from $14.8 million in the
quarter ended June 30, 1998. Casino expenses increased $500,000, or 7.8%, to
$7.1 million in the three months ended June 30, 1999 from $6.6 million in the
three months ended June 30, 1998, related to the increase in casino revenues.
However, casino expenses as a percentage of casino revenues decreased to
43.3% in the three months ended June 30, 1999 from 44.7% in the three months
ended June 30, 1998 due to spreading of fixed costs over a larger revenue
base. Hotel expenses remained unchanged at $300,000 for the three month
periods ended June 30, 1999 and June 30, 1998. Food and beverage expenses
increased $300,000, or 15.0%, to $2.5 million in the three months ended June
30, 1999 from $2.2 million in the three months ended June 30, 1998. Food and
beverage expenses as a percentage of food and beverage revenues increased to
82.0% in the three months ended June 30, 1999 from 74.5% in the three months
ended June 30, 1998, due to an increase in the cost of food sales for the
1999 quarter compared to the 1998 quarter, partially offset by a decrease in
the cost of beverage sales. Other expenses increased $1.0 million, or 191.7%,
to $1.5 million for the three months ended June 30, 1999 compared to $500,000
for the three months ended June 30, 1998, primarily due to the costs
associated with the additional retail outlet which opened in February 1999.
Selling, general and administrative expenses increased $800,000, or 32.7%, to
$3.2 million in the three months ended June 30, 1999 from $2.4 million in the
three months ended June 30, 1998, primarily due to legal expenses of $900,000
incurred in connection with proceedings involving the Company's investment in
a minority owned business. Selling, general and administrative expenses as a
percentage of revenues increased to 15.4% in the three months ended June 30,
1999 from 13.3% in the three months ended June 30, 1998 because of the
increase in expenses. Utilities and property expenses increased $200,000, or
19.5%, to $1.6 million in the three months ended June 30, 1999 from $1.4
million in the three months ended June 30, 1998, due to an increase in
property maintenance and utility expense. Utilities and property expenses as
a percentage of revenues increased to 7.9% in the three months ended June 30,
1999 from 7.6% in the three months ended June 30, 1998. Depreciation and
amortization expenses increased $500,000, or 35.8%, to $2.0 million in the
three months ended June 30, 1999 from $1.5 million in the three months ended
June 30, 1998 due to the purchase in April 1998 of equipment which was
previously under lease.
INTEREST EXPENSE. Interest expense was unchanged at $3.7 million in the 1999
quarter and the 1998 quarter.
NET LOSS. As a result of the factors discussed above, the Santa Fe recorded a
pre-tax net loss of $1.2 million for the quarter ended June 30, 1999, as
compared to a net loss of $300,000 in the quarter ended June 30, 1998.
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PIONEER
NET OPERATING REVENUES. Revenues at the Pioneer increased $900,000, or 8.9%,
to $11.3 million in the June 1999 quarter as compared to $10.4 million in the
same period in the prior year. Management believes that 1999 results were
positively impacted by an improvement in the Laughlin market compared to
prior periods.
Casino revenues increased $200,000 or 2.0%, to $8.7 million from $8.5 million
when compared to the same quarter of 1998. The increase in casino revenues
was due to an increase of $400,000, or 5.4%, in slot and video poker revenues
to $7.8 million in the 1999 period from $7.4 million in the 1998 period.
Other gaming revenues, including table games, decreased $200,000, or 20.4%,
due to decreased play and hold percentage in table games. Casino promotional
allowances decreased $100,000, or 3.2%, to $1.5 million in the 1999 quarter
from $1.6 million in the 1998 quarter.
Hotel revenues remained unchanged at $700,000 for the three months ended June
30, 1999 compared to the three months ended June 30, 1998, as a drop in
occupancy rate to 69.4% from 79.1% was offset by a 13.4% increase in average
daily room rate. The Pioneer has sought to obtain a higher room rate rather
than increased occupancy. Food and beverage revenues decreased $100,000, or
5.1%, to $2.2 million in the three months ended June 30, 1999 from $2.3
million in the three months ended June 30, 1998 primarily due to a decrease
in the amount of complimentary food and beverage provided to customers. Other
revenues increased $800,000, or 192.4%, to $1.2 million in the three months
ended June 30, 1999 compared to $400,000 in the three months ended June 30,
1998 due to the opening in August 1998 of an additional retail outlet.
OPERATING EXPENSE. Operating expense increased $1.2 million, or 11.1%, to
$11.4 million in the quarter ended June 30, 1999 from $10.2 million in the
quarter ended June 30, 1998. Excluding a $1.0 million charge for
reorganization expenses, operating expense increased $100,000, or 1.2%.
Casino expenses were unchanged at $4.5 million, in the three months periods
ended June 30, 1999 and June 30, 1998. Casino expenses as a percentage of
casino revenues decreased to 51.7% in the three months ended June 30, 1999
from 52.3% in the three months ended June 30, 1998. Hotel expenses remained
unchanged at $200,000 for the three months ended June 30, 1999 compared to
the three months ended June 30, 1998. Food and beverage expenses decreased
$200,000, or 10.6%, to $1.3 million in the three months ended June 30, 1999
from $1.5 million in the quarter ended June 30, 1998 due to the decrease in
food and beverage revenues and decreases in cost of sales. Food and beverage
expenses as a percentage of food and beverage revenues decreased to 59.2% in
the three months ended June 30, 1999 from 62.8% in the three months ended
June 30, 1998. Other expenses increased $900,000, or 422.7%, to $1.1 million
for the three months ended June 30, 1999 compared to $200,000 for the three
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months ended June 30, 1998 due to the cost associated with the additional
retail outlet which opened in August 1998. Other expenses as a percentage of
other revenues increased to 93.8% in the 1999 quarter from 52.5% in the 1998
quarter.
Selling, general and administrative expenses were unchanged at $1.4 million
in the three months ended June 30, 1999 and June 30, 1998. Selling, general
and administrative expenses as a percentage of revenues decreased to 12.6% in
the three months ended June 30, 1999 from 13.4% in the three months ended
June 30, 1998. Utilities and property expenses increased $100,000, or 7.3%,
to $1.1 million in the three months ended June 30, 1999 from $1.0 in the
three months ended June 30, 1998 primarily due to increased property
maintenance expense. Depreciation and amortization expenses decreased
$800,000, or 54.6%, to $700,000 in the three months ended June 30, 1999 from
$1.5 million in the three months ended June 30, 1998 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.
During the quarter ended June 30, 1999, PHI incurred costs and expenses in
connection with the Amended Plan. Accordingly, PHI has recorded an approximate
$1.0 million charge to earnings for reorganization and legal expenses. See
Liquidity below.
OTHER EXPENSE. Interest expense decreased $100,000, or 8.6%, to $1.9 million
in the 1999 quarter from $2.0 million in the 1998 quarter due to the payment
of approximately $5.0 million principal amount of 13 1/2% Notes in December
1998.
NET LOSS. As a result of the factors discussed above, pre-tax net loss was
unchanged at $1.9 million in the quarter ended June 30, 1999 from the quarter
ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES; TRENDS AND FACTORS RELEVANT TO FUTURE
OPERATIONS
LIQUIDITY. As of June 30, 1999, the Company held cash and cash equivalents of
$13.7 million, compared to $22.7 million at September 30, 1998. Substantially
all of the cash and cash equivalents was held by SFHI and PHI, and was
subject to restrictions which prohibit distribution to the Company.
The Company's earnings from operations before interest, taxes, depreciation
and amortization, rents, corporate expense and reorganization and certain
legal expenses ("EBITDA") were $24.6 million for the nine months ended June
30, 1999, an increase of $3.9 million or 18.9% as compared to $20.7 million
for the nine months ended June 30, 1998. EBITDA for the 1999 nine month
period represents 1.25 times rent and interest expense, compared to 1.00
times rent and interest expense in the prior year nine month period. EBITDA
was $7.7 million for the three months ended June 30, 1999, as compared to
$7.3 million for the three months ended June 30, 1998, an increase of
$400,000 or 5.5%. EBITDA for the 1999 three month period represents 1.18
times rent and interest expense,
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compared to 1.06 times rent and interest expense in the prior year three
month period. Corporate expense and reorganization expenses were $900,000 and
$1.4 million, respectively, in the current three month period. The Company
allocated a portion of Corporate expense to its subsidiaries SFHI and PHI.
Reorganization expenses represent primarily costs associated with the PFC and
PHI bankruptcy proceedings and professional fees related to certain legal
proceedings. (See "Liquidity and Capital Resources - Corporate" and Part
II-Other Information). Certain legal expense includes $900,000 reported in
connection with SFHI's investment in a minority owned business (See
Liquidity-SFHI below).
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 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 is
not be the same as that of similarly captioned measures used by other
companies.
CASH FLOW FROM OPERATING ACTIVITIES. The Company's cash provided by
operations was $3.0 million for the nine months ended June 30, 1999 as
compared to cash used in operations of $6.4 million for the prior year
period. The increase in cash provided by operations was primarily due to
improved cash flow at the Santa Fe and the Pioneer offset by increased
interest expense at SFHI and SLVC and reorganization and legal expenses. The
Company's principal uses of cash from operations are for principal payments
on indebtedness and capital expenditures, including development costs for
proposed projects, as well as reorganization expenses related to the PFC/PHI
bankruptcy proceedings and ongoing legal proceedings.
CASH USED FOR INVESTING ACTIVITIES. Cash used in investing activities was
$4.2 million during the nine month period ended June 30, 1999, as compared to
$9.5 million during the nine month period ended June 30, 1998. In the 1999
period, the Company incurred $3.1 million of capital expenditures, comprised
primarily of improvements at the Santa Fe and the Pioneer, and $1.1 million
of development and other costs related to the Henderson property. 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)
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CASH FLOW FROM FINANCING ACTIVITIES. Cash used in financing activities was
$7.7 million in the 1999 nine month period compared to cash of $20.3 million
provided by financing activities during the same period in 1998. Cash used in
financing activities in the current year period represents primarily a
principal payment to repurchase and retire $5 million principal amount of the
13 1/2% Notes pursuant to the terms of the PFC Consent Solicitation and
repayment of a $1.6 million first mortgage note secured by the approximate
21-acre parcel of undeveloped real property adjacent to the Santa Fe acquired
by SFHI in January 1999 from the Company. Cash provided by financing
activities in the prior year period represents primarily the net proceeds
resulting from the issuance by SLVC of $22.5 million of additional SLVC Notes.
LIABILITIES SUBJECT TO COMPROMISE. The Company's subsidiary, PFC, had $55
million of principal and approximately $8.0 million accrued interest due on
the 13 1/2% Notes as of June 30, 1999, which is presented as Liabilities
Subject to Compromise in the consolidated Condensed Balance Sheet contained
herein. (See General, above and Liquidity PHI, below)
CURRENT PORTION OF LONG TERM DEBT. The Company has approximately $78.0
million in current maturities of long term debt during the twelve-month
period ending June 30, 1999, comprised primarily of $57.5 million principal
amount of SLVC Notes issued by SLVC and guaranteed by the Company due
December 1999 and in default and $14.0 million of 9 1/2% Notes issued by SFHI
and guaranteed by the Company due December 2000 but in default.
Pursuant to the terms of the SLVC Notes, the nonpayment of the 13 1/2% Notes
at maturity created an event of default under the SLVC Notes, and filing for
relief under Chapter 11 by PFC and PHI created events of default under the
SLVC Notes that caused the SLVC Notes to automatically become due and
payable. In June 1999, the holders of the SLVC Notes rescinded the
acceleration and agreed to defer payment of $1.3 million of interest until
maturity, but did not waive other defaults related to the non-payment by PFC
of the 13 1/2% Notes. If the holders of the SLVC Notes demand payment under
the SLVC Notes and the Company guarantee and the Company is unable to
refinance the SLVC Notes or sell all or a portion of its assets and realize
proceeds sufficient to satisfy the debt, it is likely that SLVC and the
Company will file for relief under Chapter 11 of the Bankruptcy Code. The
Company is exploring refinancing alternatives for the SLVC Notes.
Pursuant to the terms of the 9 1/2% Notes, certain events related to the
non-payment by PFC of the 13 1/2% Notes at maturity, created events of
default under the 9 1/2% Notes. The holders of the 9 1/2% Notes have not
accelerated the 9 1/2% Notes, although no assurance can be given that the 9
1/2% Notes will not be accelerated. The Company is exploring refinancing
alternatives for the 9 1/2% Notes.
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LONG TERM DEBT, NET. As of June 30, 1999, the Company had $79.5 million in
long-term debt, net of (i) current maturities of $78.0 million, (ii) debt
discount of $1.9 million, and (iii) the debt obligations owned but not
retired of $33.1 million of 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.
If the holders of the 9 1/2% Notes accelerate the payment of the 9 1/2%
Notes, a default would occur under the 11% Notes which would permit the
holders of the 11% Notes to accelerate that indebtedness. If the 9 1/2% Notes
or the 11% Notes were to be accelerated and the Company is unable to
refinance the indebtedness or sell all or a portion of its assets and realize
sufficient proceeds to satisfy the debt, it is likely that SFHI and the
Company will 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.
The Company's debt agreements restrict the distribution of cash from SFHI,
PHI and SLVC to affiliates. 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 the
subsidiaries other than SLUC, PHI and SFHI (collecively "Corporate") must
rely on existing cash and available resources, consisting of subsidiary
assets that may be disposed of or refinanced, as well as management fees
payable by SFHI and PHI to provide liquidity to fund Corporate cash
requirements including obligations that may arise as a result of the
Company's guarantee of subsidiary debt. See more detailed discussion of
Liquidity and Capital Resources for SLVC, PHI, SFHI and Corporate, below.
SFHI - At June 30, 1999, approximately $10.3 million of the Company's current
assets, including approximately $6.7 million of cash and cash equivalents,
was held by SFHI. Results of operations at the Santa Fe for the three and
nine months ended June 30, 1999 generated EBITDA as defined, of $5.8 million
and $17.4 million, respectively, compared to $5.2 million and $15.4 million
of EBITDA in the 1998 period. EBITDA for the current three month period
represents 1.56 and 1.58 rent and interest expense compared to 1.40 and 1.32
rent and interest expense in the same periods in the prior year. In the 1999
three and nine month periods, the Santa Fe reported no rent expense compared
to approximately $0 and $1.2 million in the 1998 period. The Santa Fe
reported corporate expenses of approximately $300,000 and $1.0 million in the
1999 three and nine month periods compared to $300,000 and $800,000 in the
1998 three and nine month periods.
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SFHI's principal uses of cash from operations are for corporate expenses,
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. Legal expenses of
$900,000 were reported in fiscal 1999 in connection with proceedings
involving the Company's investment in a minority owned business. Capital
expenditures to maintain the Santa Fe in fiscal 1999 are expected to be
approximately $3.5 million excluding the purchase of real property for $3.6
million from Santa Fe Gaming Corporation in January 1999. SFHI payments to
SFGC for corporate expenses will increase in future periods based on the
terms of a management agreement effective July 1999 which provides for a base
fee of $120,000 per month and a variable fee payable under certain conditions
equal to 2% of gross revenues not to exceed $1.5 million. Results for the
nine month period ended June 30, 1999 improved compared to the same period in
the prior year. However, results for the nine month period ended June 30,1999
are not necessarily indicative of results for the entire fiscal year.
Management believes that, based on operations for the three and nine month
periods ended June 30, 1999, SFHI will have sufficient cash resources to meet
its operating and debt service requirements through the twelve month period
ending June 30, 2000, although no assurance can be given to that effect.
However, If the holders of the 9 1/2% Notes were to accelerate that
indebtedness, an event of default would occur under the 11% Indenture, which
would permit the holders of the 11% Notes to accelerate that indebtedness.
If the Company were to file for relief under Chapter 11 under 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% Note Indenture
resulting in automatic acceleration of the 11% Notes. If the 9 1/2% Notes or
11% Notes were to be accelerated, SFHI would have to refinance its
indebtedness or otherwise satisfy its debt obligations, and no assurance can
be given that it would be able to do so. If the indebtedness of SFHI is
accelerated and demand for payment is made under the Company guarantee and
the Company is unable to satisfy the debt it is likely that SFHI and the
Company will file for relief under Chapter 11 of the Bankruptcy Code. (See
Long-Term Debt, Net, discussed above).
SLVC - At June 30, 1999, a minimal amount of cash and cash equivalents was
held by SLVC. SLVC owns a 27-acre parcel of real estate on Las Vegas
Boulevard South which is subject to a lease with a water theme park operator.
SLVC generates minimal cash from the lease agreement after payment of
property costs. SLVC receives interest income on $33.1 million principal
amount of 11% Notes which are held as collateral for the SLVC Notes. SLVC's
principal use of cash is to satisfy principal and interest obligations on the
SLVC Notes.
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.
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SLVC is exploring alternatives to satisfy the 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. 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. If it is unable to
do so, it will be unable to pay the SLVC Notes at maturity. If the
indebtedness of SLVC is accelerated and a demand is made for payment under
the Company's guarantee and the Company is unable to satisfy the debt, it is
likely that SLVC and the Company would file for relief under Chapter 11 of
the Bankruptcy Code. (See - Current Portion of Long -Term Debt discussed
above)
CORPORATE - Approximately $1.5 million of the Company's current assets at
June 30, 1999, including approximately $100,000 of cash and short-term
investments, was held by Corporate. Corporate consists primarily of
non-operating entities which do not generate cash flow from operations.
Corporate's principal source of cash is received pursuant to management
agreements with SFHI and PHI.
Corporate's principal uses of cash are for administrative and professional
expenses, costs associated with the evaluation and development of proposed
projects and debt service. 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, the 9 1/2%
Notes in default and the SLVC Notes in default, as well as the guarantee of
the tenant loan if the Company terminates the lease subject to the parcel on
Las Vegas Boulevard South owned by SLVC.
Two groups of holders of 13 1/2% Notes that did not deliver consents in the
1998 consent solicitation have filed lawsuits or conunterclaims against the
Company seeking to enforce its guarantees of the 13 1/2% Notes. The Company
is defending these lawsuits vigorously. Even if the Amended Plan is
confirmed, any nonconsenting holders who vote to reject the Amended Plan or
who do not vote to accept the Amended Plan would retain their rights with
respect to the Company guarantee. If, despite the Company's vigorous defense,
either GMS Group L.L.C., Hudson Bay Partners L.P. or another 13 1/2% holder
prevails in litigation against the Company, to enforce payment on the
guaranters of the 13 1/2% Notes a money judgement could be entered against
the Company in an amount equal to the outstanding principal amount plus
accrued interest of the 13 1/2% Notes held by the prevailing party, plus fees
and expenses. The Company does not have sufficient liquid assets to satisfy a
judgment in favor of either GMS Group L.L.C. or Hudson Bay Partners L.P., and
there is no assurance that the Company would be able to obtain any financing
to enable the Company to do so. If a final judgment were to be rendered
against the Company, it is likely that the Company would file for relief
under Chapter 11 of the Bankruptcy Code. See Part II Information, Item
1-Legal Proceedings for additional information.
Management believes that Corporate has sufficient working capital and
available resources, primarily proceeds which may be available to Corporate
from the possible disposition or refinance of subsidiary assets, or from
possible modifications of subsidiary debt obligations to meet its cash
requirements through the period ending June 30, 2000, excluding debt service
obligations including guarantees, although no assurance can be given to that
effect. If demand for payment is made under the Company's guarantee of
subsidiary debt and it is unable to satisfy such debt, it is likely the
Company would file for relief under Chapter 11 of the Bankruptcy Code. (See
SFHI, PHI and SLVC)
PHI - At June 30, 1999, approximately $8.6 million of the Company's current
assets, including approximately $6.7 million of cash and cash equivalents,
was held by PHI.
Results of operations at the Pioneer for the three and nine months ended June
30, 1999 generated EBITDA as defined of $2.1 million and $6.9 million,
approximately 1.01 and 1.12 times rent and interest expense, compared to $2.1
million and $5.4 million of EBITDA in 1998, or approximately .95 and .79
times rent and interest expense. Pioneer reported rent expense of
approximately $200,000 and $500,000 in the 1999 three and nine month periods
compared to $200,000 and $700,000 in the 1998 three and nine month periods.
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Rent in future periods will be approximately the same as in the current
quarter. Pursuant to the Consent Solicitaiton Pioneer has agreed to satisfy
the semi-annual interest payment on the 13-1/2% Notes through December 2000
by making cash payments equal to 50% and issuance of additional PIK notes.
(see discussion below, PFC and PHI Amended Plan). Pioneer reported corporate
expenses of $250,000 and $800,000 in the 1999 three and nine month periods
compared to $300,000 and $800,000 in the 1998 three and nine month periods
pursuant to the terms of a management agreement entered into in connection
with the Consent Solicitation effective January 1, 1999 under which the
Company is to receive a fix fee of $83,334 per month through December 31,
1999. Commencing on January 1, 2000 the Company will receive a base fee of
$63,334 per month plus a variable fee under certain conditions equal to
$60,000 per quarter. Results for the three and nine month period ended June
30, 1999 improved compared to the same period in the prior year. However,
results for the three and nine month period ended June 30, 1999 are not
necessarily indicative of results for the entire fiscal year.
Although results of operations of the Pioneer have not been adversely
impacted since the commencement of the Consent Solicitation in October 1998
or the filing for relief under Chapter 11 by PFC and PHI, no assurance can be
given that such filing and the potential filing for relief under Chapter 11
by 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 PHI.
PHI's principal uses of cash are for reorganization expenses related to the
bankruptcy proceedings, rent payments, corporate expenses, interest payments
on the 13 1/2% Notes and capital expenditures to maintain the Pioneer.
Reorganization expenses for the three month period were approximately $1.0
million related to the bankruptcy and related legal proceedings. Capital
expenditures to maintain the Pioneer in fiscal 1999 are expected to be
approximately $1.0 million.
Management believes that, based on operations for the three and nine month
periods ended June 30, 1999, PHI will have sufficient cash and available
resources to meet its operating requirements through the twelve months ending
June 30, 2000, excluding debt service obligations on the 13 1/2% Notes,
although no assurance can be given to that effect.
PFC had $ 55.0 million of principal and approximately $8.0 million accrued
interest due on the 13 1/2% Notes as of June 30, 1999 which is presented as
Liabilities Subject to Compromise in the consolidated Condensed Balance Sheet
contained elsewhere herein. PFC did not pay the 13 1/2% Notes at maturity.
See "General" and "Liabilities subject to compromise" above and "PFC and PHI
Amended Plan" below for a discussion of bankruptcy proceedings involving PFC
and PHI.
PFC and PHI Amended Plan
If the Amended Plan is confirmed, PFC will issue a principal amount of 13 1/2%
First Mortgage Notes (together with the PIK Notes, as defined below, the
"Amended Notes ") equal to the principal amount of all outstanding 13 1/2%
Notes plus accrued interest as of December 1, 1998 after giving effect to the
redemption of approximately $1.5 million principal amount of 13 1/2% Notes
plus 50% of the interest payable thereafter through the issuance date of
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the Amended Notes. The Amended Notes will bear interest at a rate equal to 13
1/2% per annum. Interest on the Amended Notes will be payable semiannually.
The Amended 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 ("December 1, 2000") through the
issuance of additional Amended 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 Amended Notes,
including without limitation that interest on the PIK Notes will be payable
50% in cash and 50% through the fourth interest payment date through the
issuance of additional PIK Notes. The Amended 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 Amended Notes or make an offer
to repurchase all or a portion of the outstanding Amended 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 Amended Notes will require that, on or before the later of
December 31, 1999 and the date that is six months from the confirmation date
of a plan of reorganization, PFC must complete an offer to repurchase $7.5
million principal amount of Amended Notes or purchase in the open market or
otherwise purchase and retire a principal amount of Amended Notes that can be
acquired with at least $7.5 million. If this requirement is not satisfied by
the specified date, an event of default will occur under the Amended Notes.
The Company will guaranty the payment of principal of, and premium, if any,
and interest on, the Amended Notes, and the guaranty will be secured by a
pledge of the common stock of its subsidiaries SFHI, SR, Hacienda Hotel,
Inc., Sahara Nevada Corp. and Santa Fe Coffee Company and by liens on certain
of its other assets.
Giving effect to the issuance of Amended 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 (December 2000) through
the issuance of PIK Notes, there would be $65.2 million principal amount of
Amended Notes outstanding at maturity, assuming no repurchase and retirement
of Amended Notes. The ratio of EBITDA less rent for real property to cash
interest expense, assuming 50% of the interest on the 13 1/2% Notes is
paid-in-kind, would have been 2.0-to-one for the twelve months ended June 30,
1999 and EBITDA less rent for real property and corporate expenses would have
been 1.7-to-one for the twelve months ended June 30, 1999. 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 Amended
Notes is expected to be less than one-to-one (assuming no offers to
repurchase Amended Notes have been made). Therefore, it is expected that PFC
would not generate sufficient cash from operations to be able to make the
cash interest payment on the fifth interest payment date (without other
available cash resources or without contributions from the Company),
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which would be an event of default under the indenture under which the
Amended Notes will be issued. The Amended Plan 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 Amended Plan submitted by PFC
will be confirmed.
PREFERRED STOCK
The terms of the Company's Exchangeable Redeemable Preferred Stock, $.01 par
value (the "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 and to 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 1999, 1998 and 1997. Dividends
in an amount equal to dividend payments for one dividend period have accrued
and remain unpaid for two years, as a result of which the preferred
stockholders elected two directors to the Company's Board of Directors at the
1999 annual meeting of shareholders in addition to the directors elected by
the common stockholders. Effective October 1, 1998 the dividend rate
increased to 11.0% from 8.0%, beginning April 1, 1999 the dividend rate
increased to 11.5% and the dividend rate will increase by 50 basis points
each semi-annual period, up to a maximum of 16%, until the Preferred Stock is
redeemed or exchanged. As of June 30, 1999, the aggregate liquidation
preference of the Preferred Stock including accrued dividends is $23.6
million or $2.66 per share.
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.
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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 and/or
replacing such IT systems and expects to complete the process by September
30, 1999. The MIS department is currently actively working with the vendors
of all applications 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 $650,000 on system upgrades and/or replacements and has
incurred approximately $132,000 as of June 30, 1999. The Company believes
that such amount,
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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.
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.
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 the bankruptcy cases of PFC and PHI,
litigation regarding Santa Fe Gaming Corporation's guarantee of
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the 13 1/2% Notes, 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.
RECENTLY ISSUED ACCOUNTING STATEMENTS
The FASB recently issued SFAS No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities, which is effective for financial
statements for all fiscal quarters of all fiscal years beginning after June
15, 2000. SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Management
has not determined what effect, if any, adoption of SFAS 133 will have on the
Company's future operations or financial condition.
The American Institute of Certified Public Accountants' Accounting Standards
Executive Committee issued Statement of Position ("SOP") 98-5 "Reporting on
the Costs of Start-up Activities" which is effective for fiscal years
beginning after December 15, 1998. This standard provides guidance on the
financial reporting for start-up costs and organization costs. This standard
requires costs of start-up activities and organization costs to be expensed
as incurred. The initial application of this statement in October 1999
requires the Company to expense certain previously capitalized items as a
cumulative effect of a change in accounting principle. Management believes
that this SOP could have a material impact on the consolidated financial
statements depending on the status of the Company's current and future
expansion projects at the time of adoption of this standard.
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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 was 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. On January 14, 1999, the
Holder and two other holders who purportedly held 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 did not believe that the three
holders of 13 1/2% Notes complied with the requirements of the Bankruptcy
Code for the commencement of the involuntary cases. On February 4, 1999
the Company and PFC filed motions to dismiss the involuntary petitions
and sought such damages as provided by the Bankruptcy Code. These
included costs and reasonable attorneys fees and, in the event the
petitions were filed in bad faith, for all damages caused by such
filings or punitive damages.
On February 23, 1999, in accordance with the Consent Solicitation, PFC
voluntarily commenced its Chapter 11 proceedings. PFC has reserved its
right to seek damages against the three non-consenting holders for
improperly commencing the involuntary case against it. On March 19,
1999, the bankruptcy court suspended the involuntary case against the
Company pursuant to Bankruptcy Code Section 305 and further ordered
that the involuntary proceedings would be dismissed upon motion by the
Company upon the Company's obtaining certain waivers of statutes of
limitations regarding alleged avoidance actions. On August 5, 1999,
the Company filed a motion for dismissal of the involuntary case based on
the Court order on March 19, 1999
The Company is the plaintiff in an action titled THE SANTA FE GAMING
CORP. V. HUDSON BAY PARTNERS, ET AL., CV-S-99-00298-JBR (LRL). This
action was instituted on March 11, 1999 in the United States District
Court for the District of Nevada. The defendants are Hudson Bay
Partners, LP, and David H. Lesser. The complaint
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includes causes of action for violation of Section 13(d) of the
Securities and Exchange Act of 1934, breach of contract, fraud,
violation of Nevada's Uniform Trade Secrets Act, and intentional
interference with prospective economic advantage. The Company
alleges that the defendants failed to comply with the requirements
of Section 13(d) in connection with their purchases of the Company's
preferred stock, and that defendants wrongfully obtained and used
confidential and proprietary information.
The Company seeks all appropriate injunctive relief in connection with
its Section 13(d) claim, specific performance and consequential and
compensatory damages in connection with its breach of contract claim,
and compensatory and punitive damages in connection with its fraud
and intentional interference with prospective economic advantage claims,
and injunctive relief and punitive damages in connection with its claim
under Nevada's Uniform Trade Secrets Act, as well as any other
appropriate relief. On April 30, 1999, the court denied the Company's
motion for preliminary injunction with respect to 13(d) claim.
On or about June 18, 1999, defendant Hudson Bay Partners, L.P. filed a
counterclaim against the Company in which it alleges that the Company is
in default on its guarantee of the 13 1/2% Notes and seeks to recover
the amounts it claims are past due on the 13 1/2% Notes. The Company
has denied the allegations made by Hudson Bay Partners, L.P. in all
material respects. On or about July 19, 1999, Hudson Bay Partners, L.P.
filed a motion for summary judgment on its counterclaim and a request to
have that judgment entered, which the Company has since opposed. No
hearing date has been set on the motion, and no trial date has been
scheduled in the action. Discovery is ongoing.
The Company is the defendant in a pending action titled GMS GROUP, LLC
V. THE SANTA FE GAMING CORP., No. 99/602231. This action initially was
instituted on or about April 9, 1999 by means of a motion for summary
judgement in lieu of complaint filed in the Supreme Court for the State
of New York, County of New York and this action was later reinstituted
on or about May 5, 1999. GMS Group alleges that the Company is in
default on its guarantee of the 13 1/2% Notes and seeks to recover the
amounts it claims are past due on the 13 1/2% Notes. The Company has
responded to GMS Group's motion by filing a motion to dismiss the action
for lack of personal jurisdiction over the Company, or, in the
alternative, to have the action transferred to a Nevada court. The
Company has also responded to GMS Group's motion by asserting that GMS
Group is not entitled to summary relief. Decision on the motions filed
by GMS Group and the Company has been postponed until on or after August
23, 1999.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
PFC has $55 million of principal and approximately $8.0 million accrued
interest due on the 13 1/2% Notes as of June 30, 1999 which is presented
as Liabilities Subject to Compromise 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 Amended Notes in
satisfaction of the 13 1/2% Notes pursuant to the terms set forth in the
Consent Solicitation, and (ii) the
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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 inter-company 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 Amended Plan will be confirmed.
Pursuant to the terms of the SLVC Notes, the nonpayment of the 13 1/2%
Notes at maturity created an event of default, and filing for relief
under Chapter 11 by PFC and PHI created events of default under
the SLVC Notes that caused the SLVC Notes to automatically become due
and payable. In June 1999, the holders of the SLVC Notes rescinded the
acceleration and agreed to defer payment of $1.3 million of interest
until maturity, but did not waive other defaults related to the
non-payment by PFC of the 13 1/2% Notes. If the holders of the SLVC
Notes accelerate the SLVC Notes and demand payment under the SLVC
Notes and the Company guarantee and the Company is unable to
refinance the SLVC Notes or sell all or a portion of its assets and
realize proceeds sufficient to satisfy the debt, it is likely that
SLVC and the Company will file for relief under Chapter 11 of the
Bankruptcy Code. The Company is exploring refinancing alternatives
for the SLVC Notes.
Pursuant to the terms of the $14 million principal amount of 9 1/2%
Notes due 2000 (the "9 1/2% Notes") which SFHI issued, certain events
related to the non-payment by PFC of the 13 1/2% Notes at maturity,
created events of default under the 9 1/2% Notes. The holders of the
9 1/2% Notes have not accelerated the 9 1/2% Notes, although no
assurance can be given that the 9 1/2% Notes will not be accelerated.
If the holders of the 9 1/2% Notes accelerate the payment of the
9 1/2% Notes, a default would occur under the 11% Notes which would
permit the holders of the 11% Notes to accelerate that indebtedness.
If the 9 1/2% Notes or the 11% Notes were to be accelerated and the
Company is unable to refinance the indebtedness or sell all or a
portion of its assets and realize sufficient proceeds to satisfy the
debt, it is likely that SFHI and the Company will 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. The Company is exploring
refinancing alternatives for the 9 1/2% Notes.
The terms of the Company's Exchangeable Redeemable Preferred Stock, $.01
par value (the "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 and to 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 1999, 1998 and 1997. Dividends in an amount equal to
dividend payments for one dividend period have accrued and remain unpaid
for two years, as a result of which the preferred stockholders elected
two directors to the Company's Board of Directors at the 1999 annual
meeting of shareholders in addition to the directors elected by the
common stockholders. Effective October 1, 1998 the dividend rate
increased to 11.0% from 8.0%, beginning April 1, 1999 the dividend rate
increased to 11.5% and the dividend rate will increase by 50 basis
points each semi-annual period, up to a maximum of 16%, until the
Preferred Stock is redeemed or exchanged. As of June 30, 1999, the
aggregate liquidation preference of the preferred stock including
accrued dividends is $23.6 million or $2.66 per share.
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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
A. Exhibits
10.87 Management Agreement by and between Santa Fe Gaming
Corporation and Santa Fe Hotel Inc. dated as of
July 1, 1999
10.88 Management Agreement by and between Pioneer Hotel
and Santa Fe Gaming Corporation dated as of
December 30, 1998.
10.89 First Amendment to Second Amended and Restated Note
Purchase Agreement by and among Santa Fe Gaming
Corporation, Sahara Las Vegas Corp, SunAmerica Life
Insurance Company and Anchor National Life Insurance
Company dated June 18, 1999.
27 Financial Data Schedules
B. Reports
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
SANTA FE GAMING CORPORATION, Registrant
By: /s/ Thomas K. Land
--------------------------------------
Thomas K. Land, Chief Financial Officer
Dated: August 16,1999
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Exhibit 10.87
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (the "Agreement"), effective as of the 1st
day of July, 1999, is entered into by and between SANTA FE GAMING
CORPORATION, a Nevada corporation ("SGC"), and SANTA FE HOTEL INC., a Nevada
corporation ("SFHI")
WHEREAS, SFHI owns and operates a casino-hotel resort situated in Las
Vegas, Nevada; and
WHEREAS, SFHI may, from time to time, engage in certain other business
operations which are related to, or an adjunct to, its casino-hotel
operations; and
WHEREAS, SGC and its management are experienced in corporate
administration and in developing, directing, managing, and supervising
casino-hotel resort operations, including services ancillary thereto; and
WHEREAS, SGC has historically provided management services to SFHI, and
SFHI has compensated SGC for those services; and
WHEREAS, SFHI desires to formalize the terms under which SGC will
continue to render management services to SFHI, as more fully described
hereinbelow; and
WHEREAS, SGC desires to continue to render management services to
SFHI, on the terms and for the consideration described hereinbelow; and
WHEREAS, SFHI will utilize in its operations certain valuable and
unique trademarks, service marks, trade names, and logos which are the
exclusive property of SGC, for which it desires to compensate SGC as
described hereinbelow;
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants and promises set
forth herein and intending to be legally bound hereby, SGC and SFHI agree as
follows:
1. MANAGEMENT SERVICES TO BE FURNISHED.
1.1 SFHI hereby engages SGC to render the following management
services (referred to collectively hereinafter as the "Management Services"):
a. Executive services, including review and evaluation of
SFHI's results of operations and development of appropriate strategies,
programs, and long-range plans designed to improve such results;
b. Financial services, including financial planning;
development of policies for preparation and supervision of budgets, review and
evaluation of budget preparation, and budget supervision; development of
standards and procedures for internal audits, and supervision and review and
evaluation of internal studies; development of policies, standards, and
procedures for accounting, and supervision and review and evaluation of all
accounting work; retention and evaluation of independent auditors; investment of
cash, securities, and other funds not presently utilized in operations;
development and implementation of capital financing plans, including retention
of investment bankers, evaluation and implementation of proposals to raise
capital through public or private offerings of securities and through banks or
other institutional lenders and development and implementation of proposals to
refinance, redeem, or otherwise reconstitute existing indebtedness;
c. Data processing services, including development of
policies, standards, and procedures governing data processing operations,
creation, and acquisition of software programs, supervision of all software
and hardware acquisitions, and review and evaluation of all data processing
systems and operations;
2
<PAGE>
d. Legal services, including retention, and evaluation of
outside legal counsel, consultation and assistance with respect to all legal
and regulatory matters, and supervision and evaluation of all legal matters;
e. Marketing services, including development and
supervision of marketing, advertising, and public relations programs;
f. Tax planning and compliance services, including federal
and state tax return preparation and review, and tax planning and
consultation as required;
g. Site selection services, including evaluation and
consultation on the selection of prospective sites for new projects and
negotiations of real property acquisitions; and
h. Administrative services, including supervision of
personnel matters, development and implementation of appropriate employee
benefit plans; evaluation and acquisition, on behalf of SFHI, of insurance
policies and establishment of standards and policies related to all insurance
and insurance-related matters; development of standards and policies related
to safety programs and supervision of such programs; and such other
administrative services as may be agreed to by the parties.
1.2 Any Management Services to be performed for SFHI hereunder may be
performed, at SGC's sole discretion, by any subsidiary of SGC.
1.3 The services to be performed pursuant to this Agreement may be
modified, increased, or decreased by an amendment to this Agreement, executed
in accordance with Section 5.1 hereof.
1.4 Except to the extent that reimbursement to SGC shall be required
pursuant to Section
3
<PAGE>
3.2 hereof, SGC shall bear the cost of acquisition and maintenance of such
capital equipment as may be necessary to perform the Management Services.
SGC shall also bear the expense of all salaries, bonuses, and other
compensation to be paid to such personnel as may be engaged to render the
Management Services. All such persons shall be deemed to be officers,
employees, agents, or contractors of SGC, and SFHI shall not be responsible
in any manner for their compensation or for withholding of federal or state
income taxes in connection with their employment or engagement. To the
extent that any such persons must be licensed or approved by the gaming
authorities in the State of Nevada in order to perform the Management
Services, SFHI shall bear the expense of obtaining such regulatory approvals,
and SGC shall cooperate fully in order to obtain all necessary regulatory
approvals.
1.5 SGC shall, to the extent feasible, perform the Management Services
at its facilities situated in the State of Nevada. Upon the request of SGC,
SFHI shall make available its officers, employees, books and records as may be
necessary for SGC to perform the Management Services. To the extent
practicable, such persons and documents shall be made available to SGC at its
facilities in the State of Nevada.
2. LICENSE OF TRADEMARKS, ETC. SGC hereby grants to SFHI a nonexclusive
license (the "License") to use each of SGC's trademarks, service marks, trade
names, and logos in the operation of SFHI's business. SGC shall have the
right to control the nature and quality of the goods and services in
connection with which said trademarks, service marks, trade names, and logos
are used. Such use by SFHI shall inure to the benefit of SGC.
3. CONSIDERATION. In consideration of SGC's furnishing the Management
Services and granting the License, SFHI shall pay to SGC a management fee
(the "Management Fee") as
4
<PAGE>
provided in this Section 3.1, and shall reimburse SGC for expenses as
provided in Section 3.2. The Management Fee shall include a fixed payment
per month of One Hundred Twenty Thousand Dollars ($120,000) commencing upon
the effective date of this Agreement (the "Base Fee"), and a variable
payment per month equal to 2% of gross revenues of SFHI for the preceding
month; ( the "Variable Fee"), provided SFHI's EBITDA (earnings before
interest, taxes, depreciation, amortization, rent and the Management Fee) for
the twelve months ending on the last day of the relevant month is in excess
of $20.0 million; provided that in no event will the aggregate amount of the
Variable Fee payable under the Agreement exceed One Million Five Hundred
Thousand Dollars ($1,500,000) for a twelve consecutive month period. The
Base Fee and Variable Fee shall be paid on a monthly basis, not later than
ten (10) days after the end of each month during the term of this Agreement.
The aggregate Variable Fee for any fiscal year shall be adjusted, based on
audit, as may be appropriate, for any underpayments or overpayments of the
Variable Fees during the relevant fiscal year. If, based on audit, it is
determined that an additional amount of Variable Fee is payable with respect
to any fiscal year, SFHI will pay to SFG the additional amount within 10 days
of the date of determination. If, based on audit, it is determined that an
overpayment of Variable Fees has been made with respect to any fiscal year,
the amount overpaid will be offset against Management Fees otherwise payable
in succeeding month(s) until the overpayment is offset in full. At the
option of SFHI, SFHI may make prepayments of the Base Fee and/or Variable Fee
to SGC, subject to subsequent adjustment. The Base Fee and the Variable Fee
shall hereinafter be collectively referred to herein as the "Management Fee."
3.2 In addition to the Management Fee, SGC shall be entitled to be
reimbursed by SFHI for all out-of-pocket expenses incurred in connection with
rendering the Management Services.
5
<PAGE>
However, such out-of-pocket expenses shall not include payments of salaries,
bonuses, or other compensation to personnel or the cost of acquisition and
maintenance of capital equipment, which expenses and costs shall be borne by
SGC in accordance with Section 1.4 hereof; provided, however, that to the
extent SGC (or any subsidiary of SGC) shall make available to SFHI its
corporate computer hardware or software, SFHI shall be obligated to
reimburse SGC for the portion of its total costs, both direct and indirect,
associated with such equipment and software which are allocable to such use
by or for the benefit of SFHI. All reimbursements pursuant to this Section
3.2 shall be made quarterly, at the same time as the Management Fee shall be
paid.
4. TERM. This Agreement shall continue in effect unless and until
terminated by either party upon not less than ninety (90) days' written notice
to the other party.
5. AMENDMENTS.
5.1. This Agreement may be amended by an instrument in writing,
approved by the Board of Directors of SGC or an appropriate committee thereof,
and SFHI or an appropriate committee thereof, and executed by the Chief
Executive Officer or Chief Financial Officer of each of the parties.
6. MISCELLANEOUS PROVISIONS.
6.1 ASSIGNMENT. This Agreement may not be assigned by either party
without the express written consent of the other party. SGC agrees that, so
long as this Agreement shall remain in effect, it shall not enter into any
merger, consolidation, or reorganization unless the entity surviving such
transaction shall agree to be bound by this Agreement.
6.2 NOTICES. Any and all notices or other communications required or
permitted by this Agreement shall be effected by personal delivery in writing of
such notice or, if by mail, five (5)
6
<PAGE>
days after such notice has been placed in the United States mail, postage
prepaid, properly addressed as follows:
To SGC at:
4949 North Rancho Drive
Las Vegas, Nevada 89130
To SFHI:
4949 North Rancho Drive
Las Vegas, Nevada 89130
6.3 GOVERNING LAW. This Agreement and its enforcement shall be
governed by the laws of the State of Nevada as the same are applied to
contracts executed or to be performed within such State.
6.4 SEVERABILITY. In case any provision contained in this Agreement
shall be held to be illegal, invalid, or unenforceable, the legality,
validity, and enforceability of all remaining provisions shall not be in any
way affected or impaired thereby.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed in their respective corporate names by an officer duly authorized,
all as of the date first above written.
SANTA FE GAMING CORPORATION,
a Nevada corporation
By: Paul W. Lowden
---------------
Its: President, CEO
SANTA FE HOTEL, INC.
a Nevada corporation
By: Thomas K. Land
---------------
Its: Senior Vice President/Chief Financial Officer
7
<PAGE>
EXHIBIT 10.88
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (the "Agreement"), effective as of the 30 day
of December, 1998, is entered into by and between SANTA FE GAMING
CORPORATION, a Nevada corporation ("SGC"), and PIONEER HOTEL, INC., a Nevada
corporation ("PHI").
WHEREAS, PHI owns and operates a casino-hotel resort situated in
Laughlin, Nevada; and
WHEREAS, PHI may, from time to time, engage in certain other business
operations which are related to, or an adjunct to, its casino-hotel
operations; and
WHEREAS, SGC and its management are experienced in corporate
administration and in developing, directing, managing, and supervising
casino-hotel resort operations, including services ancillary thereto; and
WHEREAS, PHI desires to engage SGC to render management services to
PHI, as more fully described hereinbelow; and
WHEREAS, SGC desires to render management services to PHI for the
consideration described hereinbelow; and
WHEREAS, PHI will utilize in its operations certain valuable and unique
trademarks, service marks, trade names, and logos which are the exclusive
property of SGC, for which it desires to compensate SGC as described
hereinbelow;
NOW, THEREFORE, in consideration of the mutual covenants and promises
set forth herein and intending to be legally bound hereby, SGC and PHI agree
as follows:
1. MANAGEMENT SERVICES TO BE FURNISHED.
<PAGE>
1.1 PHI hereby engages SGC to render the following management services
(referred to collectively hereinafter as the "Management Services"):
a. Executive services, including review and evaluation of
PHI's results of operations and development of appropriate strategies,
programs, and long-range plans designed to improve such results;
b. Financial services, including financial planning;
development of policies for preparation and supervision of budgets, review
and evaluation of budget preparation, and budget supervision; development of
standards and procedures for internal audits, and supervision and review and
evaluation of internal studies; development of policies, standards, and
procedures for accounting, and supervision and review and evaluation of all
accounting work; retention and evaluation of independent auditors; investment
of case, securities, and other funds not presently utilized in operations;
development and implementation of capital financing plans, including
retention of investment bankers, evaluation and implementation of proposals
to raise capital through public or private offerings of securities and
through banks or other institutional lenders and development and
implementation of proposals to refinance, redeem, or otherwise reconstitute
existing indebtedness;
c. Data processing services, including development of policies,
standards, and procedures governing data processing operations, creation, and
acquisition of software programs, supervision of all software and hardware
acquisitions, and review and evaluation of all data processing systems and
operations;
d. Legal services, including rendering legal advice,
retention, and evaluation of outside legal counsel, consultation and
assistance with respect to all legal and regulatory matters, and supervision
and evaluation of all legal matters;
2
<PAGE>
e. Marketing services, including development and
supervision of marketing, advertising, and public relations programs;
f. Tax planning and compliance services, including federal
and state tax return preparation and review, and tax planning and
consultation as required;
g. Site selection services, including evaluation and
consultation on the selection of prospective sites for new projects and
negotiations of real property acquisitions; and
h. Administrative services, including supervision of
personnel matters, development and implementation of appropriate employee
benefit plans; evaluation and acquisition, on behalf of PHI, of insurance
policies and establishment of standards and policies related to all insurance
and insurance-related matters; development of standards and policies related
to safety programs and supervision of such programs; and such other
administrative services as may be agreed to by the parties.
1.2 Any Management Services to be performed for PHI hereunder may be
performed, at SGC's sole discretion, by any subsidiary of SGC.
1.3 The services to be performed pursuant to this Agreement may be
modified, increased, or decreased by an amendment to this Agreement, executed
in accordance with Section 5.1 hereof.
1.4 Except to the extent that reimbursement to SGC shall be required
pursuant to Section 3.2 hereof, SGC shall bear the cost of acquisition and
maintenance of such capital equipment as may be necessary to perform the
Management Services. SGC shall also bear the expense of all salaries,
bonuses, and other compensation to be paid to such personnel as may be
engaged to render the Management Services. All such persons shall be deemed
to be officers, employees, agents, or contractors of SGC, and PHI shall not
be responsible in any manner for their compensation or for
3
<PAGE>
withholding of federal or state income taxes in connection with their
employment or engagement. To the extent that any such persons must be
licensed or approved by the gaming authorities in the State of Nevada, PHI
shall bear the expense of obtaining such regulatory approvals, and SGC shall
cooperate fully in order to obtain all necessary regulatory approvals.
1.5 SGC shall, to the extent feasible, perform the Management
Services at its facilities situated in the State of Nevada. Upon the request
of SGC, PHI shall make available its officers, employees, books and records
as may be necessary for SGC to perform the Management Services. To the
extent practicable, such persons and documents shall be made available to SGC
at its facilities in the State of Nevada.
2. LICENSE OF TRADEMARKS, ETC. SGC hereby grants to PHI a
nonexclusive license (the "License") to use each of SGC's trademarks, service
marks, trade names, and logos in the operation of PHI's business. SGC shall
have the right to control the nature and quality of the goods and services in
connection with which said trademarks, service marks, trade names, and logos
are used. Such use by PHI shall inure to the benefit of SGC.
3. CONSIDERATION. In consideration of SGC's furnishing the
Management Services and granting the License, PHI shall pay to SGC a
management fee (the "Management Fee") as provided in this Section 3.1, and
shall reimburse SGC for expenses as provided in Section 3.2. The Management
Fee shall include a fixed payment of Eighty Three Thousand Three Hundred
Thirty-Four Dollars ($83,334) per month for the period commencing upon the
execution of this Agreement and ending on December 31, 1999 and then Six
Three Thousand Three Hundred Thirty-Four Dollars ($63,334) per month for the
period commencing on January 1, 2000 and continuing until the expiration or
termination of this Agreement (each individually, the "Base Fee") plus a
variable fee
4
<PAGE>
which shall be equal to Sixty Thousand Dollars ($60,000) for each full
quarter following the execution of this Agreement, provided that PHI's EBITDA
(which is defined as earnings before interest, taxes, depreciation,
amortization, rent and the Base Fee) for the such relevant quarter is in
excess of the same quarter of the prior fiscal year (individually the
"Variable Fee"). The Base Fee shall be paid on a monthly basis, not later
than ten (10) days after the end of each month during the term of this
Agreement. The Variable Fee shall be paid on a quarterly basis, not later
than forty-five (45) days after the end of PHI's first three fiscal quarters,
and not later than sixty (60) days after the end of PHI's fourth fiscal
quarter. The Variable Fee for the fourth fiscal quarter of each year shall
be adjusted, as may be appropriate, for any underpayments or overpayments of
Variable Fees during the prior three fiscal quarters. At the option of PHI,
PHI may make prepayments of the Base Fee and/or Variable Fee to SGC, subject
to subsequent adjustment. PHI shall not pay the Variable Fee during the
occurrence and continuance of a Default or an Event of Default (as those
terms are defined in that certain Indenture dated as of December 1, 1988 and
entered into by and between Pioneer Finance Corp., a Nevada corporation,
Sahara Casino Partners, L.P., and Security Pacific National Bank as trustee,
as amended. The Base Fee and the Variable Fee shall hereinafter be
collectively referred to herein as the "Management Fee."
3.2 In addition to the Management Fee, SGC shall be entitled to be
reimbursed by PHI for all out-of-pocket expenses incurred in connection with
rendering the Management Services. However, such out-of-pocket expenses
shall not include payments of salaries, bonuses, or other compensation to
personnel or the cost of acquisition and maintenance of capital equipment,
which expenses and costs shall be borne by SGC in accordance with Section 1.4
hereof; provided, however, that to the extent SGC (or any subsidiary of SGC)
shall make available to PHI its corporate computer
5
<PAGE>
hardware or software, PHI shall be obligated to reimburse SGC for the portion
of its total costs, both direct and indirect, associated with such equipment
and software which are allocable to such use by or for the benefit of PHI.
All reimbursements pursuant to this Section 3.2 shall be made quarterly, at
the same time as the Management Fee shall be paid.
4. TERM. This Agreement shall continue in effect unless and until
terminated by either party upon not less than ninety (90) days' written
notice to the other party.
5. AMENDMENTS.
5.1. This Agreement may be amended by an instrument in writing,
approved by the Board of Directors of SGC and PHI and executed by the Chief
Executive Officer or Chief Financial Officer of each of the parties.
5.2. Notwithstanding anything herein to the contrary, the amount of
the Management Fee set forth in Section 3.1 hereby may not be changed unless
such amendment is approved by a majority of the independent members (if such
exist) of the Board of Directors of both SGC and PHI.
6. MISCELLANEOUS PROVISIONS.
6.1 ASSIGNMENT. This Agreement may not be assigned by either party
without the express written consent of the other party. SGC agrees that, so
long as this Agreement shall remain in effect, it shall not enter into any
merger, consolidation, or reorganization unless the entity surviving such
transaction shall agree to be bound by this Agreement.
6.2 NOTICES. Any and all notices or other communications required
or permitted by this Agreement shall be effected by personal delivery in
writing of such notice or, if by mail, five (5) days after such notice has
been placed in the United States mail, postage prepaid, properly addressed as
follows:
6
<PAGE>
To SGC at:
4949 North Rancho Drive
Las Vegas, Nevada 89130
To PHI:
4949 North Rancho Drive
Las Vegas, Nevada 89130
6.3 GOVERNING LAW. This Agreement and its enforcement shall be
governed by the laws of the State of Nevada as the same are applied to
contracts executed or to be performed within such State.
6.4 SEVERABILITY. In case any provision contained in this Agreement
shall be held to be illegal, invalid, or unenforceable, the legality,
validity, and enforceability of all remaining provisions shall not be in any
way affected or impaired thereby.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed in their respective corporate names by an officer duly authorized,
all as of the date first above written.
SANTA FE GAMING CORPORATION,
a Nevada corporation
By: Paul W. Lowden
- -------------------------------- Its: President. CEO
- --------------------------------
PIONEER HOTEL, INC.
a Nevada corporation
By: Thomas K. Land
- -------------------------------- Its: Senior Vice President,
Chief Financial Officer
- --------------------------------
7
<PAGE>
EXHIBIT 10.89
SANTA FE GAMING CORPORATION
SAHARA LAS VEGAS CORP.
FIRST AMENDMENT
TO SECOND AMENDED AND RESTATED
NOTE PURCHASE AGREEMENT
This FIRST AMENDMENT TO SECOND AMENDED AND RESTATED NOTE PURCHASE
AGREEMENT (this "AMENDMENT") is dated as of June 18, 1999 and entered into by
and among Santa Fe Gaming Corporation, a Nevada corporation ("SGC"), Sahara
Las Vegas Corp., a Nevada corporation ("COMPANY"), SunAmerica Life Insurance
Company, an Arizona life insurance company ("SUNAMERICA"), Anchor National
Life Insurance Company, an Arizona life insurance company ("Anchor"), and
SunAmerica, as Collateral Agent, and, for purposes of Sections 4 and 5
hereof, SGC and the other Credit Support Parties (as defined in Section 4
hereof) listed on the signature pages hereof, and is made with reference to
that certain Second Amended and Restated Note Purchase Agreement dated as of
November 25, 1997 (as amended, the "NOTE PURCHASE AGREEMENT"), by and among
SGC, Company, SunAmerica and Anchor. Capitalized terms used herein without
definition shall have the same meanings herein as set forth in the Note
Purchase Agreement.
RECITALS
WHEREAS, certain Events of Default under Section 7.6 and 7.7 of the
Note Purchase Agreement have occurred and are continuing with respect to
Pioneer Finance and Pioneer Hotel, Inc. ("Pioneer Hotel"), including but not
limited to the Events of Default occurring as a result of the petitions for
relief filed under Chapter 11 of the Bankruptcy Code by Pioneer Finance and
Pioneer Hotel on February 23, 1999 and April 12, 1999, respectively (such
Events of Default, the "Pioneer Bankruptcy Defaults");
WHEREAS, SGC and the Company desire to provide under the Note
Purchase Agreement that the Pioneer Bankruptcy Defaults have not resulted in
the automatic acceleration of the Notes under Section 7 of the Note Purchase
Agreement as provided herein;
WHEREAS, SGC and the Company desire to provide for the payment of
interest due on the Notes on June 20, 1999 as provided herein;
WHEREAS, SGC, the Company and the other Credit Support Parties
acknowledge that the Pioneer Bankruptcy Defaults and other Potential Events
of Default and other Events of Default have occurred and are continuing under
the Note Purchase Agreement and the other Basic Documents and that nothing in
this Amendment or otherwise shall constitute a release, forbearance or other
waiver by SunAmerica or any of its successors and assigns of any right or
remedy it may have, including, without limitation, any right or remedy
SunAmerica may
<PAGE>
have under any Basic Document or otherwise as a result of any Events of
Default or Potential Events of Default.
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto
agree as follows:
SECTION 1 AMENDMENTS TO THE NOTE PURCHASE AGREEMENT
1.1 AMENDMENT TO SECTION 1.1: DEFINITIONS AND CONSTRUCTION
A. Subsection 1.1 of the Note Purchase Agreement is hereby
amended by adding thereto the following definitions, which shall be inserted
in proper alphabetical order:
"'FIRST AMENDMENT' means that certain First Amendment to Second
Amended and Restated Note Purchase Agreement dated as of June 18, 1999 among
SGC, the Company and SunAmerica and, for purposes of Sections 4 and 5
thereof, the other Credit Support Parties."
"'FIRST AMENDMENT EFFECTIVE DATE' has the meaning assigned to that
term in the First Amendment."
1.2 MODIFICATION TO SECTION 2.4
SGC, Company and SunAmerica and Anchor, as Holders of all of the
Notes, agree that the Company may satisfy its obligation to pay interest on
the Notes due on June 20, 1999 (the "June Payment Date") by paying to
SunAmerica all cash and cash equivalents in the Collateral Account and the
Cash Collateral Account on or prior to June 29, 1999, which payment shall
not be less than $1,825,000 (such amount, the "Cash Interest Payment"), it
being understood and agreed (i) that the cash payment shall first be
applied to pay interest in the amount of $1,803,750 accrued at the rate of
9.75% per annum on the Tranche A Notes as provided under the Note Purchase
Agreement on a ratable basis and then applied to pay interest in part in
the amount of not less than $21,250 accrued and due as of June 20, 1999 at
the rate of 13.25% per annum on the Tranche B Notes as provided under the
Note Purchase Agreement on a ratable basis and (ii) that all amounts of
interest otherwise due on the Notes on the June Payment Date that are not
satisfied by the Cash Interest Payment, including all amounts accruing
under both the Tranche A Notes and the Tranche B Notes pursuant to Section
2.4C as a result of the occurrence and continuance of Events of Default
(all such amounts, the "Deferred Amount"), shall be compounded as of the
June Payment Date, shall continue to accrue interest and be compounded as
provided in the applicable Note and Note Purchase Agreement, shall continue
to be outstanding and evidenced by the applicable Note for all purposes and
shall be due and payable on December 15, 1999 or such earlier date as the
principal of the applicable Note is or becomes due and payable in
accordance with the Note Purchase Agreement and the other Basic Documents.
2
<PAGE>
SunAmerica and Anchor, as Holders of all of the Notes, hereby waive
any Potential Event of Default or Event of Default as a result of the
failure of the Company to pay the Deferred Amount in cash on the interest
payment date scheduled on June 20, 1999.
1.3 AMENDMENTS AND MODIFICATIONS TO SECTION 7
Section 7 of the Note Purchase Agreement is hereby amended by
amending and restating clause (i) of the first sentence of the first
paragraph following Section 7.14 as follows:
"(i) upon the occurrence of any Event of Default with respect to Company
described in subsection 7.6 or 7.7, each of the unpaid principal amount of
and accrued interest on the Notes (to the full extent permitted by
applicable law) and all other Obligations shall automatically become
immediately due and payable; without presentment, demand, protest or other
requirements of any kind, all of which are hereby expressly waived by SGC
and Company"
SGC, the Company and SunAmerica and Anchor, as Holders of all of
the Notes, agree that the acceleration of the Notes prior to the First
Amendment Effective Date as a result of the Pioneer Bankruptcy Defaults
pursuant to clause (i) of the first sentence of the first paragraph following
Section 7.14 is rescinded, it being understood and agreed that the Holders
have the continuing right to accelerate the Notes as a result of any Pioneer
Bankruptcy Default or any other Event of Default pursuant to the first
sentence of the first paragraph following Section 7.14 of the Note Purchase
Agreement (as amended by this First Amendment) or as otherwise provided in
any Basic Document.
1.4 CERTAIN AGREEMENT UNDER SECTION 7
In consideration of, among other things, Holders' agreement to enter
into the First Agreement, to the extent permitted by applicable law, Company
agrees that if a petition is filed by or against it commencing a case under the
Bankruptcy Code or if Company is the subject of any insolvency, bankruptcy,
receivership, readjustment of debt, dissolution, reorganization, liquidation or
similar proceeding, under state or federal law, voluntary or involuntary,
Collateral Agent on behalf of the Holders will be immediately and absolutely
entitled to, and Company hereby consents to, the following relief, singly,
alternatively or cumulatively, and Company will not object to, contest or oppose
any motion, application, complaint or other proceeding by Collateral Agent to
obtain such relief, and Company will take all actions necessary to enable
Collateral Agent to obtain such relief, including: (a) Collateral Agent shall
be entitled to the immediate termination of the automatic stay imposed by
Section 362 of the Bankruptcy Code so as to enable it to exercise all of its
rights and remedies under the Note Purchase Agreement and the other Basic
Documents or applicable law; (b) Collateral Agent shall be entitled to the
immediate dismissal of such case pursuant to Section 305(a)(1) of the Bankruptcy
Code (with attorney's fees and other costs), and Company agrees that such
dismissal will be in the interests of creditors and itself; and (c) Collateral
Agent shall be entitled to the immediate dismissal of such case under Section
1112(b) of the Bankruptcy Code for cause, and Company agrees that the filing of
such case by it shall per se be deemed to have been commenced in bad faith and
solely for the improper purpose
3
<PAGE>
of impeding once again the exercise of Collateral Agent's rights and remedies
with attendant unnecessary delay and needless cost.
SECTION 2 LIMITATION OF AMENDMENT
Without limiting the generality of the provisions of subsection 9.1
of the Credit Agreement, the amendment set forth above shall be limited
precisely by its terms, shall not have any force or effect with respect to
any other matter except as expressly provided above, and nothing in this
Amendment shall be deemed to:
(a) constitute a waiver or modification of any other term,
provision or condition of the Note Purchase Agreement or any other
instrument or agreement referred to therein; or
(b) prejudice any right or remedy that the Collateral Agent or any
Holder may now have (except to the extent such right or remedy was based
upon existing defaults that will not exist after giving effect to this
Amendment) or may have in the future under or in connection with the Note
Purchase Agreement, any Basic Documents or any other instrument or
agreement referred to therein.
Except as expressly set forth herein, the terms, provisions and
conditions of the Note Purchase Agreement and the other Basic Documents shall
remain in full force and effect and in all other respects are hereby ratified
and confirmed.
SECTION 3 CONDITIONS TO THE EFFECTIVENESS OF THIS AMENDMENT
Section 1 of this Amendment shall become effective upon the execution
of this Amendment by SGC, the Company, the other Credit Parties, SunAmerica and
Anchor and the delivery of the following to SunAmerica and Anchor (the date of
satisfaction of such conditions being referred to herein as the "FIRST AMENDMENT
EFFECTIVE DATE"):
1. Resolutions of each Credit Party's Board of Directors or the
executive committee thereof approving and authorizing the execution,
delivery, and performance of this Amendment, certified as of the First
Amendment Effective Date by its corporate secretary or an assistant
secretary as being in full force and effect without modification or
amendment; and
2. Signature and incumbency certificates of each Credit Party's
officers executing this Amendment.
SECTION 4 REPRESENTATIONS AND WARRANTIES
In order to induce SunAmerica and Anchor to enter into this Amendment
and to amend the Note Purchase Agreement in the manner provided herein, each of
SGC and the
4
<PAGE>
Company represents and warrants to SunAmerica and Anchor that the
following statements are true, correct and complete:
A. CORPORATE POWER AND AUTHORITY. Each Credit Party has
all requisite corporate power and authority to enter into this Amendment and to
carry out the transactions contemplated by, and perform its obligations under,
the Note Purchase Agreement, as amended by this Amendment (the "AMENDED
AGREEMENT").
B. AUTHORIZATION OF AGREEMENTS. The execution and
delivery of this Amendment and the performance of the Amended Agreement have
been duly authorized by all necessary corporate action on the part of each of
each Credit Party.
C. NO CONFLICT. The execution and delivery by each Credit
Party of this Amendment and the performance by each Credit Party of the Amended
Agreement and other Basic Documents do not and will not (i) violate any
provision of any law or any governmental rule or regulation applicable to any
Credit Party, the Certificate or Articles of Incorporation or Bylaws of any
Credit Party or any order, judgment or decree of any court or other agency of
government binding on any Credit Party, (ii) conflict with, result in a breach
of or constitute (with due notice or lapse of time or both) a default under any
material contractual obligation of any Credit Party, (iii) result in or require
the creation or imposition of any Lien upon any of the properties or assets of
any Credit Party (other than Liens created under any of the Basic Documents in
favor of the Collateral Agent and the Holders), or (iv) require any approval of
stockholders or any approval or consent of any Person under any material
contractual obligation of any Credit Party.
D. GOVERNMENTAL CONSENTS. The execution and delivery by
each Credit Party of this Amendment and the performance by each Credit Party of
the Amended Agreement and the other Basic Documents do not and will not require
any registration with, consent or approval of, or notice to, or other action to,
with or by, any federal, state or other governmental authority or regulatory
body.
E. BINDING OBLIGATION. This Amendment, the Amended
Agreement and the other Basic Documents have been duly executed and delivered by
each Credit Party and are the legally valid and binding obligations of each
Credit Party enforceable against each Credit Party in accordance with their
respective terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or limiting creditors'
rights generally or by equitable principles relating to enforceability.
F. ABSENCE OF DEFAULT. No event will result from the
consummation of the transactions contemplated by this Amendment that would
constitute an Event of Default or a Potential Event of Default.
SECTION 5 ACKNOWLEDGEMENT AND CONSENT
SGC is a party to the Note Purchase Agreement and certain other Basic
Documents, including the Amended Agreement and SGC Guaranty, pursuant to which,
among
5
<PAGE>
other things, SGC has guarantied the Obligations of the Company. Sahara
Resorts is a party to the Sahara Resorts Guaranty and the Sahara Resorts
Pledge Agreement, pursuant to which, among other things, Sahara Resorts has
(i) guarantied the Obligations and (ii) created Liens in favor of SunAmerica
on certain Collateral to secure the obligations of Sahara Resorts under the
Basic Documents to which Sahara Resorts is party. Casino Properties is a
party to the Casino Properties Guaranty and the Casino Properties Pledge
Agreement, pursuant to which, among other things, Casino Properties has (i)
guarantied the Obligations and (ii) created Liens in favor of SunAmerica on
certain Collateral to secure the obligations of Casino Properties under the
Basic Documents to which Casino Properties is party. Hacienda Hawaiian is
party to the Hacienda Hawaiian Guaranty and the Hacienda Hawaiian Pledge
Agreement, pursuant to which, among other things, Hacienda Hawaiian has (i)
guarantied the Obligations and (ii) created Liens in favor of SunAmerica on
certain Collateral to secure the obligations of Hacienda Hawaiian under the
Basic Documents to which Hacienda Hawaiian is party. SGC, Sahara Resorts,
Casino Properties sand Hacienda Hawaiian are collectively referred to herein
as the "CREDIT SUPPORT PARTIES", and the Guaranties, the Sahara Resorts
Pledge Agreement, the Casino Properties Pledge Agreement and Hacienda
Hawaiian Pledge Agreement are collectively referred to herein as the "CREDIT
SUPPORT DOCUMENTS".
Each Credit Support Party hereby acknowledges that it has reviewed
the terms and provisions of the Note Purchase Agreement, this Amendment and
the other Basic Documents and consents to the amendments and modifications of
the Note Purchase Agreement effected pursuant to this Amendment. Each Credit
Support Party hereby confirms that each Credit Support Document to which it
is a party or otherwise bound and all Collateral encumbered thereby will
continue to guaranty or secure, as the case may be, to the fullest extent
possible the payment and performance of all "Obligations," "Guaranteed
Obligations" and "Secured Obligations," as the case may be (in each case as
such terms are defined in the applicable Credit Support Document), including
without limitation the payment and performance of all such "Obligations,"
"Guaranteed Obligations" and "Secured Obligations," as the case may be, in
respect of the Obligations of Company now or hereafter existing under or in
respect of the Amended Agreement.
Each Credit Support Party acknowledges and agrees that any of the
Credit Support Documents to which it is a party or otherwise bound shall
continue in full force and effect and that all of its obligations thereunder
shall be valid and enforceable and shall not be impaired or limited by the
execution or effectiveness of this Amendment or any other Basic Document or
agreement. Each Credit Support Party represents and warrants that all
representations and warranties with respect to such Credit Support Parties
contained in the Amended Agreement and the Credit Support Documents to which
it is a party or otherwise bound are true, correct and complete in all
material respects on and as of the date of this Amendment to the same extent
as though made on and as of that date, except to the extent such
representations and warranties specifically relate to an earlier date, in
which case they were true, correct and complete in all material respects on
and as of such earlier date.
Each Credit Support Party (other than SGC) acknowledges and agrees
that (i) notwithstanding the conditions to effectiveness set forth in this
Amendment, such Credit
6
<PAGE>
Support Party is not required by the terms of the Note Purchase Agreement or
any other Basic Document to consent to the amendments to the Note Purchase
Agreement effected pursuant to this Amendment and (ii) nothing in the Note
Purchase Agreement, this Amendment or any other Note Purchase Document shall
be deemed to require the consent of such Credit Support Party to any future
amendments to the Note Purchase Agreement.
SECTION 6 RELEASE
Company and each Credit Support Party, its successors-in-title,
legal representatives, assignees and heirs, as applicable, and, to the extent
the same is claimed by right of, through or under Company or any such Credit
Support Party, its past, present and future employees, agents,
representatives, officers, directors, shareholders, parents, subsidiaries,
affiliates and trustees, and each of them (the "Releasing Parties") does
hereby forever remise, release and discharge the Collateral Agent and each
Holder, and the Collateral Agent's and each Holder's successors-in-title,
legal representatives and assignees, past, present and future officers,
directors, shareholders, trustees, agents, employees, parents, subsidiaries,
affiliates, consultants, experts, advisors, attorneys and other
professionals, as well as any and all persons and entities to whom the
Collateral Agent or any Holder would be liable if such persons or entities
were found to be liable to Company or any Credit Support Party or any of
them, and each of them (collectively hereinafter the "Released Parties"),
from any and all manner of action and actions, cause and causes of action,
claims, counterclaims, suits, debts, dues, sums of money, accounts,
reckonings, bonds, bills, specialties, covenants, contracts, controversies,
damages, judgments, expenses, executions, liens, claims of liens, claims of
costs, penalties, attorneys' fees, or any other compensation, recovery or
relief on account of any liability, obligation, demand or cause of action of
whatever nature relating to, arising out of or in connection with the Note
Purchase Agreement, this Amendment, the Amended Agreement and the other Basic
Documents or any Events of Default or Potential Events of Default, including
but not limited to, acts, omissions to act, actions, negotiations,
discussions and events resulting in the finalization and execution of this
Amendment or any other Basic Documents, as, among and between any Releasing
Party and any Released Party, such claims whether now accrued and whether now
known or hereafter discovered, from the beginning of time through the date
hereof, and specifically including, without any limitation, any claims of
liability asserted or which could have been asserted with respect to, arising
out of or in any manner whatsoever connected directly or indirectly with any
"lender liability-type" claim (the "Release"). Notwithstanding anything
herein to the contrary, this Release will not extend to and will not affect
any claims which may be asserted pursuant to events, circumstances, acts or
omissions after the date of this Amendment.
It is a further condition of the consideration hereof and is the
intention of the Company and each Credit Support Party in executing this
Amendment that the same shall be effective as a bar as to each and every claim,
demand and cause of action specified in this Section 6 and, in furtherance of
this intention, Company and each Credit Support Party hereby expressly waives
any and all rights or benefits conferred by the provisions of any applicable
law, including but not limited to SECTION 1542 OF THE CALIFORNIA CIVIL CODE, and
expressly consents that this Amendment shall be given full force and effect
according to each and all of its express terms and conditions, including those
relating to unknown and unsuspected
8
<PAGE>
claims, demands and causes of actions, if any, as well as those relating to
any other claims, demands and causes of actions hereinabove specified.
SECTION 1542 provides:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
Company and each Credit Support Party acknowledges that it may hereafter
discover claims or facts in addition to or different from those which Company
or any Credit Support Party now knows or believes to exist with respect to
the subject matter of this Agreement described in this Section 6 and which,
if known or suspected at the time of executing this Amendment, may have
materially affected this Release. Nevertheless, Company and each Credit
Support Party hereby waives any right, claim or cause of action that might
arise as a result of such different or additional claims or facts. Company
and each Credit Party acknowledges that it understands the significance and
consequence of such release and such specific waiver herein, including such
waivers of SECTION 1542.
The parties agree that the references to Section 1542 of the
California Civil Code herein are made in an abundance of caution and no
inference may be drawn to that section, or any other aspect of California
law, governs this Amendment, the Note Purchase Agreement or any other Basic
Document.
Nothing in this Section 6 or in this Amendment is, is intended to
be, or should be construed or constituting a release of any rights or claims
that are or may be held by the Released Parties against the Releasing Parties.
SECTION 7 MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE NOTE PURCHASE AGREEMENT
AND THE OTHER BASIC DOCUMENTS.
(i) On and after the date of this Amendment, each reference in the
Note Purchase Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Note Purchase
Agreement, and each reference in the other Basic Documents to the
"Note Purchase Agreement", "thereunder", "thereof" or words of like
import referring to the Note Purchase Agreement shall mean and be a
reference to the Amended Agreement.
(ii) Except as specifically amended by this Amendment, the Note
Purchase Agreement and the other Note Purchase Documents shall remain
in full force and effect and are hereby ratified and confirmed.
8
<PAGE>
(iii) The execution, delivery and performance of this Amendment shall
not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of
SunAmerica under, the Note Purchase Agreement or any of the other Note
Purchase Documents.
A. FEES AND EXPENSES. SGC and Company acknowledge that
all costs, fees and expenses as described in subsection 9.2 of the Note Purchase
Agreement incurred by any Holder and its counsel with respect to this Amendment
and the documents and transactions contemplated hereby shall be for the account
of Company.
B. HEADINGS. Section and subsection headings in this
Amendment are included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be given any
substantive effect.
C. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
NEVADA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
D. COUNTERPARTS; EFFECTIVENESS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall constitute but one
and the same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document. This Amendment shall become
effective upon the execution of a counterpart hereof by Company, SunAmerica,
Anchor and each of the Credit Support Parties and receipt by Company and
SunAmerica, Anchor of written or telephonic notification of such execution and
authorization of delivery thereof.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
SANTA FE GAMING CORPORATION, individually and as a
Credit Support Party
By: Thomas K. Land
Title: Senior Vice President/Chief Financial
Officer
SAHARA LAS VEGAS CORP.
By: Thomas K. Land
Title: Senior Vice President/Chief Financial
Officer
SAHARA RESORTS (for purposes of Sections 4 and 5
only), as a Credit Support Party
By: Thomas K. Land
Title: Senior Vice President/Chief Financial
Officer
CASINO PROPERTIES, INC. (for purposes of Sections
4 and 5 only), as a Credit Support Party
By: Thomas K. Land
Title: Senior Vice President/Chief Financial
Officer
HACIENDA HAWAIIAN PROPERTIES, INC. (for purposes
of Sections 4 and 5 only), as a Credit Support
Party
By: Thomas K. Land
Title: Senior Vice President/Chief Financial
Officer
10
<PAGE>
SUNAMERICA LIFE INSURANCE COMPANY, as Holder and
as Collateral Agent
By: Peter McMillan
Title: Authorized Agent
ANCHOR NATIONAL LIFE INSURANCE COMPANY
By: Peter McMillan
Title: Authorized Agent
11
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