<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 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
---------------------------------------------------------
SANTA FE GAMING CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 88-0304348
- ---------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4949 N. RANCHO DRIVE, LAS VEGAS, NEVADA 89130
- --------------------------------------------------------------------------------
(Address of principal executive office and zip code)
(702) 658-4300
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES_____ NO_____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
6,195,356 as of FEBRUARY 14, 2000
- --------------------------------------------------- --------------------
Amount Outstanding Date
<PAGE>
SANTA FE GAMING CORPORATION
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
December 31, 1999 (UNAUDITED) and
September 30,1999..........................................................2
CONSOLIDATED CONDENSED STATEMENTS OF
OPERATIONS (UNAUDITED) for the
three months ended December 31, 1999 and 1998..............................3
CONSOLIDATED CONDENSED STATEMENTS OF
STOCKHOLDERS' DEFICIENCY (UNAUDITED) for the
three months ended December 31, 1999.......................................4
CONSOLIDATED CONDENSED STATEMENTS OF CASH
FLOWS (UNAUDITED) for the three months ended
December 31, 1999 and 1998.................................................5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (UNAUDITED).....................................................6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................14
PART II. OTHER INFORMATION....................................................................26
</TABLE>
<PAGE>
SANTA FE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,885,290 $ 13,710,226
Accounts receivable, net 1,015,741 1,097,626
Inventories 1,366,139 1,185,514
Prepaid expenses & other 4,092,449 4,049,669
Assets held for sale 0 25,856,829
------------ ------------
Total current assets 29,359,619 45,899,864
Land held for development 23,109,400 23,109,400
Property and equipment, net 103,407,160 105,972,969
Other assets 2,578,726 3,042,463
------------ ------------
Total assets $158,454,905 $178,024,696
============ ============
LIABILITIES and STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 6,132,516 $ 4,815,886
Interest payable 844,874 2,613,709
Accrued and other liabilities 7,725,673 7,020,748
Debt due upon sale of assets 0 19,482,336
------------ ------------
14,703,063 33,932,679
Current portion of long-term debt, net 130,867,635 17,466,041
------------ ------------
Total current liabilities 145,570,698 51,398,720
Long-term debt - less current portion 8,007,913 122,074,897
Liabilities subject to compromise, net 54,969,159 63,810,662
Stockholders' deficiency (50,092,865) (59,259,583)
------------ ------------
Total liabilities and stockholders' deficiency $158,454,905 $178,024,696
============ ============
</TABLE>
See the accompanying Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
SANTA FE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Revenues:
Casino $ 25,597,523 $ 24,315,664
Hotel 1,379,916 1,395,846
Food and beverage 5,541,242 5,434,995
Other revenues 3,753,728 2,314,133
----------------- -----------------
Gross revenues 36,272,409 33,460,638
Less casino promotional allowances (3,463,944) (3,306,724)
----------------- -----------------
Net operating revenues 32,808,465 30,153,914
----------------- -----------------
Operating expenses:
Casino 11,981,029 11,319,525
Hotel 466,580 467,044
Food and beverage 3,734,790 3,545,683
Other operating expenses 2,968,877 1,332,858
Selling, general and administrative 3,709,307 3,107,536
Corporate expenses 731,101 890,567
Utilities and property expenses 3,661,430 2,519,328
Depreciation and amortization 3,266,700 3,254,541
Reorganization expenses 876,766 0
----------------- -----------------
Total operating expenses 31,396,580 26,437,082
----------------- -----------------
Operating income 1,411,885 3,716,832
Interest expense 6,414,343 6,522,865
Gain on sale 12,098,609 0
Other expenses 0 532,497
----------------- -----------------
Income(loss) before income tax expense
(benefit) and extraordinary item 7,096,151 (3,338,530)
Federal income tax expense (benefit) 0 0
----------------- -----------------
Income (loss) before extraordinary item 7,096,151 (3,338,530)
Extraordinary item-gain on early extinquishment
of debt net of tax provision of $0 2,070,567 -
----------------- -----------------
Net income (loss) 9,166,718 (3,338,530)
Dividends accrued on preferred shares 568,597 521,214
----------------- -----------------
Net income (loss) applicable to common shares $ 8,598,121 $ (3,859,744)
================= =================
Average common shares outstanding 6,195,356 6,195,356
================= =================
Income (loss) before extraordinary item
per common share $ 1.15 $ (0.54)
================= =================
Income (loss) per common share $ 1.39 $ (0.62)
================= =================
</TABLE>
See the accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
SANTA FE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common Preferred Paid-in Accumulated Treasury
Stock Stock Capital Deficit Stock Total
------- ----------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, October 1, 1999 $61,954 $24,117,989 $51,513,504 $(134,865,256) $(87,774) $(59,259,583)
Net income 9,166,718 9,166,718
Preferred stock
dividends accrued 568,597 (568,597) 0
------- ----------- ----------- ------------- -------- ------------
Balances, December 31, 1999 $61,954 $24,686,586 $51,513,504 $(126,267,135) $(87,774) $(50,092,865)
======= =========== =========== ============= ======== ============
</TABLE>
See the accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
SANTA FE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31, 1999 December 31, 1998
- ---------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Cash and cash eqivalents provided by
operations $ 298,008 $ 238,761
Decrease in accounts receivable, net 81,885 530,349
Increase in inventories (180,625) (103,286)
Increase in prepaid expenses & other (42,781) (18,737)
Decrease (increase) in other assets 433,381 (860,315)
Increase in accounts payable 1,316,630 258,042
Decrease in interest payable (4,242,124) (1,815,992)
Increase(decrease) in accrued and other liabilities (1,180,805) 602,756
----------------- -----------------
Net cash used in operating activities before
reorganization items (3,516,431) (1,168,422)
Reorganization expenses paid in connection with
Chapter 11 and related legal proceedings (876,766) 0
----------------- -----------------
Net cash used in operating activities (4,393,197) (1,168,422)
----------------- -----------------
Cash flows from investing activities:
Proceeds from sale of land held for development
and related agreements 37,126,512 0
Capital expenditures (555,584) (752,368)
Development costs (25,388) (407,190)
----------------- -----------------
Net cash provided by (used in) investing activities 36,545,540 (1,159,558)
----------------- -----------------
Cash flows from financing activities:
Cash paid on long-term debt (22,958,221) (5,616,718)
Debt issue cost (19,058) (99,238)
----------------- -----------------
Net cash used in financing activities (22,977,279) (5,715,956)
----------------- -----------------
Increase (decrease) in cash and cash equivalents 9,175,064 (8,043,936)
Cash and cash eqivalents,
beginning of period 13,710,226 22,650,882
----------------- -----------------
Cash and cash eqivalents,
end of period $ 22,885,290 $ 14,606,946
================= =================
</TABLE>
See the accompanying Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
SANTA FE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL INFORMATION AND BASIS OF PRESENTATION
Santa Fe Gaming Corporation, formerly known as Sahara Gaming Corporation, (the
"Company" or "Santa Fe Gaming"), a publicly traded Nevada corporation, is the
successor corporation of two affiliates, Sahara Resorts ("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") (the "Operating Companies"). SFHI owns and operates the Santa Fe Hotel
and Casino (the "Santa Fe"), located in Las Vegas, Nevada, and PHI owns and
operates the Pioneer Hotel & Gambling Hall (the "Pioneer") in Laughlin, Nevada.
The Company owns, through SFHI, real estate adjacent to the Santa Fe, and
through an indirect wholly-owned subsidiary, Sahara Las Vegas Corp. ("SLVC"), on
Las Vegas Boulevard South (the "Strip").
In November 1999, SLVC sold real property located in Henderson, Nevada. In
connection with the sale, the Company, SLVC, SFHI and members of the family
of Paul W. Lowden, majority stockholder of the Company, entered into
non-compete agreements, in which they agreed not to compete through November
15, 2014 within a five-mile radius of two of the buyer's casinos located in
the Henderson area. Additionally, the Company and SFHI entered into a Right
of First Refusal Agreement with the buyer, pursuant to which SFHI granted the
buyer a 15-year right of first refusal, subject to certain exceptions, to
purchase either capital stock or debt or other securities convertible into
capital stock of SFHI or SFHI assets in the event SFHI sells a substantial
portion of its assets.
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 $55.0 million, which is
attributable to principal and accrued interest on the 13 1/2% Notes issued by
Pioneer Finance Corp ("PFC") which matured December 1, 1998 and were not paid
(the "13 1/2% Notes") and are net of debt owned by an affiliate. PFC and PHI
filed for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in February and April 1999, respectively. In addition,
SFHI is in default under the 9 1/2% Notes issued by SFHI and guaranteed by
the Company (the "9 1/2% Notes") which mature in December 2000, due as a
result of the failure to pay the 13 1/2% Notes. The lenders of the
6
<PAGE>
9 1/2% Notes have not demanded immediate payment, although they are entitled
to do so at anytime. The Company has guaranteed substantially all the other
debt of its subsidiaries, SLVC and SFHI. In addition, at December 31, 1999,
current liabilities exceed current assets by approximately $116.2 million,
which is primarily attributable to (i) $99.4 million principal amount of 11%
First Mortgage Notes issued by SFHI and guaranteed by the Company ("11%
Notes") of which $33.1 million is owned by SLVC but not retired, (ii) $43.0
million principal amount of notes issued by SLVC and guaranteed by the
Company ("SLVC Notes") and (iii) $14.0 million principal amount of 9 1/2%
Notes, all of which mature in December 2000. Furthermore, there is a
stockholders' deficiency of $50.1 million. The Company's inability to meet
the repayment terms of the 13 1/2% Notes, its net losses and its
stockholders' deficiency raise substantial doubt about its ability to
continue as a going concern.
Management's plans regarding these matters, include seeking confirmation of a
joint plan of reorganization under the Bankruptcy Code by PFC and PHI ("Joint
Plan") and exploring refinancing alternatives for substantially all of its
debt. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
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, 1999.
The results of operations for the three month period ended December 31, 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
December 31, 1999, the results of its operations for the three month periods
ended December 31, 1999 and 1998, the changes in stockholders' deficiency for
the three month period ended December 31, 1999, and cash flows for the three
month periods ended December 31, 1999 and 1998.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
7
<PAGE>
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 Condensed
Balance Sheets and are recorded for the amounts that are expected to be
allowed under the Joint Plan. In addition, the Consolidated Condensed
Statements of Operations and Consolidated Condensed Statements of Cash Flows
for the period ended December 31, 1999 disclose expenses related to the
Chapter 11 case as reorganization expenses.
NOTE 3 - CASH AND CASH EQUIVALENTS
As of December 31, 1999, the Company held cash and cash equivalents of $22.9
million compared to $13.7 million at September 30, 1999. Substantially all of
the cash and cash equivalents were held by SFHI, PHI and SLVC, and were subject
to restrictions which restrict distribution of this cash to the Company.
At December 31, 1999, approximately $5.7 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 11% Notes of SFHI was issued. As of December 31, 1999,
SFHI did not meet the conditions precedent to making a distribution to the
Company.
At December 31, 1999, approximately $7.5 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 December 31, 1999, PHI did not meet the conditions precedent
to making a distribution to the Company. Approximately $3.9 million of PHI's
cash is reserved for payments to be made to certain holders of 13 1/2% Notes,
pursuant to an order of the Bankruptcy Court. See Note 9
At December 31, 1999, approximately $7.5 million of the Company's consolidated
cash and cash equivalents was held by SLVC and was subject to certain
restrictions and limitations on its use by the terms of a note purchase
agreement pursuant to which the SLVC Notes were issued.
8
<PAGE>
NOTE 4 - ASSETS HELD FOR SALE
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 September 30, 1999 the cost to acquire
the property is included in Assets held for sale in the Consolidated
Condensed Balance Sheet. In addition to costs to acquire the property, the
Company has recorded approximately $10.8 million in preliminary
architectural, engineering, permitting, and other development costs, which
are also included in Assets held for sale in the accompanying Consolidated
Condensed Balance Sheet at September 30, 1999.
In November 1999, SLVC sold the real property in Henderson, Nevada and the
Company and certain affiliates entered into certain agreements for $37.2
million. In connection with the sale, SLVC, the Company, SFHI and members of
the family of Paul W. Lowden, majority stockholder of the Company, entered
into non-compete agreements and the Company and SFHI granted rights of first
refusal with respect to the Santa Fe Hotel assets and securities. The total
consideration of $37.2 million was comprised of $22.5 million in cash and a
promissory note, payable on 60-days notice, in the principal amount of $14.75
million. The promissory note has been pledged to secure the SLVC Notes. Of
the cash proceeds, SLVC used $20.6 million to pay $6.1 million in accrued
interest and fees on the SLVC Notes, of which $5.0 million is included in
debt due upon sale of assets in the Consolidated Condensed Balance Sheet at
September 30, 1999 and to repay $14.5 million principal amount of the SLVC
Notes, reducing the outstanding principal amount of SLVC Notes to $43
million. Additionally, SLVC used approximately $500,000 to pay development
and construction obligations associated with the property. The Company
reported a pre-tax gain on sale of assets in the quarter ending December 31,
1999 of approximately $12.1 million. The balance of the cash, approximately
$1.4 million was retained for working capital.
In December 1999, SLVC received payment of the $14.75 million unsecured
promissory note received in connection with the disposition of the Henderson
property. See Note 7 and 9.
NOTE 5 - CURRENT PORTION OF LONG-TERM DEBT
As of December 31, 1999, the Company had approximately $130.9 million in
current maturities of long-term debt due to third parties during the
twelve-month period ending December 31, 2000, net of debt discount of $1.3
million and debt obligations owned but not retired of $33.1 million of 11%
Notes. Current maturities of long term debt is comprised primarily of $99.4
million principal amount of 11% Notes, less $33.1 million owned but not
retired, $43.0 million principal balance of SLVC Notes, $14.0 million
principal amount of 9 1/2% Notes and a $4.8 million Note (the "Sierra Note"),
all of which mature in December 2000.
9
<PAGE>
In December 1999, SLVC and the Company amended the terms of the SLVC Notes. As
amended, the SLVC Notes bear interest at 12% per annum, payable on June 20,
2000, and mature on December 14, 2000. SLVC has a mandatory $3 million
redemption obligation on June 20, 2000. Under certain conditions, SLVC is
permitted to use the proceeds of the promissory note and to borrow an additional
$7.5 million, for the purchase of 13 1/2% Notes or debt service on the SLVC
Notes. Under certain circumstances, SLVC may distribute up to $7.5 million to
the Company in the form of cash or principal amount of 13 1/2% Notes.
NOTE 6 - LONG-TERM DEBT, NET
As of December 31, 1999, the Company had $8.0 million in long-term debt, net of
current maturities of $130.9 million, comprised primarily of $7.3 million
principal amount of promissory notes secured by equipment at the Santa Fe which
mature in April 2001.
NOTE 7 - LIABILITIES SUBJECT TO COMPROMISE
In December 1999, SLVC purchased approximately $9.5 million principal amount
of 13 1/2% Notes, plus accrued and unpaid interest, for approximately $9.0
million. The 13 1/2% Notes purchased by SLVC have been pledged as collateral
to the SLVC Notes. The Company reported an approximate $2.1 million
extraordinary gain on the acquisition of the 13 1/2% Notes by SLVC in the
accompanying Consolidated Condensed Statements of Operations for the three
month period ended December 31, 1999.
At December 31, 1999, Liabilities subject to compromise is reported net of
debt owned by affiliates and not retired and consists of approximately $45.5
million of principal and approximately $9.5 million of accrued interest due
on the 13 1/2% Notes. See Note 9
NOTE 8 - SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
Supplemental statement of cash flows information for the three month periods
ended December 31, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
1999 1998
------ ------
(dollars in thousands)
<S> <C> <C>
Operating Activities:
Cash paid during the period for interest $8,960 $8,016
====== ======
Investing and Financing Activities:
Debt incurred in connection with the
acquisition of machinery and equipment $ 76 $ 109
====== ======
</TABLE>
10
<PAGE>
NOTE 9 - SUBSEQUENT EVENTS
PETITION FOR RELIEF UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE AND
LIABILITIES SUBJECT TO COMPROMISE
GUARANTOR LITIGATION
In January 2000, SLVC and PHI, acquired the approximately $6.5 million
principal amount of 13 1/2% Notes, plus accrued and unpaid interest for
approximately $8.0 million from the GMS Group. In connection with the
purchase, the GMS Group agreed to dismiss without prejudice its legal action
in the state of New York against the Company, in which GMS was seeking to
recover amounts it claims are past due on the Company's guaranty of the 13
1/2% Notes. The approximate $5.8 million principal amount of the 13 1/2%
Notes acquired by SLVC were pledged as collateral for the SLVC Notes. PHI
acquired approximately $700,000 of the 13 1/2% Notes in accordance with an
order by Bankruptcy Court approving redemption of 10.83% principal amount of
certain 13 1/2% Notes plus accrued interest.
MODIFIED JOINT PLAN
On February 7, 2000 the Debtors filed a proposed Disclosure Statement to
accompany the Fifth Amended Joint Plan of Reorganization (the "Modified Joint
Plan"). The Bankruptcy Court has scheduled a hearing on the Disclosure
Statement attached to the Modified Joint Plan for February 15, 2000 and has
tentatively set confirmation hearings for the Modified Joint Plan for March
24, 2000.
If the Modified Joint Plan is confirmed, PFC will issue a principal amount of
13 1/2% First Mortgage Notes (together with the pay-in-kind notes, as
described below, the "Amended Notes") equal to the principal amount of all
outstanding 13 1/2% Notes plus accrued and unpaid interest from June 1, 1998
through the effective date of the Modified Joint Plan. The Company and its
affiliates, other than the Debtors, have committed at least $20.0 million to
the Debtors on the earlier of the redemption of the Amended Notes or the
recission of the pledge of the SFHI stock ("SFGC Contribution"). The SFGC
Contribution can be satisfied through a contribution of a combination of 13
1/2% Notes valued at principal amount plus accrued interest and cash. 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, 2001. Until the SFGC Contribution, PFC will have
the right to pay in kind up to 50% of the interest payable on each June 1,
and December 1, 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. The Amended Notes will be redeemable at 100%
of the principal amount plus accrued and unpaid interest thereon, at any
time.
11
<PAGE>
The Company will guarantee the payment of and interest on, the Amended Notes,
and the guaranty will be secured by a pledge of the common stock of certain
subsidiaries, including SR, and by liens on certain of its other assets.
The Modified Joint Plan is subject to the approval of the Bankruptcy Court. No
assurance can be given that the modified Joint Plan will be confirmed.
OTHER
In January 2000, pursuant to an order of the Bankruptcy Court, PHI paid $1.4
million to holders of consented 13 1/2% Notes, representing 50% of the interest
due for the semi-annual period ended December 1, 1999.
12
<PAGE>
NOTE 10 - SEGMENT INFORMATION
The Company's primary operations are in the hotel/casino industry and in fiscal
years 2000 and 1999 were conducted through PHI and SFHI. "Other" below includes
financial information for the Company's other operations and eliminating
entries.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
FOR THE THREE MONTHS ENDED: (UNAUDITED)
PIONEER HOTEL (DOLLARS IN THOUSANDS)
- ------------------------------------
<S> <C> <C>
Operating revenues $ 11,243 $ 10,618
================= =================
Operating income $ 203 $ 917
================= =================
Interest expense $ 2,000 $ 1,982
================= =================
Depreciation and amortization $ 647 $ 671
================= =================
Rents $ 181 $ 179
================= =================
EBITDA (1) $ 2,159 $ 2,068
================= =================
Capital expenditures $ 447 $ 334
================= =================
Identifiable assets(2) $ 44,023 $ 42,510
================= =================
SANTA FE HOTEL
- ------------------------------------
Operating revenues $ 21,364 $ 19,400
================= =================
Operating income $ 2,707 $ 3,968
================= =================
Interest expense $ 3,681 $ 3,684
================= =================
Depreciation and amortization $ 1,938 $ 1,752
================= =================
Rents $ - $ -
================= =================
EBITDA (1) $ 5,644 $ 6,021
================= =================
Capital expenditures $ 184 $ 514
================= =================
Identifiable assets (2) $ 82,617 $86,618
================= =================
OTHER & ELIMINATIONS
- ------------------------------------
Operating revenues $ 201 $ 136
================= =================
Operating loss $ (1,498) $ (1,168)
================= =================
Interest expense $ 733 $ 857
================= =================
Depreciation and amortization $ 682 $ 832
================= =================
Rents $ - $ -
================= =================
EBITDA $ 9 $ (48)
================= =================
Capital expenditures $ - $ 14
================= =================
Identifiable assets (2) $ 31,815 $ 53,560
================= =================
TOTAL
- ------------------------------------
Operating revenues $ 32,808 $ 30,154
================= =================
Operating income $ 1,412 $ 3,717
================= =================
Interest expense $ 6,414 $ 6,523
================= =================
Depreciation and amortization $ 3,267 $ 3,255
================= =================
Rents $ 181 $ 179
================= =================
EBITDA (1) $ 7,812 $ 8,041
================= =================
Capital expenditures $ 631 $ 862
================= =================
Identifiable assets $ 158,455 $ 182,688
================= =================
</TABLE>
(1) EBITDA represents earnings before interest, taxes, depreciation and
amortization, rents, corporate expenses, reorganization expenses and other
non-recurring charges. The Company's definition of EBITDA may not be the same
as that of similarly captioned measures used by other companies.
(2) Indentifiable assets represents total assets less elimination for
intercompany items.
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SANTA FE GAMING CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
CONSOLIDATED
NET OPERATING REVENUES. Consolidated revenues for the three month period
ended December 31, 1999 were $32.8 million, representing a $2.6 million, or
8.8%, increase from $30.2 million for the same period in the prior year.
Revenues increased by $2.0 million at the Santa Fe and $600,000 at the
Pioneer.
OPERATING EXPENSE. Total operating expenses increased $5.0 million, or 18.8%,
to $31.4 million in the three months ended December 31, 1999 from $26.4 in
the three months ended December 31, 1998. Operating expenses increased by
$3.3 million, or 20.9%, at the Santa Fe, $1.3 million, or 13.8%, at the
Pioneer, including $900,000 in reorganization expenses, and were unchanged at
SLVC. The Company recorded a $1.2 million charge in utilities and property
expenses and other expenses to reserve the carrying value of timeshare assets.
OPERATING INCOME. Consolidated operating income for the three month period
ended December 31, 1999 was $1.4 million, representing a $2.3 million, or
62.0%, decrease from $3.7 million for the same period in the prior year.
Operating income decreased by $700,000 at the Pioneer and $1.3 million at the
Santa Fe.
OTHER EXPENSE. Consolidated interest expense for the three month period ended
December 31, 1999 was $6.4 million, representing a $100,000, or 1.7%,
decrease compared to $6.5 million for the same period in the prior year.
GAIN ON SALE OF ASSETS AND RELATED AGREEMENTS. The Company recorded a $12.1
million gain on the sale of real property in Henderson, Nevada and related
agreements.
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. Consolidated income before income
tax and extraordinary item for the three month period ended December 31, 1999
was $7.1 million, representing a $10.4 million, or 312.6%, improvement
compared to a $3.3 million loss in the same period in the prior year,
principally due to the gain on the sale of real property and related
agreements.
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EXTRAORDINARY ITEM. During the quarter ended December 31, 1999, SLVC
purchased $9.5 million principal amount of 13 1/2% Notes, plus accrued and
unpaid interest for approximately $9.0 million, resulting in a $2.1 million
gain on the extinguishment of debt.
The Company did not record an income tax provision in the current quarter.
Accounting Principles Board Opinion 28 states that tax expense for an
interim period be measured using an estimated annual effective rate for the
annual period. The Company's annualized effective tax rate is 0%. The Company
did not record an income tax benefit in 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 12% in
the current period compared to an 11% dividend rate in the prior year.
Consolidated net income applicable to common shares was $8.6 million or $1.39
per common share compared to a $3.9 million net loss, or $0.62 loss, per
common share in the prior year period.
SANTA FE
NET OPERATING REVENUES. Revenues at the Santa Fe increased $2.0 million, or
10.1%, in the three months ended December 31, 1999 to $21.4 million as
compared to $19.4 million in the same period in the prior year.
Casino revenues increased $900,000, or 6.2%, to $16.6 million from $15.7
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 $800,000,
or 6.2%, in slot and video poker revenues to $14.4 million in the 1999
quarter from $13.6 million in the 1998 quarter. Other gaming revenues,
including table game revenues, increased $100,000, or 6.7%, primarily due to
increased sports book revenue. Casino promotional allowances increased
$100,000, or 6.4%, to $1.8 million in the 1999 quarter from $1.7 million in
the 1998 quarter due to the increase in customer volume.
Hotel revenues decreased $100,000, or 4.6%, to $800,000 for the three months
ended December 31, 1999 compared to $900,000 for the three months ended
December 31, 1998, due to a decrease in occupancy rate to 80.6% from 88.6%.
Management believes that the decrease in occupancy is attributable to the
opening of non-gaming hotels near the Santa Fe. Food and beverage revenues
increased $200,000, or 4.7%, to $3.5 million in the three months ended
December 31, 1999 compared to $3.3 million in the three months ended December
31, 1998 due to an increase in customer volume. Other revenues increased
$900,000, or 78.3% to $2.2 million in the three months ended December 31,
1999 from $1.3 million in the three months ended December 31, 1998, primarily
due to the opening in February 1999 of an additional retail outlet.
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OPERATING EXPENSE. Operating expenses increased $3.3 million, or 20.9%, to
$18.7 million in the quarter ended December 31, 1999 from $15.4 million in
the quarter ended December 31, 1998.
Casino expenses increased $400,000, or 6.7%, to $7.3 million in the three
months ended December 31, 1999 from $6.9 million in the three months ended
December 31, 1998, related to the increase in casino revenues. Casino
expenses as a percentage of casino revenues increased to 44.1% in the three
months ended December 31, 1999 from 43.9% in the three months ended December
31, 1998. Hotel expenses remained unchanged at $300,000 for the three month
periods ended December 31, 1999 and 1998 despite the decrease in occupancy
rate due to increased costs incurred to attract hotel customers. Food and
beverage expenses increased $200,000, or 10.9%, to $2.6 million in the three
months ended December 31, 1999 from $2.4 million in the three months ended
December 31, 1998. Food and beverage expenses as a percentage of food and
beverage revenues increased to 75.6% in the three months ended December 31,
1999 from 71.4% in the three months ended December 31, 1998, due to an
increase in labor cost for the 1999 quarter compared to the 1998 quarter,
partially offset by a decrease in the cost of beverage sales. Other expenses
increased $1.1 million, or 190.5%, to $1.6 million for the three months ended
December 31, 1999 compared to $500,000 for the three months ended December
31, 1998, primarily due to the costs associated with the additional retail
outlet which opened in February 1999.
Selling, general and administrative expenses increased $1.3 million, or
57.0%, to $3.4 million in the three months ended December 31, 1999 from $2.1
million in the three months ended December 31, 1998, primarily due to
increased labor costs, professional services and management fees. Selling,
general and administrative expenses as a percentage of revenues increased to
15.7% in the three months ended December 31, 1999 from 11.0% in the three
months ended December 31, 1998. Utilities and property expenses were
substantially unchanged at $1.5 million in the three months ended December
31, 1999 and 1998. Utilities and property expenses as a percentage of
revenues decreased to 7.1% in the three months ended December 31, 1999 from
7.5% in the three months ended December 31, 1998. Depreciation and
amortization expenses increased $200,000, or 10.6%, to $1.9 million in the
three months ended December 31, 1999 from $1.7 million in the three months
ended December 31, 1998.
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
net loss of $1.0 million for the quarter ended December 31, 1999, compared to
net income of $300,000 in the quarter ended December 31, 1998.
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PIONEER
NET OPERATING REVENUES. Revenues at the Pioneer increased $600,000, or 5.9%,
to $11.2 million in the December 1999 quarter as compared to $10.6 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 $300,000 or 3.5%, to $8.9 million from $8.6 million
when compared to the same quarter of 1998. The increase in casino revenues
was due to an increase of $400,000, or 5.0%, in slot and video poker revenues
to $7.9 million in the 1999 period from $7.5 million in the 1998 period.
Other gaming revenues, including table games, decreased $100,000, or 6.6%,
due to decreased play in keno. Casino promotional allowances remained
unchanged at $1.6 million in the 1999 and the 1998 quarter.
Hotel revenues remained unchanged at $500,000 for the three months ended
December 31, 1999 compared to the three months ended December 31, 1998, as a
rise in occupancy rate to 65.8% from 61.7% was offset by a 3.1% decrease in
average daily room rate. Food and beverage revenues decreased $100,000, or
2.4%, to $2.0 million in the three months ended December 31, 1999 from $2.1
million in the three months ended December 31, 1998 primarily due to a
decrease in the amount of complimentary food and beverage provided to
customers. Other revenues increased $400,000, or 42.5%, to $1.3 million in
the three months ended December 31, 1999 compared to $900,000 in the three
months ended December 31, 1998 due to increased sales in retail outlets.
OPERATING EXPENSE. Operating expense increased $1.3 million, or 13.8%, to
$11.0 million in the quarter ended December 31, 1999 from $9.7 million in the
quarter ended December 31, 1998. Excluding $900,000 of reorganization
expenses in the 1999 quarter compared to none in the 1998 quarter, operating
expense increased $500,000, or 4.8%. Casino expenses increased $200,000, or
4.5% to $4.6 million for the three months ended December 31, 1999 from $4.4
million in the quarter ended December 31, 1998 primarily due to increased
promotional expenses. Casino expenses as a percentage of casino revenues
increased to 51.9% in the three months ended December 31, 1999 from 51.4% in
the three months ended December 31, 1998. Hotel expenses remained unchanged
at $200,000 for the three months ended December 31, 1999 compared to the
three months ended December 31, 1998. Food and beverage expenses decreased
$100,000, or 6.1%, to $1.1 million in the three months ended December 31,
1999 from $1.2 million in the quarter ended December 31, 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 53.2% in the three months ended December 31, 1999 from 55.3% in the three
months ended December 31, 1998. Other expenses increased $400,000, or 53.1%,
to $1.2 million for the three months ended December 31, 1999 compared to
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$800,000 for the three months ended December 31, 1998 due to the increase in
retail sales. Other expenses as a percentage of other revenues increased to
91.1% in the 1999 quarter from 84.8% in the 1998 quarter.
Selling, general and administrative expenses decreased $100,000, or 8.3% to
$1.4 million in the three months ended December 31, 1999 compared to $1.5
million in the three months ended December 31, 1998, primarily due to
decreased management fees pursuant to the management agreement between PHI
and the Company. Selling, general and administrative expenses as a percentage
of revenues decreased to 12.2% in the three months ended December 31, 1999
from 14.1% in the three months ended December 31, 1998. Utilities and
property expenses remained unchanged at $1.0 million in the three months
ended December 31, 1999 and December 31, 1998. Depreciation and amortization
expenses remained unchanged at $700,000 in the three months ended December
31, 1999 and three months ended December 31, 1998. During the quarter ended
December 31, 1999, PHI has incurred approximately $900,000 in reorganization
expenses related to the Pioneer bankruptcy proceedings.
OTHER EXPENSE. Interest expense remained unchanged at $2.0 million in the
1999 quarter from the 1998 quarter. During the quarter ended December 31,
1998, PHI incurred costs and expenses in connection with restructuring the
13 1/2% Notes resulting in a $500,000 charge to earnings.
NET LOSS. As a result of the factors discussed above, net loss increased
$200,000, or 20.1%, to $1.8 million in the quarter ended December 31, 1999
from $1.6 million in the quarter ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES; TRENDS AND FACTORS RELEVANT TO FUTURE
OPERATIONS
LIQUIDITY. As of December 31, 1999, the Company held cash and cash
equivalents of $22.9 million compared to $13.7 million at September 30, 1999.
Earnings before interest, taxes, depreciation and amortization, rents,
corporate expenses, reorganization expenses and other non-recurring charges
("EBITDA") decreased $200,000, or 2.9%, to $7.8 million in the three months
ended December 31, 1999 from $8.0 million in the three months ended December
31, 1998. The Company will incur less net interest expense in future periods
as a result of reductions in the outstanding principal amount of SLVC Notes
by $14.5 million and SLVC's purchase of $9.5 million of 13 1/2% Notes.
EBITDA should not be construed as a substitute for operating income or a
better indicator of liquidity than cash flow from operating, investing and
financing activities, which are determined in accordance with generally
accepted accounting principles ("GAAP"), and is included herein to provide
additional information with respect to the ability of the Company to meet its
future debt
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service, capital expenditure and working capital requirements. Although
EBITDA is not necessarily a measure of the Company's ability to fund its cash
needs, management believes that EBITDA is a useful tool for measuring the
ability of the Company to service its debt. The Company's definition of
EBITDA is not the same as that of similarly captioned measures used by
other companies.
Management believes that, based on operations for the three months ended
December 31, 1999, the Company will have sufficient resources from operations
and the real property owned by SLVC on Las Vegas Boulevard South to meet its
operating requirements, excluding the 13 1/2% Notes, which are the subject of
the PFC and PHI Bankruptcy proceedings, and current maturities of long-term
debt, through the twelve month period ending December 31, 2000, although no
assurance can be given to that effect.
At December 31, 1999, the Company had approximately $130.9 million in current
maturities of long-term debt, net of debt discount of $1.3 million and debt
obligations owned but not retired of $33.1 million of 11% Notes excluding the
13 1/2% Notes. Current maturities of long term debt, net is comprised
primarily of $99.4 million principal amount of 11% Notes, less $33.1 million
owned but not retired, $43.0 million principal balance of SLVC Notes, $14.0
million principal amount of 9 1/2% Notes and a $4.8 million Note (the "Sierra
Note"), all of which mature in December 2000. The Company had $8.0 million in
long-term debt, net of current maturities as of December 31, 1999.
Although management has in the past and is currently exploring refinancing or
debt modification alternatives, as well as a possible disposition of the Las
Vegas Boulevard South property, in order to satisfy the maturities of debt
obligations in 2000, no assurance can be given that the Company will be able
to refinance or modify some or all of its indebtedness or dispose of, or
obtain financing with respect to the Las Vegas Boulevard South property. Any
such refinancing or modification would be subject to the Company's future
operations and the prevailing market conditions at the time of such proposed
transaction and may require the approval of the Nevada Gaming Authorities for
such financings or asset sales. If the Company is ultimately unable to
refinance or modify any such debt prior to maturity, it is likely the Company
would file for relief under Chapter 11 of the Bankruptcy Code.
Debt agreements restrict the distribution of cash from certain of the
Company's subsidiaries to the Company. Cash flow from SFHI and PHI is not
currently, and is not expected in the foreseeable future to be, available for
distribution to the Company. The SLVC Notes permit up to $7.5 million to be
distributed to the Company for the limited purpose of acquiring 13 1/2% Notes
for retirement. In addition, debt agreements limit additional indebtedness of
such subsidiaries.
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Therefore, the Company and its subsidiaries other than SLVC, PHI and SFHI
(collectively "Corporate") must rely on existing cash and available
resources, or cause subsidiaries to dispose of or refinance assets, to
provide liquidity to fund Corporate cash requirements.
CASH FLOW FROM OPERATING ACTIVITIES. The Company's cash used in operations
was $4.4 million for the three months ended December 31, 1999 as compared to
$1.2 million for the prior year period. The increase in cash used in
operations was primarily due to the payment of accrued interest and fees on
the SLVC Notes, PFC and PHI reorganization expenses and legal expenses.
CASH FLOW FROM INVESTING ACTIVITIES. Cash provided by investing activities
was $36.6 million during the three months ended December 1999, compared to
cash used in investing activities of $1.2 million during the three months
ended December 1998. In November 1999, the Company sold real property in
Henderson, Nevada and entered into related agreements for total consideration
of $37.2 million. In the fiscal 1999 three-month period the Company incurred
$800,000 of capital expenditures, comprised primarily of improvements at the
Santa Fe and the Pioneer.
CASH FLOW FROM FINANCING ACTIVITIES. Cash used in financing activities was
$23.0 million in the 1999 three month period compared to $5.7 million during
the same period in 1998. In the first quarter of fiscal 2000, the Company
used proceeds from the sale of the Henderson property and related agreements
to reduce the outstanding principal amount of SLVC Notes by $14.5 million and
purchase $9.5 million of 13 1/2% Notes. Cash used in financing activities in
the 1999 fiscal period represents primarily a principal payment to repurchase
and retire $5.0 million principal amount of the 13 1/2% Notes 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.
SFHI - At December 31, 1999, approximately $9.5 million of the Company's
current assets, including approximately $5.7 million of cash and cash
equivalents was held by SFHI.
Results of operations at the Santa Fe for the quarter ended December 31, 1999
generated EBITDA, as defined, of $5.6 million, compared to $6.0 million of
EBITDA in 1998. SFHI's principal uses of cash from operations are interest
payments on indebtedness, capital expenditures to maintain the facility, and
charges for management services from Corporate. In the fiscal 2000 period,
the Santa Fe reported approximately $800,000 in charges for management
services provided by Corporate compared to $300,000 in the fiscal 1999
period. In July 1999, Santa Fe and the Company formalized the terms under
which the Company provides management services to Santa Fe by entering into a
management agreement which provides for an annual base fee and an incentive
fee, based on specified levels of operating results not to exceed $2.9
million annually. Interest expense in fiscal 2000 is expected to be
approximately the same as expended in fiscal 1999. Capital expenditures to
maintain the facility in fiscal 2000 are expected to be approximately the
same as fiscal 1999.
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Management believes that, based on operations for the three month period
ended December 31, 1999, SFHI will have sufficient cash resources to meet its
operating requirements (excluding current maturity of long-term debt) through
the twelve month period ending December 31, 2000, although no assurance can
be given to that effect. SFHI's 11% Notes and 9 1/2% Notes mature in December
2000. Additionally, the 9 1/2% Notes are in default, and the holders may
accelerate the debt at any time. SFHI is exploring alternatives for
refinancing or modifying the 9 1/2% Notes and 11% Notes. The Company has no
arrangements for any refinancings or modifications.
SLVC - At December 31, 1999, approximately $7.5 million of the Company's cash
and cash equivalents was held by SLVC. In January 2000, SLVC purchased
approximately $5.7 million principal amount of 13 1/2% Notes plus accrued
interest for approximately $7.1 million. The 13 1/2% Notes acquired were
pledged as collateral to secure the SLVC Notes.
SLVC's primary source of cash is interest income on $33.1 million principal
amount of 11% Notes and $9.5 million principal amount of 13 1/2% Notes.
SLVC's principal use of cash is to satisfy principal and interest obligations
on the SLVC Notes including a mandatory prepayment of $3.0 million on June
20, 2000. Under certain conditions, SLVC is permitted to borrow an additional
$7.5 million, the proceeds of which may be used by SLVC to purchase 13 1/2%
Notes, pay principal or interest on the SLVC Notes or to make a distribution
to the company for the purpose of acquiring 13 1/2% notes. SLVC owns a
27-acre parcel of real estate on Las Vegas Boulevard South, which is subject
to a lease with a water theme park operator. SLVC generates minimal cash from
the lease agreement after payment of property costs.
Management believes that SLVC has available resources, consisting primarily
of interest payments on the 11% Notes and 13 1/2% Notes, as well as the real
property on Las Vegas Boulevard South to meet the principal and interest
obligations on the SLVC Notes and other operating requirements through
December 31, 2000, although no assurance can be given to that effect. The
SLVC Notes mature in December 2000 and there is a mandatory $3.0 million
prepayment requirement on June 20, 2000. SLVC is exploring alternatives for
repayment of the SLVC Notes including but not limited to the sale of the
27-acre parcel on Las Vegas Boulevard South and refinancing or modification
of the SLVC Notes. The Company has no arrangements for any such refinancings,
modifications, dispositions or other financings, and no assurance can be
given that SLVC will successfully make such arrangements.
PHI - At December 31, 1999 approximately $9.3 million of the Company's
current assets, including approximately $7.5 million of cash and cash
equivalents, was held by PHI. Of this amount, approximately $3.9 million is
reserved for payments to holders of 13 1/2% Notes pursuant to orders by the
Bankruptcy Court. In January 2000, PHI used $1.4 million to pay interest, in
part, on 13 1/2%
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Notes due December 1, 1999 and $800,000 to repurchase 10.83% of principal and
interest of certain non-consented 13 1/2% Notes together with accrued
interest.
Results of operations at the Pioneer for the quarter ended December 31, 1999
generated EBITDA, as defined, of $2.2 million, compared to $2.1 million of
EBITDA in 1998. EBITDA margin decreased to 19.2% the first quarter of fiscal
2000 from 19.5% in the first quarter of fiscal 1999. PHI's principal uses of
cash are for operating lease payments, corporate expenses, interest payments
on indebtedness, reorganization expenses and capital expenditures to maintain
the facility. Pioneer incurred charges for management services from Corporate
of $250,000 and $300,000 in the three months ended December 31, 1999 and
1998, respectively. In December 1998, the Pioneer and the Company entered
into a management agreement which provides for a base and an incentive fee
not to exceed $1.0 million per year based on the Pioneer achieving specified
levels of operating results. Pioneer reported rent expense of approximately
$200,000 in fiscal 1999 and 1998. Capital expenditures to maintain the
facility in fiscal 2000 are expected to be approximately the same as in
fiscal 1999.
Although results of operations of the Pioneer have not been noticeably
adversely impacted since PFC's February 1999 filing for relief under Chapter
11 of the Bankruptcy Code, no assurance can be given that the filing for
relief under Chapter 11 by PFC, and by PHI, and potentially by the Company
and other subsidiaries of the Company, will not have a material adverse
affect on the operations and financial condition of the Pioneer.
Management believes that, based on operations for the three months ended
December 31, 1999, PHI will have sufficient cash and available resources to
meet its operating requirements (excluding principal and accrued interest on
the 13 1/2% Notes) through the twelve months ending December 31, 2000, although
no assurance can be given to that effect.
PFC and PHI have filed for relief under Chapter 11 of the United States
Bankruptcy Code. See "Legal Proceedings" for information regarding the
bankruptcy cases.
CORPORATE - Approximately $3.0 million of the Company's current assets at
December 31, 1999, including approximately $2.2 million of cash and cash
equivalents, was held by Corporate.
Corporate consists primarily of non-operating entities which do not generate
cash flow from operations. Corporate's principal uses of cash are for debt
service, administrative and professional expenses and costs associated with
the evaluation and development of proposed projects. Additional potential
uses of cash by Corporate include obligations that may arise as a result of
the Company's guarantee of subsidiary debt, and the guarantee of the tenant
loan if
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the Company terminates a third party lease on the parcel on Las Vegas
Boulevard South owned by SLVC. The guaranteed debt of the Company's
subsidiaries, PHI, SLVC and SFHI, include the 13 1/2% Notes which are the
subject of PFC's and PHI's bankruptcy proceedings and the 9 1/2% Notes, which
are in default, as well as the SFHI 11% Notes and the SLVC Notes which mature
in December 2000.
Management believes that Corporate has sufficient working capital and
available resources to meet its operating requirements through the twelve
month period ending December 31, 2000, although no assurance can be given to
that effect. The Sierra Note, with an outstanding principal balance of $4.8
million at December 31, 1999, matures in December 2000, and the Company has
guaranteed $142.9 million of subsidiary debt (the 11% Notes, the 9 1/2% Notes
and the SLVC Notes) that mature in December 2000. Although management is
exploring refinancing or debt modification alternatives, as well as possible
disposition of the Las Vegas Boulevard South property, in order to satisfy
the maturities of debt obligations in 2000, no assurance can be given that
the Company will be able to refinance or modify some or all of its
indebtedness, or dispose of the Las Vegas Boulevard South property. If it is
unable to do so, it is likely that the Company will file for relief under
Chapter 11 of the Bankruptcy Code.
PREFERRED STOCK
The Company's preferred stock provides 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 to subordinated notes commencing in September 1998 and to declare and
pay dividends or make distributions with respect to the Company's capital
stock, which currently prohibit the payment of cash dividends on the
preferred stock. The Company has accrued the semi-annual preferred stock
dividends due in fiscal years 1999, 1998 and 1997. Because dividends in an
amount equal to dividend payments for one dividend period have accrued and
remain unpaid for two years, the preferred stockholders, voting as a separate
class, elected two directors at the annual meeting held in May 1999. In
October 1999, the dividend rate increased to 12.0% and will increase by 50
basis points each semi-annual period thereafter, up to a maximum of 16%. At
December 31, 1999, the aggregated liquidation preference of the Preferred
Stock was $24,686,586, or $2.79 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
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fiscal year 1998 in the amount of $800,000 ("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 $350,000 remaining payment to Mr. Lowden,
payable in connection with the 1998 Fiscal Year Bonus, against the remaining
outstanding obligation of LICO to the Company. In December 1999, at the
request of Mr. Lowden, the Company's payment of $175,000 of bonus and fee
obligations satisfied through the offset of the LICO loan was rescinded, and
LICO's obligation to pay to the Company $175,000, together with interest
thereon from January 1998, was reinstated. The Company satisfied its
obligation to pay the remaining $175,000 obligation to Mr. Lowden by the
offset of the outstanding $175,000 obligation of LICO to the Company in
January 2000.
In January 2000, the Company paid $50,000 to each of Messers. Paul W. Lowden,
Christopher W. Lowden and David G. Lowden in exchange for each of them
individually having entered into a fifteen year non-compete agreement in
November 1999 in connection with the sale of the real property in Henderson,
Nevada and related agreements.
COMPUTERIZED OPERATIONS AND THE YEAR 2000
The Company conducted a review of its computer systems to identify areas that
could be affected by year 2000 issues and completed updating many of its
existing systems to improve overall business performance and to accommodate
business for the year 2000.
The Company believes that there has been no material impact from the year
2000 issues on its operations or its consolidated financial position, results
of operations or cash flows. However, certain ongoing risks may exist
relative to the non-compliance of third parties with operational significance
to the Company, such as key suppliers to its operations. Accordingly, there
can be no assurance that the Company will not be adversely impacted in the
future by year 2000 issues.
As of December 31, 1999, the Company has incurred approximately $600,000 of
costs directly associated with the year 2000 issues.
EFFECTS OF INFLATION
The Company has been generally successful in recovering costs associated with
inflation through price adjustments in its hotels. 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 bankruptcy, competition, leverage and debt
service, financing and refinancing efforts, general economic
24
<PAGE>
conditions, changes in gaming laws or regulations (including the legalization
of gaming in various jurisdictions) and risks related to development and
construction activities.
25
<PAGE>
SANTA FE GAMING CORPORATION
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
PETITION FOR RELIEF UNDER CHAPTER 11
As previously disclosed, on February 23, 1999, 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 PFC's 1998 Consent Solicitation, described
below. Contemporaneously with the filing of PHI's voluntary petition,
PFC and PHI (collectively, the "Debtors") filed with the Bankruptcy
Court a proposed Disclosure Statement and Joint Plan of Reorganization
as amended (the "Joint Plan"). The Joint Plan was filed in accordance
with consents obtained from holders of approximately 75% of the
outstanding principal amount of 13 1/2% Notes, pursuant to which PFC
agreed to file for relief under Chapter 11 and the consenting holders
agreed to vote to accept a plan of reorganization substantially similar
to the treatment proposed in PFC's Consent Solicitation Statement, dated
October 23, 1998, as amended, ("Consent Solicitation"). On August 30,
1999 the Bankruptcy Court approved the Disclosure Statement to accompany
the Joint Plan. On October 25, 1999, the Debtors' proposed modifications
to the Joint Plan to satisfy balloting thresholds without resoliciting
the Joint Plan. The Bankruptcy Court ruled against the Debtors proposed
modifications to the Joint Plan and held that the Debtors proposed
modifications would require re-solicitation. The Court terminated the
Debtors' exclusivity, expressly subject to reinstatement, thereby
granting other parties in interest the right to file a plan to
reorganize the Debtors. On November 8, 1999 the Bankruptcy Court refused
to permit a Disclosure Statement to accompany the plan of reorganization
filed on behalf of Hudson Bay Partners LLC ("HBP"). On December 14,
1999, the Bankruptcy Court refused to approve a Joint Disclosure
Statement to accompany the plan of reorganization filed by HBP and High
River Partnership ("High River"). In addition, the Bankruptcy Court
reinstated exclusivity for the Debtors. Debtors filed their Fifth Amended
Plan of Reorganization on February 7, 2000 and the Bankruptcy Court has
scheduled a hearing on the Disclosure Statement for February 15, 2000
(See below "Modified Joint Plan" for more detailed discussion). No
assurance can be given that the Modified Joint 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, and (iii) assume the land lease
for approximately 6 1/2 acres on which a portion of the Pioneer is
located.
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PFC 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 the Consent Solicitation. The principal and accrued interest due on
the 13 1/2% Notes is $55.0 million as of December 31, 1999 and are
reflected as Liabilities subject to compromise, net of $10.9 million
principal and accrued interest owned by an affiliate reported in the
Consolidated Condensed Balance Sheet, included elsewhere in this
Quarterly Report on Form 10Q.
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, the Company provided
collateral for its previously unsecured guarantee of the 13 1/2% Notes,
through the pledge of stock of certain of its subsidiaries including
SFHI and SR, the majority owner of the stock of SLVC, Hacienda Hotel
Inc., Sahara Nevada Corp. and Santa Fe Coffee Company and by the grant
of liens on certain of its other assets. In addition, consenting holders
agreed to be bound by restrictions on the transfer or sale of 13 1/2%
Notes. 13 1/2% Notes subject to consents may be transferred only if the
transferee agrees to be bound by the terms of the Consent Solicitation.
Pursuant to the terms of the Consent Solicitation, because certain
events will not occur by December 31, 1999, holders of at least 75% of
the 13 1/2% Notes subject to consents may terminate the consents.
Pursuant to the Consent Solicitation, in December 1998 PFC purchased on
a pro-rata basis 10.83% principal amount from all consenting holders,
representing an aggregate of $5.0 million principal amount of 13 1/2%
Notes, plus accrued interest. In July 1999 PFC paid in cash $1.4 million
for 50% of the interest payment due June 1, 1999 to Consenting Holders.
In December 1999, the Court approved payment in cash $1.4 million for
50% of the interest due December 1, 1999 to Consenting Holders. In a
separate motion, the court approved payment in cash of approximately
$800,000 representing 50% of the interest due on June 1, 1999 and
December 1, 1999 payable to non-consenting holders and approximately
$1.4 million representing the 10.83% pro-rata principal redemption plus
accrued interest, to non-consenting holders, which pro-rata amount was
27
<PAGE>
previously paid to consenting holders in December 1998 for their
pro-rata portion upon confirmation of the plan.
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 restriction
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.
On November 10, 1999, Hudson Bay Partners LP, ("HBP"), commenced an
adversary proceeding against the Debtors and the Company seeking
declaratory and injunctive relief contesting, among other matters, the
validity of the consents obtained in the Consent Solicitation. On
December 13, 1999, the Bankruptcy Court did not enter a final judgment
regarding the enforceability of the consents obtained pre-petition in
the Consent Solicitation, but preliminarily (1) determined the consents
to be invalid and (2) enjoined the Debtors and the Company from stating
that they will seek to enforce the Consents. If the consents are
ultimately held to be unenforceable, the Company intends to seek
rescission of the grants of security interests securing its guaranty of
the 13 1/2% Notes. In this respect, the Company has filed a motion with
the Bankruptcy Court requesting a modification of the preliminary
injunction entered by the Bankruptcy Court to allow the Company and
certain subsidiary corporations (Hacienda Hotel Inc., Sahara Nevada
Corp., and Santa Fe Coffee Company) to file a counterclaim against HBP
and the trustee of the indenture governing the 13 1/2% Notes for
rescission of the security interests granted by those companies in
connection with the Consents in the event that the Bankruptcy Court
concludes that the Consents are unenforceable. The Bankruptcy Court is
scheduled to decide whether to modify the preliminary injunction to
allow the counterclaim at a hearing on March 2, 2000. In addition, the
Bankruptcy Court has scheduled a status conference in the HBP adversary
proceeding for February 18, 2000, at which the Bankruptcy Court is
likely to set the matter for trial and establish deadlines for discovery
which may not occur prior to balloting on the Debtors Joint Plan.
MODIFIED JOINT PLAN
On February 7, 2000, the Debtors filed a proposed Disclosure Statement to
accompany the Fifth Amended Joint Plan of Reorganization (the "Modified
Joint Plan"). The Bankruptcy Court has scheduled a hearing on the
Disclosure Statement attached to the Modified Joint Plan for February
15, 2000 and has tentatively set confirmation hearings for the Modified
Joint Plan for March 24, 2000.
If the Modified Joint Plan is confirmed, PFC will issue a principal
amount of 13 1/2% First Mortgage Notes (together with the pay-in-kind
notes, as described below, the "Amended Notes") equal to the principal
amount of all outstanding 13 1/2% Notes plus accrued and unpaid interest
from June 1, 1998 through the effective date. The Company and its
affiliates, other than the Debtors, have
28
<PAGE>
committed at least $20.0 million to the Debtors on the earlier of the
redemption of the Amended Bonds or the recission of the pledge of the
SFHI stock ("SFGC Contributions"). The SFGC Contribution can be satisfied
through a contribution of a combination of 13 1/2% Notes, valued at
principal amount plus accrued interest, and cash. 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, 2001. Until the SFGC Contribution, PFC will have
the right to pay in kind up to 50% of the interest payable on each June
1, and December 1, 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. The Amended Notes will be
redeemable at 100% of the principal amount plus accrued and unpaid
interest thereon, 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.
The Company will guarantee the payment of and interest on, the Amended
Notes, and the guaranty will be secured by a pledge of the common stock
of certain subsidiaries, including SR, and by liens on certain of its
other assets.
The Modified Joint Plan is subject to the approval of the Bankruptcy
Court. No assurance can be given that the Joint Plan will be confirmed.
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
agreements pursuant to which SFHI's outstanding indebtedness was issued,
which would result in automatic acceleration of the 11% Notes and the 9
1/2 % Notes and the SLVC Notes.
29
<PAGE>
GUARANTEE LITIGATION - GMS
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 alleged that the Company was in
default on its guaranty of the 13 1/2% Notes and sought to recover the
amounts it claims are past due on the 13 1/2% Notes.
In January 2000, SLVC and PHI, in total, acquired approximately $6.5
million principal amount of 13 1/2% Notes, plus accrued and unpaid
interest for approximately $8.0 million from the GMS Group. In
connection with the purchase, the GMS Group agreed to dismiss without
prejudice its legal action in the state of New York against the Company.
SLVC acquired approximately $5.8 million principal amount of the 13 1/2%
Notes as collateral for the SLVC Notes. PHI acquired approximately
$700,000 of the 13 1/2% Notes in accordance with an order by Bankruptcy
Court approving redemption of 10.83% principal amount of certain 13 1/2%
Notes plus accrued interest.
30
<PAGE>
TREASURE BAY - SECURITIES LITIGATION
On December 12, 1994, the Company and SFHI filed a lawsuit in the Court,
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 of 1934, 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. The defendants have filed answers to the complaint
and discovery is continuing.
On December 15, 1994, Francis L. Miller filed a lawsuit in the
Mississippi Circuit Court, Second Judicial District, against the Company
and SFHI, as well as Paul W. Lowden and Suzanne Lowden, alleging, among
other things, that the Company made certain misrepresentations which
induced Francis Miller to entrust the management of his investments in
Treasure Bay's two Mississippi casinos to the Company and SFHI and to
sell the Company and SFHI a 20% ownership interest in Treasure Bay. The
lawsuit was subsequently amended to remove Suzanne Lowden as a
defendant. The Company and SFHI filed a successful motion to transfer
this case to the Court.
The Court 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 the Company against Messrs. Miller, Rankin, Hendrix and
Burkholder on December 12, 1994 in the Court. Thus, the two lawsuits
were combined. The parties to the combined litigation have concluded
most of the formal discovery involved in this case.
31
<PAGE>
Each party has filed summary judgment motions in the case asking that
the other party's claims be dismissed and for related relief. A hearing
was conducted on October 18, 1999 on the summary judgement motion.
On December 7, 1999, the Court issued its Orders on the summary judgment
motions filed by the parties. The Court partially granted the Company's
motion for summary judgment to some of the claims disputed by Miller in
his cross-complain, but left some issues to be decided for trial. The
Court also denied Miller, et al's motion for summary judgment dismissing
the Company's remaining claims, thereby ensuring that the matter will
eventually proceed to trial against the defendants, very likely sometime
the late Spring 2000. However, the Court granted one of the Miller
defendants' motion for summary judgment, in effect, precluding one of
the claims made by the Company from the raised at trial. The Company has
filed a Motion for Reconsideration of the ruling with the Court on the
grounds that the Court misinterpreted the law in granting the motion. It
is anticipated the Court will issue a ruling on the Company's Motion for
Reconsideration within the next 2-3 months. A trial date will then be
set to decide the remaining claims asserted against the Defendants.
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
PFC has $55 million of principal and approximately $10.8 million
accrued interest due on the 13 1/2% Notes as of December 31, 1999 which
is presented net of $9.5 million principal and $1.4 million accrued
interest owned by affiliates as Liabilities subject to compromise in the
Consolidated Condensed Balance Sheet contained elsewhere herein. See
"Legal Proceedings".
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. The Company is also exploring
refinancing alternatives for the 9 1/2% Notes.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 11% Notes to accelerate. If the
9 1/2% Notes or the 11% Notes were to be
32
<PAGE>
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.
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
Exhibits
27 Financial Data Schedules
Reports
None
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
SANTA FE GAMING CORPORATION, Registrant
By: /s/ THOMAS K. LAND
---------------------------------------
Thomas K. Land, Chief Financial Officer
Dated: February 14, 2000
34
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