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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO
______________
Commission File No. 1-12030
Stratosphere Corporation
(Exact name of registrant as specified in its charter)
Delaware 88-0292318
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2000 Las Vegas Boulevard South
Las Vegas, Nevada _ 89104
(Address of principal executive offices) (Zip Code)
(702) 382-4446
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
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Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10- K or any
amendment to this Form 10-K. [ ]
As of March 21, 1997, 58,393,105 shares of the Registrant's Common Stock were
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant on such date, based upon the last sale price
of the Common Stock as reported by NASDAQ on March 21, 1997, was $36,919,744.
For purposes of this computation, affiliates of the Registrant are deemed to be
the Registrant's executive officers and directors and Grand Casinos, Inc.
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ITEM 1. BUSINESS
The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties.
The actual results of Stratosphere Corporation (the "Company") could differ
materially from the Company's historical results of operations and those
discussed in the forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those identified
in "-Certain Factors."
OVERVIEW
The Company owns and operates the Stratosphere Tower, Casino & Hotel
("Stratosphere"), a major destination resort containing a fully integrated
casino/hotel, observation tower and entertainment complex located at the north
end of the Las Vegas Strip. Stratosphere currently operates a 97,000 square
foot casino (the "Casino"), 1,444 hotel rooms and suites, a
retail-entertainment center including retail and dining experiences (the
"Entertainment Center"), an observation tower, six restaurants and other
attractions.
Stratosphere Corporation and its wholly owned subsidiary Stratosphere
Gaming Corp. ("SGC") filed voluntary petitions on January 27, 1997, for Chapter
11 Reorganization pursuant to the United States Bankruptcy Code. Stratosphere
Corporation and SGC are acting as debtors in possession on behalf of their
respective bankrupt estates and are authorized as such to operate their
business subject to bankruptcy court supervision. Stratosphere Corporation, SGC
and Grand filed a Joint Plan of Reorganization (the "Plan") on January 27,
1997.
On January 6, 1997, Stratosphere Corporation announced an
agreement-in-principle by and among Grand Casinos, Inc., ("Grand"), Stratosphere
Corporation, and the holders of over 57 percent of Stratosphere Corporation's
$203 million 14 1/4% First Mortgage Notes (the "First Mortgage Notes")
pertaining to the restructuring of the First Mortgage Notes and the equity
capitalization of Stratosphere Corporation. Stratosphere Corporation's
announcement indicated further that the agreement-in-principle will expire
unless a plan of reorganization consistent with the terms thereof is confirmed
by a Bankruptcy Court by June 30, 1997.
Stratosphere is centered around the Stratosphere Tower (the "Tower"),
the tallest free-standing observation tower in the United States. Standing
1,149 feet above the Las Vegas Strip, the Tower is three times taller than any
building currently existing in Las Vegas and is visible from all directions,
including to visitors flying into Las Vegas. The Tower's Pod (the "Pod"), a
12-story indoor and outdoor building that begins at the 771-foot level,
features a 360-seat revolving restaurant, a 220-seat cocktail lounge, indoor
and outdoor observation decks and two amusement rides located over 900 feet in
the air -- a roller coaster and a simulated "Big Shot" (the "Thrill Rides") --
as well as other features and attractions. Stratosphere has been designed to
create an exciting and unique gaming and entertainment experience that
management believes will make Stratosphere a "must see" tourist attraction for
many of Las Vegas' 28 million annual visitors and
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over one million local residents.
Stratosphere currently is operating with, among other things, the
Tower, a hotel with 1,444 rooms and suites, a 97,000 square foot casino
featuring 2,003 slot machines, 56 table games, a sports book, a keno lounge, a
160,000 square foot second level containing a retail-entertainment center and
650 seat Broadway Showroom, a 250-seat entertainment lounge and parking for
approximately 4,000 cars (collectively, "Phase I"). Stratosphere opened for
business on April 29, 1996.
Under the terms of the Plan, Stratosphere Corporation's $203 million 14
1/4% Notes currently outstanding will be exchanged for $203 million of new
Stratosphere Notes bearing interest at 11 1/4%, due May 15, 2002. The Plan
calls for interest payable in kind at 14 1/4% per annum for the November 15,
1996, interest payment, now in arrears, and a payment in kind at 11 1/4% per
annum for the May 15, 1997, interest payment, with all subsequent interest
payments paid in cash. The new Notes will also receive additional contingent
interest equal to 15% of Stratosphere Corporation's consolidated annual cash
flow from $60.0 million to $80.0 million, up to $3.0 million per year. The new
Notes will be callable at 110% of par (plus accrued interest) on May 15, 1999.
Stratosphere also will be permitted, subject to certain restrictions, to issue
up to $25.0 million in additional new Notes to fund its working capital
requirements.
The Plan also provides for a Rights Offering to all existing holders of
Stratosphere Common Stock, including Grand, which will guarantee net proceeds
to Stratosphere Corporation of at least $75.0 million. The proceeds of the
Rights Offering will be used to finance completion of Phase II of Stratosphere,
which includes a new hotel tower consisting of approximately 1,000 room bays, a
pool and recreation area, landscaping and other improvements to the
Stratosphere complex. Existing shares of Stratosphere Corporation's Common
Stock will be canceled and shareholders will receive transferable rights to
purchase one share of Common Stock in reorganized Stratosphere at $1.31 per
share. Each purchaser of a share pursuant to the Rights Offering, other than
those subscribed for by Grand as its pro-rata share, will also receive a
three-year warrant to purchase one-half of a share of Common Stock at $3.00 per
full share. As part of the Plan, Grand has agreed to purchase its pro-rata
share of the Rights Offering (approximately 42 percent) for approximately $31.9
million. Additionally, Grand will provide a standby commitment to purchase any
unsubscribed portion of the Rights Offering not exercised by other shareholders
of Stratosphere Corporation. Grand will provide a new Completion Guarantee for
Phase II of Stratosphere, which will cover up to $25 million in cost overruns
on completion of Phase II. Any amounts paid by Grand pursuant to the
Completion Guarantee would constitute subordinated debt of Stratosphere with
interest payable at 11 1/4 %.
The Rights Offering will result in the issuance of 58.4 million shares
of Stratosphere Common Stock, with net proceeds of at least $75.0 million. Upon
completion of the reorganization and Rights Offering, the Company will have
approximately 96.8 million shares of Common Stock outstanding and warrants
outstanding to purchase an additional 17.0 million shares of Common Stock at
$3.00 per share.
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Under the Plan, Grand will convert $50.0 million due from Stratosphere
Corporation into 39.7% (approximately 38.4 million shares) of Stratosphere
Corporation's Common Stock outstanding upon the completion of the
reorganization. Grand previously loaned this amount to Stratosphere pursuant
to the Completion Guarantee given in connection with the Company's 1995 Public
Offering of First Mortgage Notes. Assuming full subscription by the public
shareholders in the Rights Offering, Grand will subscribe for approximately
24.5 million shares of reorganized Stratosphere Corporation for $32.1 million.
These shares, together with shares received from the conversion of $50.0 million
of debt, will result in Grand owning 65% of Stratosphere Corporation (without
giving effect to the warrants).
The Plan is subject to a number of conditions, including Plan confirmation
by the United States Bankruptcy Court, District of Nevada, receipt of all
necessary regulatory approvals, including those required by Nevada gaming
authorities, completion of definitive Plan related documents, and other
customary closing conditions. In addition, Grand's obligations under the Plan
are conditioned upon resolution or discharge of certain pending securities
lawsuits, receipt by Grand of an investment banking fairness opinion, a two
year Management Agreement wherein Grand agrees to manage construction of Phase
II and the day to day operations of Stratosphere Corporation for $500,000 per
year inclusive of all costs and expenses, and Stratosphere Corporation's
consolidated cash flows (as defined in the Plan) for the months between October
1, 1996, and June 30, 1997, averaging not less than $2,267,000 per month. The
average for the five months ended February 23, 1997, was $1,615,736. Grand has
announced that it is monitoring the Company's monthly consolidated cash flows.
Based on these conditions there can be no assurance that the Plan will be
confirmed. Stratosphere Corporation has announced that, if the Plan or a
similar proposal is not confirmed, Stratosphere Corporation will likely
be unable to continue as a going concern.
THE TOWER
At 1,149 feet in height, the Tower is the tallest free-standing
observation tower in the United States and the tallest free-standing structure
west of the Mississippi River. From the indoor and outdoor observation decks,
lounge and restaurant, Tower visitors have dramatic views of the Las Vegas
Strip, downtown and the surrounding Las Vegas Valley. Visitors travel to the
observation decks, restaurant and lounge in four high speed, double-decked
elevators, which travel at 1,800 feet per minute, and which have an aggregate
capacity of 128 visitors. These elevators make as many as 22.5 round trips per
hour and move as many as 2,880 people per hour.
The Pod is a 12-story, 105,000 square foot building that begins at the
771-foot level of the Tower. The Pod, which has a maximum capacity of 2,700
visitors at any one time, has an indoor and outdoor observation deck and is
open from 9:00 a.m. to midnight weekdays and until 2:00 a.m. on weekends.
The Pod's third and fourth levels contain conference and meeting rooms
that can be rented out for business or social occasions. Level six contains a
360-seat revolving restaurant. Levels seven, eight and nine will feature a
220-seat cocktail lounge and indoor and outdoor
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observation decks. The Pod also contains gift shops and several free-standing
kiosks featuring souvenirs and food products designed to capitalize on the
unique nature of the Tower.
Level twelve is the staging area for the Thrill Rides. The first
ride, the "Big Shot," propels riders from the 921-foot level of the Pod
approximately 180 feet straight up the mast of the Tower, in a harnessed seat,
and allows for a controlled free fall back to the landing platform. The second
ride, a roller coaster, the "High Roller," begins at the 909-foot level and
transports up to 36 passengers at a time along tracks wrapped around the top
portion of the Pod. The High Roller was out of service during a significant
portion of 1996; however, the Company believes that all related mechanical
difficulties have been fully repaired.
THE CASINO AREA
Stratosphere's casino contains 97,000 square feet of gaming space,
with approximately 2,003 slot machines, 56 table games, a sports book and Keno
lounge. Stratosphere's bar and lounge facilities have been positioned for
convenient access to the gaming areas.
The Casino was remodeled and reconfigured to accommodate the Company's
new marketing plan which features state of the art slot machines and video
games offering, in total, the best odds in Las Vegas. Some of the games
offered include 98% return on all dollars slots, 100% return on $. 25 video
poker, 100x odds on craps, 99.5% return on blackjack, and single zero
roulette.
The Casino areas have been designed to cater to all levels of casino
play. Although the Company does not emphasize credit play, credit is available
to high-stakes wagerers on a discretionary basis. Slot and table game
customers will be able to join a frequent players club, which awards benefits
and gifts based upon the customer's level of play.
THE RETAIL-ENTERTAINMENT CENTER
The Retail-Entertainment Center, located on the second floor of the
Base Building, currently occupies approximately 160,000 square feet, of which
57,000 square feet is currently undeveloped. The retail area offers various
restaurants and shops and, in combination with the 650 seat show room that
offers four shows a day, is designed to appeal to the wide spectrum of visitors
who come to Las Vegas
In addition, a 250-seat entertainment lounge, located on the first
level of the Base Building, features Las Vegas lounge style entertainment.
Guests of the showrooms will be provided with amenities found in other Las
Vegas showrooms.
THE HOTEL
The Hotel currently has 1,444 rooms and suites. The Hotel has five
restaurants, including
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the 434-seat "Stratosphere Buffet," the 200-seat "Sister's Cafe and Grille,"
the "Big Sky Steakhouse," "Roxy's 50's Diner," and "Ferarro's," an Italian
cuisine restaurant. Stratosphere has parking for over 4,000 cars.
BUSINESS AND MARKETING STRATEGY
The Company's business development strategy will utilize
Stratosphere's unique characteristics to attract Las Vegas visitors and
residents. Stratosphere offers extremely favorable gambling odds for its slot
and table game products compared to other Las Vegas operators. The benefits of
playing at the Stratosphere are actively marketed by Stratosphere. A
significant amount of visitors and residents of Las Vegas are attracted by this
business strategy. The Company has also implemented a customer development
program that identifies quality casino players and converts them into preferred
guests. The Company has created a profile of its customers, utilizing
available demographic data, regularly conducted customer surveys and other
sources to market to these segments. Repeat visits from preferred guests are
achieved by providing superior guest service, a friendly gaming atmosphere,
complimentary services where appropriate, and invitations to Stratosphere's
special events. To maintain high levels of patronage, the Company employs a
direct mail program targeting the customers in its database with a variety of
product offerings, including incentives to visit the Company's facilities on a
frequent basis.
COMPETITION
The casino/hotel industry is highly competitive. Las Vegas is a world
class destination resort, with numerous other tourist attractions. Major Las
Vegas casino/hotels are themselves tourist attractions, including The Mirage,
Excalibur, Circus Circus, the MGM Grand Hotel Casino and Theme Park, Treasure
Island, Monte Carlo, New York New York and Luxor.
In addition, certain states have recently legalized, and others may
legalize casino gaming in specific areas, and passage of the Indian Gaming
Regulatory Act in 1988 has led to rapid increases in Native American gaming
operations. Such proliferation of gaming activities could materially and
adversely affect the Company's business. In particular, the legalization of
casino gaming in or near any metropolitan area from which the Company intends
to attract customers could have a material adverse effect on the Company's
business.
EMPLOYEES
The Company currently employs approximately 2,450 people, of which
approximately 1,300 are covered by a collective bargaining agreement which
expires in April 1997. The Company believes that its relationship with its
employees is satisfactory.
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NEVADA GAMING REGULATION
The ownership and operation of casino gaming facilities in Nevada are
subject to:(i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively, the "Nevada Act"); and (ii) various local ordinances
and regulations. Gaming operations in Nevada are subject to the licensing and
regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the
Nevada State Gaming Control Board ("Nevada Board") and various other county and
city regulatory agencies, including the City of Las Vegas, collectively
referred to as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of
periodic reports with the Nevada Gaming Authorities; (iv) the prevention of
cheating and fraudulent practices; and (v) providing a source of state and
local revenues through taxation and licensing fees. Change in such laws,
regulations and procedures could have an adverse effect on the Company's gaming
operations.
The Company is registered with the Nevada Commission as a publicly
traded corporation (a "Registered Corporation") and has been found suitable to
own the stock of Stratosphere Gaming Corp., a Nevada corporation and
wholly-owned subsidiary of the Company (the "Operating Subsidiary"). The
Operating Subsidiary is licensed by the Nevada Gaming Authorities and is a
corporate licensee (a "Corporate Licensee") under the terms of the Nevada Act.
The gaming license requires the periodic payment of fees and taxes and is not
transferable. The Company and the Operating Subsidiary have obtained the
various registrations, approvals, permits, findings of suitablility and
licenses in order to engage in gaming activities in Nevada.
As a Registered Corporation, the Company is required periodically to
submit detailed financial and operating reports to the Nevada Commission and
furnish any other information that the Nevada Commission may require. In
addition, no person may become a stockholder of, or receive, any percentage of
profits from the Operating Subsidiary without first obtaining licenses and
approvals from the Nevada Gaming Authorities.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or the
Operating Subsidiary in order to determine whether such individual is suitable
or should be licensed as a business associate of the Operating Subsidiary.
Officers, directors and certain key employees of the Operating Subsidiary must
file applications with the Nevada Gaming Authorities and may be required to
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be licensed or found suitable by the Nevada Gaming Authorities. Officers,
directors and key employees of the Company who are actively and directly
involved in the activities of the Operating Subsidiary may be required to be
licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming
Authorities may deny an application for licensing for any cause which they deem
reasonable. A finding of suitability is comparable to licensing, and both
require submission of detailed personal and financial information followed by a
thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities and in addition to
their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or the Operating Subsidiary, the companies
involved would have to sever all relationships with such person. In addition,
the Nevada Commission may require the Company or the Operating Subsidiary to
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company and the Operating Subsidiary will be required to submit
detailed financial and operating reports to the Nevada Commission.
Substantially all material loans, liens, sales of securities and similar
financing transactions by the Operating Subsidiary will be required to be
reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by the
Operating Subsidiary, the gaming licenses it holds could be limited,
conditioned, suspended or revoked, subject to compliance with certain statutory
and regulatory procedures. In addition, the Company, the Operating Subsidiary
and the persons involved could be subject to substantial fines for each
separate violation of the Nevada Act at the discretion of the Nevada
Commission. Further, a supervisor could be appointed by the Nevada Commission
to operate the Company's gaming property and, under certain circumstances,
earnings generated during the supervisor's appointment (except for reasonable
rental value of the premises) could be forfeited to the State of Nevada.
Limitation, conditioning or suspension of the licenses of the Operating
Subsidiary could (and revocation of any gaming license of the Operating
Subsidiary would) materially adversely affect the Company.
Any beneficial holder of a Registered Corporation's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated and have his suitability as a beneficial holder of
the Registered Corporation's voting securities determined if the Nevada
Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the state of Nevada. The applicant
must pay all costs of investigation incurred by the Nevada Gaming Authorities
in conducting any such investigation.
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The Nevada Act requires any person who acquires more than 5% of a
Registered Corporation's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of a Registered Corporation's voting securities apply to the Nevada
Commission for a finding of suitability within thirty days after the Chairman
of the Nevada Board mails the written notice requiring such filing. Both Mr.
Stupak and Grand have been approved as controlling shareholders in connection
with the Company's registration. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more
than 10%, but not more than 15%, of a Registered Corporation's voting
securities may apply to the Nevada Commission for a waiver of such finding of
suitability if such institutional investor holds the voting securities for
investment purposes only. An institutional investor shall not be deemed to
hold voting securities for investment purpose unless the voting securities were
acquired and are held in the ordinary course of business as an institutional
investor and not for the purpose of causing, directly or indirectly, the
election of a majority of the members of the board of directors of the
Registered Corporation, any change in the Registered Corporation's corporate
charter, bylaws, management, policies or operations, or any of its gaming
affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding the Registered Corporation's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial
holder of voting securities who must be found suitable is a corporation,
partnership or trust, it must submit detailed business and financial
information including a list of beneficial owners. The applicant is required
to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability
or a license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any stockholder found unsuitable and
who holds, directly or indirectly, any beneficial ownership of the voting
securities of the Company beyond such period of time as may be prescribed by
the Nevada Commission may be guilty of a criminal offense. The Company is
subject to disciplinary action if, after it receives notice that a person is
unsuitable to be a stockholder or to have any other relationship with it, it
(i) pays that person any dividend or interest upon voting securities of the
Company, (ii) allows that person to exercise, directly or indirectly, any
voting right conferred through securities held by that person, (iii) pays
remuneration in any form to that person for services rendered or otherwise, or
(iv) fails to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities including, if necessary, the immediate
purchase of said voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any
debt security
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of a Registered Corporation, such as the First Mortgage Notes, to file
applications, be investigated and be found suitable to own the debt security of
a Registered Corporation it has reason to believe that such ownership would
otherwise be inconsistent with the declared policies of the State of Nevada.
If the Nevada Commission determines that a person is unsuitable to own such
security, then pursuant to the Nevada Act, the Registered Corporation can be
sanctioned, including the cost of its approvals, if without the prior approval
of the Nevada Commission, it: (i) pays to the unsuitable person any dividend,
interest, or any distribution whatsoever; (ii) recognizes any voting right by
such unsuitable person in connection with such securities; (iii) pays the
unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for
finding the record holder unsuitable. The Company will also be required to
render maximum assistance in determining the identity of the beneficial owner.
The Company may also be required to disclose to the Nevada Commission, upon its
request, the identities of any of their security holders, including the holder
of the First Mortgage Notes and the Class B Warrants. The Nevada Commission
has the power to require the stock certificates of the Company to bear a legend
indicating that the securities are subject to the Nevada Act. However, the
Nevada Commission has not imposed such a requirement on the Company.
The Company may not make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or proceeds
therefrom are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. Approval of a public offering does not constitute a finding,
recommendation or approval by the Nevada Commission or the Nevada Board as to
the accuracy or adequacy of the prospectus or the investment merits of the
securities offered. Any representation to the contrary is unlawful. A rights
offering of Capital Stock in a public offering in order to satisfy the Standby
Equity Commitment or as part of the Plan of Reorganization will require the
prior approval of the Nevada Commission. No assurance can be given that such
approval would be obtained.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting
agreements, or any act or conduct by a person whereby he obtains control, may
not occur without the prior approval of the Nevada Commission. Entities
seeking to acquire control of a Registered Corporation must satisfy the Nevada
Board and Nevada Commission in a variety of stringent standards prior to
assuming control of such Registered Corporation. The Nevada Commission may
also require controlling stockholders, officers, directors and other persons
having a material relationship or involvement with the entity proposing to
acquire control, to be investigated and licensed as part of the approval
process relating to the transaction.
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The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming licensees, and Registered
Corporations that are affiliated with those operations, may be injurious to
stable and productive corporate gaming. The Nevada Commission has established
a regulatory scheme to ameliorate the potentially adverse effects of these
business practices upon Nevada's gaming industry and to further Nevada's policy
to: (i) assure the financial stability of corporate gaming licensees and their
affiliates; (ii) preserve the beneficial aspects of conducting business in the
corporate form; and (iii) promote a neutral environment for the orderly
governance of corporate affairs. Approvals are, in certain circumstances,
required from the Nevada Commission before the Registered Corporation can make
exceptional repurchases of voting securities above the current market price
thereof and before a corporate acquisition opposed by management can be
consummated. The Nevada Act also requires prior approval of a plan of
recapitalization proposed by the Registered Corporation's Board of Directors in
response to a tender offer made directly to the Registered Corporation's
stockholders for the purposes of acquiring control of the Registered
Corporation.
License fees and taxes, computed in various ways depending on the type
of gaming or activity involved, are payable to the state of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either: (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated. A casino
entertainment tax is also paid by casino operations where entertainment is
furnished in connection with the selling of food, refreshments and merchandise.
Nevada licensees that hold a license to manufacture or distribute gaming
devices also pay certain fees and taxes to the state of Nevada.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such persons
(collectively, "Licensees"), and who proposes to become involved in a gaming
venture outside of Nevada, is required to deposit with the Nevada Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Nevada Board of their participation in such
foreign gaming. The revolving fund is subject to increase or decrease in the
discretion of the Nevada Commission. Thereafter, Licensees are required to
comply with certain reporting requirements imposed by the Nevada Act.
Licensees are also subject to disciplinary action by the Nevada Commission if
they knowingly violate any laws of the foreign jurisdiction pertaining to the
foreign gaming operation, fail to conduct the foreign gaming operation in
accordance with the standards of honesty and integrity required of Nevada
gaming operations, engage in activities that are harmful to the state of Nevada
or its ability to collect gaming taxes and fees, or employ a person in the
foreign operation who has been denied a license or finding of suitability in
Nevada on the ground of personal unsuitability.
NEVADA LIQUOR REGULATIONS
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The sale of alcoholic beverages at Stratosphere is subject to
licensing and regulation by the City of Las Vegas. All licenses are revocable
and are transferable only with prior approval of the City of Las Vegas. The
City of Las Vegas has full power to limit, condition, suspend or revoke any
such license, and any such disciplinary action may (and revocation would) have
a material adverse effect on the operations of the Company.
CERTAIN FACTORS
In addition to factors discussed elsewhere in this Annual Report Form
10-K, the following are important factors that could cause actual results or
events to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company.
BANKRUPTCY. Stratosphere Corporation and its wholly owned subsidiary
Stratosphere Gaming Corp. ("SGC") filed voluntary petitions on January 27, 1997,
for Chapter 11 Reorganization pursuant to the United States Bankruptcy Code. The
Company and SGC are acting as debtors in possession on behalf of their
respective bankruptcy estates and are authorized as such to operate their
business subject to bankruptcy court supervision. Stratosphere Corporation, SGC
and Grand filed a Joint Plan of Reorganization (the "Plan") on January 27, 1997.
The Plan is subject to a number of conditions, including the Company's financial
performance and settlement of certain litigation on behalf of Grand. There can
be no assurance that the conditions to the Plan will be satisfied or that the
Plan will be confirmed by the Bankruptcy Court. In the event a plan of
reorganization cannot be confirmed, the Company may be forced to liquidate its
assets.
NEED FOR ADDITIONAL FINANCING. The Company has completed construction
of Phase I, of which $162.5 million was incurred during fiscal 1996 and has
spent approximately $62.0 million on Phase II of the project. The Company has
ceased construction of Phase II due to its inability to fund further
construction. The Company estimates the total additional cost to complete
Phase II is $75.0 million. The Company estimates that the construction of
Phase II will take approximately seven months. The Company believes that the
completion of Phase II is critical to its long-term viability. The completion
of Phase II by the Company is dependent on the Company's ability to obtain
bankruptcy court confirmation regarding the Plan filed or of a plan providing
adequate funding for the completion of Phase II. There can be no assurance
that if the Plan is not confirmed there will be adequate additional financing
to complete Phase II.
RISKS OF NEW CONSTRUCTION. Major construction projects (and
particularly one the size, complexity and scale of Phase II) entail significant
risks, including shortages of materials or skilled labor, unforeseen
engineering, environmental and/or geological problems, work stoppages, weather
interference, unanticipated cost increases and nonavailability of construction
equipment. Construction, equipment or staffing problems or difficulties in
obtaining any of the requisite licenses, permits, allocations and
authorizations from regulatory authorities could increase the total cost, or
delay or prevent the construction or opening of Phase II or otherwise affect
the design and features of Phase II.
<PAGE> 14
COMPETITION. The casino/hotel industry is highly competitive. Hotels
located on or near the Las Vegas Strip compete primarily with other Las Vegas
Strip hotels and with a few major hotels in downtown Las Vegas. The Hotel and
the Casino will also compete with a large number of hotels and motels located
in and near Las Vegas. The Tower will compete with all other forms of
entertainment, lodging and recreational activities in and near Las Vegas. Many
of the Company's competitors are larger than the Company and have greater name
recognition and may have greater resources.
POSSIBLE CONFLICTS OF INTEREST. Grand is actively involved in the
gaming industry and other directors and officers of the Company also are
involved in the gaming industry. Casinos owned or managed by Grand and such
persons may directly or indirectly compete with the Company. In addition, the
potential for conflicts of interest exists among the Company, Grand and such
persons for future business opportunities. While the Company, Grand and such
persons intend to pursue other business opportunities, there is no agreement
regarding conflicts of interest, and such additional business opportunities
available to Grand or such persons may not be presented to the Company.
REGULATION. The ownership and operations of casinos in Nevada are
highly regulated. The Company and its directors, officers and principal
stockholders will need either to be licensed or found suitable by the gaming
authorities in Nevada and must provide detailed financial and other reports.
Changes in Nevada law or regulations may limit or otherwise materially affect
the types of gaming that may be conducted. The Nevada Gaming Commission has the
power to investigate and require the finding of suitability of any record or
beneficial shareholder of the Company. Any holder of more than five percent of
the Common Stock of the Company is required to report to the Nevada Gaming
Commission. Any holder of more than 10% of the Common Stock must apply to the
Nevada Gaming Commission to be found suitable. Under certain circumstances, an
"institutional investor," (as defined in the Nevada Gaming Control Act) which
acquires more than 10%, but not more than 15%, of the voting securities of a
"Registered Corporation" (as defined in the Nevada Gaming Control Act) may
apply to the Nevada Gaming Commission for a waiver of such finding of
suitability if such institutional investor holds the voting securities for
investment purposes only.
<PAGE> 15
ITEM 2. PROPERTIES
The Company currently owns approximately 24.5 acres of land on or near
the Las Vegas Strip. The Company entered into an Owner Participation Agreement
(the "Owner Participation Agreement") with the City of Las Vegas Downtown
Redevelopment Agency (the "Redevelopment Agency") in December 1994. This
property and the property the Company is seeking to acquire pursuant to the
Agreements lie within the downtown redevelopment district, an area designated by
the City for economic redevelopment and urban renewal, and the Company believes
that it will be successful in its acquisition. Pursuant to the Owner
Participation Agreement, the Redevelopment Agency has acquired certain property
and is attempting to acquire two remaining properties. While the Company
believes that through the City's power of eminent domain or through negotiations
with current owners, all remaining property will be acquired, there can be no
assurance that all such property will be acquired or that such property will be
acquired within the Company's budget. The Company has acquired all but two
parcels of property being sought by the City for the Company. The City is
currently taking all steps necessary to acquire these two parcels but there can
be no assurance that it will succeed in acquiring such parcels. The City's
right to acquire these two properties is currently on appeal to the Nevada
Supreme Court. The Company believes that, if necessary, it can independently
acquire the remaining parcels or that Stratosphere can be reconfigured to be
built on the land the Company currently owns or has rights to acquire, however,
the size and scope of Stratosphere may have to be changed should some of the
property not be obtained. In all, the Company expects to have approximately
25.5 acres on which to build Stratosphere.
The Company has also built a park which was deeded to the City of Las
Vegas and is required by the Owner Participation Agreement to acquire a
building from Mr. Stupak that is currently leased by the City as a community
center and will donate this building to the Redevelopment Agency. The Company
previously donated $100,000 to the Agency pursuant to its Agreement. This money
will be used to renovate the building as a multi-use facility, including a day
care center. Pursuant to the Owner Participation Agreement, the Company has
also agreed to provide relocation assistance and that 15% of the new jobs
generated by Stratosphere will be made available to employ persons residing in
the immediate vicinity of Stratosphere.
The Company has entered into a Development and Lease Agreement (the
"Master Lease") with Strato Retail LLC pursuant to which Strato Retail LLC
developed approximately 160,000 square feet of the second floor of the Base
Building into a retail and entertainment center (the "Premises"). The Master
Lease provided for base rent plus percentage rent. Strato Retail LLC paid the
Company approximately $9.9 million for the construction of the Phase I retail
shell and, pursuant to the Master Lease, is obligated to pay $7.9 million for
the construction of the Phase II expansion of the retail shell.
ITEM 3. LEGAL PROCEEDINGS
On January 27, 1997, the Company and its wholly-owned subsidiary
Stratosphere Gaming Corporation ("SGC") filed voluntary petitions for Chapter
11 Reorganization pursuant to the United States Bankruptcy Code. As of that
date, the United States Bankruptcy Court for the District of Nevada assumed
jurisdiction over the assets of the Company and SGC. The Company and SGC are
acting as debtors in possession on behalf of their respective bankruptcy
estates, and are authorized as such to operate their business subject to
bankruptcy court supervision.
On August 5, 1996, a complaint was filed in the United States District
Court for the District of Nevada (Michael Caesar, et al. v. Stratosphere
Corporation, et al.) against the Company, Lyle A. Berman (an officer and
director of the Company and Grand), Robert E. Stupak (a former officer and
director of the Company), Thomas A. Lettero (an officer of the Company"), Thomas
G. Bell (a director of the Company), Andrew S. Blumen (an officer and director
of the Company), and Grand. The complaint purports to seek relief on behalf of
a class of plaintiffs who purchased the Company's Common Stock during the period
from December 19, 1995, through July 2, 1996, inclusive. The complaint alleges
that the defendants made misrepresentations and engaged in other wrongdoings.
In addition to the Caesar case, eight additional cases making the same
claims against the same defendants (and in one instance also against Stanley
Taube - a director of the Company and also an officer and director of Grand)
have been filed by the following plaintiffs: Regina Peltz on August 13, 1996;
Ronald Stengel on August 13, 1996; Robert Johnson on September 19, 1996; David
Vallee on September 25, 1996; Anthony L. Poli on October 7, 1996; Darrell
Russell and Gail Russell on October 7, 1996; Mitchell Gordon on October 7,
1996; and James J. Enright, Jr., on October 28, 1996. These complaints purport
to seek relief on behalf of a class of plaintiffs who purchased the Company's
Common Stock during the period from December 19, 1995, through July 22, 1996,
inclusive. The complaints allege that the defendants made misrepresentations
and engaged in other wrongdoings. On January 15, 1997, the court ordered these
eight additional lawsuits to be consolidated with the Caesar lawsuit under the
caption "In re Stratosphere Corporation Securities Litigation."
On February 14, 1997, plaintiffs filed a Consolidated and Amended Class
Action Complaint naming as defendants Grand, Bob Stupak, Lyle A. Berman,
Stanley M. Taube, David R. Wirshing, Thomas A. Lettero, Andrew S. Blumen,
Thomas G. Bell, Bob Stupak Enterprises, BT Securities Corporation and
Montgomery Securities, Inc. The Consolidated and Amended Class Action
Complaint alleges causes of action under the federal securities laws and Nevada
law for purported misrepresentations during the period between December 19,
1995 and July 26, 1996. The litigation is brought on behalf of a putative
class of purchasers of Stratosphere Corporation securities during that time
period. The Consolidated and Amended Class Action Complaint does not name the
Company as a defendant, presumably due to the automatic stay imposed by the
Company's bankruptcy filing. On February 25, 1997, Grand and certain
individual defendants filed a motion to dismiss the complaint. The court has
scheduled a hearing on that motion on April 25, 1997. Discovery and other
proceedings have been stayed pending the court's ruling on that motion.
On March 14, 1997, the plaintiffs in the consolidated federal
litigation discussed above (the "Securities Litigation Claimants") filed a
complaint against the Company in an adversary proceeding in the context of the
Company's bankruptcy proceedings in the United Sates Bankruptcy Court for the
District of Nevada. The Securities Litigation Claimants allege that the
Company made misrepresentations and engaged in other wrongdoings during the
period between December 19, 1995 and July 22, 1996 in violation of the federal
securities laws and Nevada law. These claims are scheduled to be determined in
an estimation proceeding in the bankruptcy court. A hearing in the estimation
proceeding is currently scheduled to begin on May 5, 1997.
On August 16, 1996, a complaint was filed in District Court, Clark
County, Nevada (Victor Opitz, et al. v. Stratosphere Corporation, et al.)
against the Company, Grand, Robert B. Stupak (a former officer and director of
the Company), Lyle A. Berman (an officer and director of the Company and Grand)
and Stanley Taube (a director of the Company and Grand). The complaint purports
to seek relief on behalf of a class of plaintiffs who purchased stock during the
period from December 19, 1995, to July 22, 1996. The complaint alleges the
defendants made misrepresentations and engaged in other wrongdoing. The court
has granted the Company's motion to stay this litigation pending the outcome of
the federal shareholder litigation.
On April 3, 1994, a complaint was filed in the United States District
Court for the District of Nevada (Harvey J. Cohen, et al. v. Stratosphere
Corporation, et al.) against the Company, Mr. Stupak, Lyle Berman, Grand and
others. By Order filed April 10, 1995, the district court dismissed the federal
securities law claims with prejudice and dismissed the common law claims without
prejudice. On May 3, 1995, the plaintiffs filed a notice of appeal of the
district court's order with the United States Court of Appeals for the Ninth
Circuit. The complaint purported to seek relief in connection with the Company's
initial public offering (the "IPO"), each consisting of one share of Common
Stock and one warrant, on behalf of two classes of plaintiffs for unspecified
monetary damages. The complaint alleged that the defendants made
misrepresentations, breached a contract and engaged in other wrongdoing in
connection with the IPO, so that the defendants and their affiliates, associates
and friends could, while avoiding all economic risk, purchase IPO Units in the
IPO rather than one plaintiff class, and that this alleged conduct caused a
second dealer class to lose out on other profits it allegedly deserved. The
Company has asked the Court of Appeals to affirm the district court's order.
On or about August 29, 1995, a complaint was filed in the District Court,
Clark County, Nevada (Harvey J. Cohen, et al. vs. Stratosphere Corporation, et
al.) against the Company, Mr. Stupak, Lyle Berman, Grand and others. The
complaint purports to represent a class of plaintiffs and seeks relief for
misrepresentation, breach of contract and tortious interference with contract
regarding the IPO.
On or about December 20, 1995, a complaint was filed in the District
Court, Clark County, Nevada (Vegas Market Place, Inc. vs. Bob Stupak,
Individually dba Vegas World Hotel and Casinos, et al) against the Company, Mr.
Stupak and others. The complaint seeks damages arising out of a lease executed
between Bob Stupak, dba Vegas World Hotel and Casino and Vegas Market Place,
Inc. Among the causes of action brought in the complaint are quiet title,
breach of contract, specific performance, constructive eviction, declaratory
judgment, breach of implied covenant of good faith and fair dealing, intentional
interference with perspective economic advantage, intentional interference with
contractual relationships, preliminary injunction and permanent injunction. The
Company has filed a motion to dismiss several of the claims for relief brought
in this complaint.
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to February 24, 1994 there was no established trading market for
the Company's securities. On February 24, 1994, the Company's Common Stock
commenced trading on the Nasdaq Small Cap Market under the symbol TOWV and the
Pacific Stock Exchange under the symbol TOW. From February 24, 1994 to June
23, 1994, the Common Stock traded on the Nasdaq Small Cap Market. The symbol
was changed to TOWVQ to indicate that the Company had begun operating under
bankruptcy proceedings on January 27, 1997. On June 24, 1994, the Common Stock
commenced trading on the Nasdaq National Market. The following table sets
forth the range of high and low sales prices for the Common Stock for the
periods indicated, as reported by Nasdaq.
<TABLE>
<CAPTION>
Price Range
of Common Stock
---------------
High Low
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
First Quarter 5-7/8 4
Second Quarter 8-1/8 4-3/8
Third Quarter 9-1/4 6-1/2
Fourth Quarter 12-5/8 7-1/4
YEAR ENDED DECEMBER 29, 1996:
First Quarter 12-1/4 9-1/8
Second Quarter 14 5-3/4
Third Quarter 6-7/8 1-3/16
Fourth Quarter 2-15/16 23/32
</TABLE>
The Company's Common Stock was delisted from the Pacific Stock
Exchange on December 3, 1996, and the Company has been notified by Nasdaq that
because the Company no longer satisfies Nasdaq's listing standards, the
Company's Common Stock will be delisted from the National Market System on March
31, 1997. The Company has appealed Nasdaq's determination to delist the
Company's Common Stock, however, there can be no assurance that the Company's
appeal will be successful. If the Company's Common Stock is delisted from the
National Market System, the liquidity of the Common Stock will be adversely
affected. As of March 21, 1997, the Company had approximately 2,300
stockholders of record.
The Company has never paid any cash dividends with respect to the
Common Stock. The Indenture (the "First Mortgage Note Indenture") between
the Company,
<PAGE> 18
the Operating Subsidiary, and American Bank National Association, as trustee,
relating to the First Mortgage Notes restricts the payment of dividends by the
Company and restricts the transfer of funds by certain of the Company's
subsidiaries to the Company.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year
Ended
Year Ended December 31, December 29,
-----------
Statement of Operations Data: 1992 1993 1994 1995 1996
------------------------------------------------------ -----------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Net revenues (a) $ - $ - $ 107 $ 60 $ 108,739
Costs and expenses 634 1,281 1,050 947 439,905
------------------------------------------------------ -----------
Loss from operatiions (634) (1,281) (943) (887) (331,166)
Other expense (income) - - (665) 3,776 17,677
------------------------------------------------------ -----------
Net loss $ (634) $ (1,281) $ (278) $ (4,663) $(348,843)
====================================================== ===========
Loss per share $ (0.01) $ (0.12) $ (6.00)
========================== ===========
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
1995 QUARTERS 1996 QUARTERS
------------------------------------------- ------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues (a) $ 18 $ 3 $ 24 $ 15 $ 9 $ 29,889 $ 35,319 $ 43,522
Costs and expenses 271 (72) 221 527 37 37,645 54,853 347,370
--------------------------------------------- ---------------------------------------------
Income (loss) from (253) 75 (197) (512) (28) (7,756) (19,534) (303,848)
operations
Other expense
(income) 745 2,574 2,085 (1,628) (1,944) 3,348 6,492 9,781
--------------------------------------------- ---------------------------------------------
Net income (loss) $ (998) $(2,499) $ (2,282) $ 1,116 $ 1,916 $(11,104) $ (26,026) $(313,629)
============================================= =============================================
Income (loss)
per share $(0.03) $ (0.07) $ (0.06) $ 0.04 $ 0.03 $ (0.19) $ (0.45) $ (5.37)
============================================= =============================================
</TABLE>
(a) The Company began operations on April 29, 1996.
Because income (loss) per share amounts are calculated using the
weighted average number of common shares outstanding during each quarter, the
sum of the per share amounts for the four quarters may not equal the total loss
per share amounts for the year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified
in its entirety by, the Company's Consolidated Financial Statements and the
Notes thereto and other financial information included elsewhere or
incorporated by reference in this Form 10-K.
OVERVIEW
The Company commenced operations on April 29, 1996, with a 1,149 foot, free
standing observation tower with an integrated casino, hotel and
retail-entertainment center. Prior to opening, the Company was in the
development stage and did not have any historical operating income as there
were no operating revenues. Until opening, expenses consisted primarily of
interest and amortization of costs and expenses relating to the 14 1/4 First
Mortgage Notes issued in March 1995.
On January 27, 1997, the Stratosphere Corporation and its wholly-owned
subsidiary Stratosphere Gaming Corporation ("SGC") filed voluntary petitions
for Chapter 11 Reorganization pursuant to the United States Bankruptcy Code.
As of that date, the United States Bankruptcy Court for the District of Nevada
assumed jurisdiction over the assets of the Company and SGC. The Company and
SGC are acting as debtors in possession on behalf of their respective
bankrupt
<PAGE> 20
estates, and are authorized as such to operate their business subject to
bankruptcy court supervision. The Company and Grand Casinos, Inc. filed a
Joint Plan of Reorganization (the "Plan") with the court on the filing date.
(See Liquidity and Capital Resources for additional information).
Due to the short operating period, historical results may not be indicative
of future operating results and comparisons to prior fiscal years may not
provide relevant information and therefore have not been included.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 29, 1996
The Company experienced a net loss before the recording of several
non-recurring charges of $9.7 million or ($0.17) per weighted average common
share. The non-recurring charges included a non-cash charge of $295.9 million
or ($5.07) per share related to the adoption of SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of,"
$4.0 million or ($0.07) per share of pre-opening expenses, $3.0 million or
($0.05) per share charge for bad debt reserve relating to the receivable due
from Bob Stupak for the servicing of his vacation package customers and $1.0
million or ($0.02) per share for restructuring costs. The net loss after
these non-recurring charges was $313.6 million or ($5.37) per share.
TWELVE MONTHS ENDED DECEMBER 29, 1996
The Company experienced a net loss for fiscal year 1996 before the
recording of several non-recurring charges of $25.0 million or ($0.43) per
weighted average common share. The non-recurring charges included a non-cash
charge of $295.9 million or ($5.09) related to the adoption of SFAS 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," $23.9
million or ($0.41) per share toward the amortization of preopening expenses,
$3.0 million or ($0.05) per share charge for bad debt reserve relating to the
receivable due from Bob Stupak for servicing of his vacation package customers
and $1.0 million or ($0.02) per share for restructuring costs. The net loss
after the aforementioned non-recurring charges was $348.8 million or ($6.00)
per share.
REVENUES
Gross revenues were $120.0 million (before promotional allowances of $11.2
million) for the fiscal year ended December 29, 1996. Casino revenue
represented 40% of gross revenue, hotel 16%, food and beverage 22%, and tower,
retail and other revenue 21%. Revenues generated from slot machines represented
70.0% of total casino revenue.
On October 1, 1996, the Company completed a partial remodel and
reconfiguration of the casino and launched a new casino marketing campaign. The
campaign and casino changes
<PAGE> 21
position the casino product as the best gaming value in Las Vegas by offering
favorable rules on table games and liberal pay backs on slot machines. Casino
revenue increased $7.1 million (from $14.2 million in the third quarter to
$21.3 million in the fourth quarter). Although management believes the primary
reason for the increase was due to the new marketing campaign and remodeling,
the increase may also have been influenced by seasonal and other unrelated
conditions. There can be no assurance that this improvement will continue or
be indicative of future trends.
The Company experienced hotel occupancy of 87% for fiscal year 1996
with an average daily rate of $64. Tower visitation totaled 2,443,532 for the
period inclusive of guests dining at the Top of The World revolving restaurant.
Fourth-quarter visitation decreased from 881,861 in the third quarter to 777,281
in the fourth quarter, which management believes is primarily due to seasonal
conditions. The Company believes that the negative publicity surrounding its
bankruptcy filing in January 1997 will have a short-term adverse effect on
revenues.
COSTS AND EXPENSES
Costs and expenses totaled $439.9 million for fiscal year 1996.
Amortization of pre- opening expenses relating to Phase I of the project was
$23.9 million which were fully amortized at December 29,1996.
As discussed above, the Company adopted Statement of Financial
Accounting Standards No. 121, " Accounting for the Impairment of Long- Lived
Assets and for Long-Lived Assets to Be Disposed Of," as of the end of fiscal
year 1996. The initial non-cash charge was $295.9 million or $5.09 loss per
weighted average common share. The impairment loss was measured as the amount
by which the carrying value of the long-lived assets exceeded their fair market
value. Management has made a preliminary assessment of the fair market value
of each long-lived asset category to reflect the impairment loss. Any changes
in such fair market value determination which would result from independent
appraisal or other third party sources are not expected to have a material
impact on the Company's future consolidated results of operations.
Depreciation and amortization was $11.5 million. The depreciation of
assets began April 29, 1996, at which time the assets were placed in service.
Future depreciation will not be consistent with the past as the asset values
used in the calculation have been reduced for future periods pursuant to the
application of Statement of Financial Accounting Standards No. 121.
Future adjustment of asset values is possible with the anticipated
adoption of fresh-start reporting at the confirmation date upon bankruptcy court
approval of a plan of reorganization. Such adjustments may impact depreciation
expense in future periods.
Selling, general and administrative expenses included a charge of $3.0
million relating to the establishment of a bad debt reserve for funds due the
Company from Bob Stupak for the servicing of vacation packages sold by Mr.
Stupak. The Company ceased servicing vacation packages on January 13, 1997.
The ability of the Company to provide its resort as a facility for servicing
the vacation packages in the future will be dependent on the Company and Bob
Stupak
<PAGE> 22
being able to make adequate arrangements that would be subject to approval by
the bankruptcy court.
Also included in selling, general and administrative expenses was $1.0
million of costs associated with the restructuring. These costs are expected
to continue and are anticipated to increase during the term of the bankruptcy.
The Company will expense these costs during the periods incurred. During the
term of the bankruptcy all such costs will require court approval prior to
being paid.
OTHER - NET
Interest income decreased by $4.4 million during fiscal 1996 due to a
reduction in cash balances. The amounts earned during the prior year include
interest earned on the funds placed in the Phase I construction escrow account.
Interest expense was $21.8 million in fiscal 1996, or $9.8 million
greater than the amount incurred during 1995. Such increase is attributable to
the fact that 1996 represents the first year that a full year's interest was
incurred on the First Mortgage Notes. Interest of $14.0 and $13.2 was
capitalized during fiscal 1996 and 1995 respectively. The Company will not
accrue interest on the First Mortgage Notes for the period subsequent to the
bankruptcy filing until a plan of reorganization is approved.
As of December 29, 1996, the Company had a net operating loss carry
forward of approximately $27.5 million. The availability of the carry forward
will be subject to the tax treatment accorded the final plan of reorganization.
LIQUIDITY AND CAPITAL RESOURCES
RESTRUCTURING PLAN
On January 6, 1997, the Stratosphere Corporation and SCG (the
"Debtors") announced an agreement-in-principal by and among Grand, the Debtors,
and the holders of over 57 percent of the Company's First Mortgage Notes
pertaining to the restructuring of the First Mortgage Notes and the equity
capitalization of the Company. The Company's announcement indicated further
that the agreement-in-principal will expire unless a plan of reorganization
consistent with the terms thereof is confirmed by a Bankruptcy Court by June 30,
1997. The Debtors filed voluntary petitions on January 27, 1997, for Chapter 11
Reorganization pursuant to the United States Bankruptcy Code. The Debtors are
acting as debtors in possession on behalf of their respective bankrupt estates
and are authorized as such to operate their business subject to bankruptcy court
supervision. The Debtors and Grand filed a Joint Plan of Reorganization (the
"Plan") on January 27, 1997.
Under the terms of the Plan, Stratosphere's $203 million 14 1/4% Notes
currently
<PAGE> 23
outstanding will be exchanged for $203 million of new Stratosphere Notes
bearing interest at 11 1/4%, due May 15, 2002. The Plan calls for interest
payable in kind at 14 1/4% per annum for the November 15, 1996 interest
payment, now in arrears, and a payment in kind at 11 1/4% per
annum for the May 15, 1997 interest payment, with all subsequent interest
payments paid in cash. The new Notes will also receive additional contingent
interest equal to 15% of Stratosphere's consolidated annual cash flow from
$60.0 million to $80.0 million, up to $3.0 million per year. The new Notes
will be callable at 110% of par (plus accrued interest) on May 15, 1999.
Stratosphere also will be permitted, subject to certain restrictions, to issue
up to $25.0 million in additional new Notes to fund its working capital
requirements.
The restructuring Plan will also include a Rights Offering to all
existing holders of Stratosphere Common Stock, including Grand, which will
guarantee net proceeds to the Company of at least $75.0 million. The proceeds
of the Rights Offering will be used to finance completion of Phase II of the
Stratosphere resort complex, which includes a new hotel tower consisting of
approximately 1,000 room bays, a pool and recreation area, landscaping and
other improvements to the Stratosphere complex. Existing Stratosphere shares
will be canceled and shareholders will receive transferable rights to purchase
one share of Common Stock in reorganized Stratosphere at $1.31 per share. Each
purchaser of a share pursuant to the Rights Offering, other than those
subscribed for by Grand, as its pro-rata share, also will receive a three- year
warrant to purchase one-half of a share of Common Stock at $3.00 per full
share. As part of the restructuring plan, Grand has agreed to purchase its
pro-rata share of the Rights Offering (approximately 42 percent) for
approximately $31.9 million. Additionally, Grand will provide a standby
commitment to purchase any unsubscribed portion of the Rights Offering not
exercised by other Stratosphere shareholders. Grand has also agreed to provide
a new Completion Guarantee for Phase II of the Stratosphere project, which will
cover up to $25 million in cost overruns on completion of Phase II. Any
amounts paid by Grand pursuant to the Completion Guarantee would constitute
subordinated debt of Stratosphere with interest payable at 11 1/4 %.
The Rights Offering will result in the issuance of 58.4 million shares
of Stratosphere Common Stock, with net proceeds of at least $75.0 million.
Upon completion of the reorganization and Rights Offering, Stratosphere will
have approximately 96.8 million shares of Common Stock outstanding and warrants
outstanding to purchase an additional 17.0 million shares of Common Stock at
$3.00 per share.
Under the Plan, Grand will convert $50.0 million due from Stratosphere
into 39.7% (approximately 38.4 million shares) of the Common Stock of
Stratosphere Corporation outstanding upon the completion of the reorganization.
Grand previously loaned this amount to Stratosphere pursuant to its Completion
Guarantee on the construction of the Stratosphere casino, hotel and tower,
which opened in Las Vegas on April 29, 1996. Assuming full subscription by the
public shareholders in the Rights Offering, Grand will subscribe for
approximately 24.5 million shares of reorganized Stratosphere Corporation for
$32.1 million. These shares together with shares received from the conversion
of $50.0 million of debt, will result in Grand owning 65% of Stratosphere
Corporation (without giving effect to the warrants).
<PAGE> 24
The Plan is subject to a number of conditions, including Plan
confirmation by the United States Bankruptcy Court, District of Nevada, receipt
of all necessary regulatory approvals, including those required by Nevada
gaming authorities, completion of definitive Plan related documents, and other
customary closing conditions. In addition, Grand's obligations under the Plan
are conditioned upon resolution or discharge of certain pending securities
litigation, receipt by Grand of an investment banking fairness opinion, a two
year Management Agreement wherein Grand agrees to manage construction of Phase
II and the day to day operations of Stratosphere for $500,000 per year
inclusive of all costs and expenses, and Stratosphere's consolidated cash flows
(as defined in the Plan) for the months between October 1, 1996, and June 30,
1997, averaging not less than $2,267,000 per month. The average for the five
months ended February 23, 1997, was $1,615,736. Based on these conditions
there can be no assurance that the Plan on file will ultimately be confirmed.
If the Plan or a similar proposal that restructures the existing debt
and provides adequate working capital is not confirmed, the Company will
likely be unable to continue as a going concern.
DEBT
Long-term debt totaled $272.5 million at December 29,1996, consisting
of the following:
On March 9, 1995, the Company closed on its offering of $203,000,000
14 1/4% First Mortgage Notes due 2002. The proceeds of the offering were used
to develop and construct Phase I of the project. The Company did not make the
required November 15, 1996, interest payment of $14.5 million. As of December
29, 1996, the Company accrued $18.3 million of interest expense. The Company
will not accrue any interest on this debt subsequent to the bankruptcy filing
until a plan of reorganization is confirmed.
Pursuant to the Memorandum of Agreement issued in connection with the
First Mortgage Notes, Grand also entered into a Standby Equity Commitment with
the Company pursuant to which Grand may contribute to the Company up to $20.0
million in new equity through the purchase of Capital Stock (other than
Disqualified Stock), on non-cumulative bases, in each of the first three years
following the time that the Stratosphere Tower Project is operating. Such
funds would be contributed to the Company as long as the Company's Consolidated
Cash Flow does not reach $50.0 million, subject to certain terms and conditions
to cover, on a dollar for dollar basis, any shortfall in the Company's
consolidated cash flow. The maximum commitment for the three years would be
$60.0 million. Funds for the Standby Equity Commitment would be made
available, to the extent necessary, through a rights offering of Common Stock,
at a discount of approximately 50% from the then-current market price, to all
stockholders of the Company; provided, however, that Grand would be obligated
to purchase any such shares of Common Stock, in addition to its pro rata share
as a stockholder of the Company, not so purchased by the other public
stockholders. The Company will retain the right to obtain the equity funds
which would otherwise be provided by the Standby Equity Commitment through
other means deemed appropriate.
<PAGE> 25
Under the terms of the Plan, Grand will be released from its
obligations under the Standby Equity Agreement.
The Company consummated a $37.5 million capital lease transaction on
May 3, 1996. On October 30, 1996, the Company executed a Standstill Agreement
as the Company was in default with the lease agreement based on its failure to
meet certain financial covenants. Pursuant to the agreement, the Company
reduced the principal by $4.2 million on a pro rata basis with funds held in
the escrow account. As of March 21, 1997, the Company has made all required
payments relating to the capital lease obligations and plans to continue making
such payments in the future. The capital lease obligations currently yield
interest at 8.3%. The Standstill Agreement is no longer in effect as the
Company has filed bankruptcy.
Pursuant to the Completion Guarantee under the Indenture to the First
Mortgage Notes, the Company borrowed $50.0 million from Grand as of December
29, 1996. The loan is subordinate to the First Mortgage Notes and Capital
lease obligations and accrues interest at the rate of 14.25%. The interest
will accrue but will not be paid until the Company meets certain financial
covenants pursuant to the Indenture under the First Mortgage Notes. The loan
matures one year after the First Mortgage Notes. The Company will not accrue
any interest on this debt subsequent to the bankruptcy filing until a plan of
reorganization is confirmed. Under the Plan this debt would be converted to
equity through the issuance of approximately 38.4 million shares of the
Company's Common Stock.
SHAREHOLDERS DEFICIT
The Company had a shareholders' deficit at December 29, 1996, of $137.4
million. Shareholders' deficit may be subject to future adjustments with
the anticipated adoption of fresh-start reporting upon confirmation of a plan
of reorganization by the bankruptcy court.
On February 23, 1994, the Company consummated an Initial Public
Offering ("IPO") of 11,700,000 Units (each $5.00 Unit consisting of one share
of Common Stock and a redeemable warrant to purchase one share of Common
Stock). The redeemable warrants, exercisable for a period of five years, had
an exercise price of $5.83 per share and could be redeemed by the Company for
$.01 per warrant upon 30 days' prior written notice in the event the closing
bid price of the Company's Common Stock equaled or exceeded $7.375 per share
for 10 consecutive trading days ending not more than 30 days preceding the date
of the notice of redemption. The Company received proceeds of $53,913,175 from
the IPO, net of commissions and escrow fees but prior to other offering related
expenses of $2,519,156.
Prior to receipt of the net proceeds from the IPO, the Company met its
capital requirements through capital contributions and loans from BSE or its
affiliates, loans from Grand and mortgage financing. The Company used
$12,465,700 of the proceeds to repay amounts borrowed from BSE and Grand.
<PAGE> 26
On February 17, 1994, BSE transferred certain assets and services to
the Company with a historical cost of $15,689,347 representing a capital
contribution of $8,001,000 (18,299,000 shares of Common Stock) and a loan for
$7,688,347. The transfers made by BSE consisted principally of the following:
(i) real estate comprised of land upon which the Stratosphere Tower was
constructed and additional real estate, including certain existing rental
properties, upon which additional attractions and possible future projects will
be constructed: (ii) all plans, designs, contracts, concepts and construction
in progress relating to the Stratosphere Tower and (iii) certain direct costs
and expenses incurred in connection with the IPO and certain other reimbursable
expenses directly associated with the Stratosphere Tower project. In addition,
through February 17, 1994, BSE or its affiliates (principally Vegas World)
contributed services to the Company aggregating $2,134,887. These expenses
represent an allocation of expenses incurred by those affiliates on behalf of
the Company and management's estimate of other expenses that would have been
incurred had the Company operated on a stand alone basis during the periods
presented. As discussed in Note 1, for purposes of the accompanying
consolidated financial statements, the aforementioned capital contributions and
loans made by BSE or its affiliates are reflected in the periods the underlying
assets were acquired and services rendered.
In connection with the IPO, the Company, BSE, Stupak and Grand entered
into various agreements pursuant to which:
- Grand purchased 5,750,000 of the 11,700,000 Units sold in the
IPO for $26,915,750.
- At the close of the IPO, Grand acquired 5,357,132 shares of
Common Stock from BSE at BSE's cost of approximately $.44 per
share.
- Grand was granted the option to purchase certain assets of
Vegas World.
- At the close of the IPO, BSE deposited into escrow an
additional 4,119,572 shares of the Company's Common Stock then
owned by BSE ("BSE Escrow Shares"). Subsequent to the exercise
of an option by the Company to purchase certain assets of
Vegas World (See Note 5), Grand acquired the BSE Escrow Shares
in August 1994 at BSE's cost of approximately $.44 per share.
Concurrent with the closing of the First Mortgage Notes Offering,
Grand invested approximately $33.5 million in the Company by purchasing 8,250
unregistered shares of the Company's Series A Convertible Non-Voting Preferred
Stock for $4,063 per share (the "Series A Preferred Stock"). Each share of
Series A Preferred Stock was convertible into 1,000 shares of the Company's
Common Stock. At the Company's annual meeting of stockholders on May 19, 1995,
the Company's stockholders approved Grand's conversion of the Series A
Preferred Stock into the Common Stock.
Subsequently, Grand has converted the Series A Preferred Stock into
8,250,000 shares of the Common Stock. The shares of Common Stock issued upon
conversion of the Series A Preferred
<PAGE> 27
Stock are not transferable for a period of five years from March 9, 1995.
Grand also agreed that it would not transfer or exercise the 5,750,000
Redeemable Warrants beneficially owned by Grand.
On September 7, 1995, the Company called for redemption on October 10,
1995, all of the outstanding Redeemable Warrants at a price of $0.01 per
Redeemable Warrant, for a total redemption price of $117,000. Each Redeemable
Warrant entitled the registered holder thereof to purchase one share of Common
Stock at $5.83 per share. The Company received approximately $34.2 million in
net proceeds from the issuance of the Common Stock upon exercise of all the
Redeemable Warrants (excluding those held by Grand). In addition the Company
received $112,625 from the exercise of 26,500 Stock Options.
On December 22, 1995, the Company closed an offering (the "First
Offering") of 10,000,000 shares of the Common Stock, resulting in proceeds to
the Company of $75,200,000. Of these shares, 8,400,000 shares were sold at
$8.00 per share in an underwritten public offering (the "Public Offering"),
resulting in net proceeds to the Company, after underwriting discounts, of
$7.52 per share. The remaining 1,600,000 shares (the "Direct Shares") of the
First Offering were sold directly by the Company for $7.52 per share to
affiliates of the Company. Of the Direct Shares, 1,000,000 were sold to Grand,
500,000 shares were sold to Lyle Berman, Chief Executive Officer and a director
of the Company and Chief Executive Officer and Chairman of the Board of Grand,
and 100,000 shares were sold to Stanley Taube, a director of the Company and
the Vice President and a director of Grand. On December 29, 1995, the Company
closed on the offering (the "Second Offering," together with the First
Offering, the "Equity Offerings"), of 1,260,000 shares granted in an option to
the underwriters of the Equity Offerings. Proceeds to the Company from the
Second Offering were $9,475,200.
On January 11, 1996, the Company purchased approximately 3.5 acres
across the street from its property. The property was used to build a
500-car parking lot. The Company issued 1,050,000 shares of Common Stock for
the purchase of which 500,000 shares went directly to the owner of the land,
500,000 shares were sold to an unrelated third party and 50,000 shares were
paid as a fee to the broker of the transaction.
During March 1996 the Company acquired approximately two acres through
the issuance of 765,559 shares to an unrelated third party. The property has
been used to stage Phase II construction materials and equipment, and may be
used to provide future additional parking.
On May 6, 1996, the Company received proceeds of $723,406 through the
exercise of 81,596 sales agent warrants that were issued in connection with the
IPO.
The Company's Common Stock has been delisted from the Pacific Stock
Exchange on December 3, 1996, and the Company has been notified by Nasdaq that
because the Company no longer satisfies Nasdaq's listing standards, the
Company's Common Stock will be delisted from the National Market System on March
31, 1997. The Company has appealed Nasdaq's determination to delist the
Company's Common Stock, however, there can be no assurance that the Company's
appeal will be successful. If the Company's Common Stock is delisted from the
National Market System, the liquidity of the Common Stock will be adversely
affected. If delisting occurs, the Company's Common Stock will become a
"designated security" under the rules and regulations promulgated by the
Securities and Exchange Commission. In general, designated securities are
subject to various procedural requirements (the "Penny Stock Rules") that make
them more difficult for brokers to sell to certain people, and many brokers have
decided not
<PAGE> 28
to trade securities subject to the Penny Stock Rules. Accordingly, if the
Company's Common Stock is delisted from the National Market System the
liquidity of shareholders' investments therein will be adversely affected.
CASH FLOW, WORKING CAPITAL AND CAPITAL EXPENDITURES
The Company's unrestricted cash balances totaled approximately $22.0
million as of February 23, 1997. The Company estimates that its current
level of operations will generate adequate cash flow to operate during the term
of the bankruptcy.
The Company has completed construction of Phase I, of which $162.5
million was incurred during fiscal 1996 and has spent approximately $62.0
million on Phase II of the project. The Company has ceased construction of
Phase II due to its inability to fund further construction. The Company
estimates the total additional cost to complete Phase II is $75.0 million. The
Company estimates that the construction of Phase II will take approximately
seven months. The Company believes that the completion of Phase II is critical
to its long-term viability. The completion of Phase II by the Company is
dependent on the Company's ability to obtain bankruptcy court confirmation
regarding the Plan filed or of a plan providing adequate funding for the
completion of Phase II.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-K and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains statements that are forward- looking, such as statements relating to
plans for future expansion, future construction costs and other business
development activities as well as other capital spending, financing sources and
the effects of regulation (including gaming and tax regulation) and
competition. Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results in the future
and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These risks
and uncertainties include, but are not limited to, those relating to
development and construction activities, dependence on existing management,
leverage and debt service (including sensitivity to fluctuations in interest
rates), domestic or global economic conditions, changes in federal or state tax
laws or the administration of such laws and changes in gaming laws or
regulations (including the legalization of gaming in certain jurisdictions).
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants 31
Independent Auditors' Report 32
Consolidated Balance Sheets at December 29, 1996, and December 31, 1995 33
Consolidated Statement of Operations for the fiscal years ended December 29, 1996,
December 31, 1995 and 1994 34
Consolidated Statements of Stockholders' Equity for the period from January 1, 1994,
to December 29, 1996 35
Consolidated Statements of Cash Flows for the fiscal years ended December 29, 1996,
December 31, 1995 and 1994 36
Notes to Consolidated Financial Statements 38
</TABLE>
<PAGE> 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Stratosphere Corporation:
We have audited the accompanying consolidated balance sheets of Stratosphere
Corporation (a Delaware corporation) and subsidiaries as of December 29, 1996
and December 31, 1995, and the related consolidated statements of operation,
stockholders' equity and cash flows for the years ended December 29, 1996 and
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stratosphere
Corporation and subsidiaries as of December 29, 1996 and December 31, 1995, and
the results of their operations and their cash flows for the years ended
December 29, 1996 and December 31, 1995, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company filed for Chapter 11
bankruptcy protection on January 27, 1997. The bankruptcy filing raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 8.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 26, 1997
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Stratosphere Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Stratosphere Corporation (a development
stage company majority-owned by Grand Casinos Resorts, Inc.) and subsidiary for
the year ended December 31, 1994. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements of Stratosphere
Corporation and subsidiary referred to above present fairly, in all material
respects, the results of their operations and their cash flows for the year
ended December 31, 1994 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Las Vegas, Nevada
February 3, 1995
<PAGE> 33
CONSOLIDATED
BALANCE SHEETS STRATOSPHERE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 22,558,804 $ 92,595,770
Cash and cash equivalents - restricted 2,678,344 -
Securities available for sale 2,000,905 5,140,950
Accounts receivable 4,575,490 4,485,681
Other current assets 6,127,325 2,056,897
- --------------------------------------------------------------------------------------------------------------
Total Current Assets 37,940,868 104,279,298
- --------------------------------------------------------------------------------------------------------------
Property and Equipment, Net 130,000,000 194,908,237
- --------------------------------------------------------------------------------------------------------------
Other Assets:
Cash and cash equivalents-restricted - 115,413,435
Debt issuance and deferred financing costs-net 12,339,097 13,507,699
Pre-opening costs-net - 5,796,862
Related party receivable - net 800,000 -
- --------------------------------------------------------------------------------------------------------------
Total Other Assets 13,139,097 134,717,996
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 181,079,965 $ 433,905,531
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable-trade $ 1,250,786 $ 338,745
Accounts payable-construction 858,665 33,523,612
Current installments of long-term debt 429,103 -
Current installments of capital lease obligations 8,684,360 -
Accrued interest 18,644,462 3,645,657
Accrued payroll and related expenses 5,005,047 166,485
Affiliate payable 1,878,717 803,865
Other accrued expenses 9,231,792 137,403
- --------------------------------------------------------------------------------------------------------------
Total Current Liabilities 45,982,932 38,615,767
- --------------------------------------------------------------------------------------------------------------
Long-term Liabilities:
Long-term debt - less current installments 203,000,000 203,000,000
Capital lease obligations - less current installments 19,539,815 -
Note payable to affiliate 50,000,000 -
- --------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 272,539,815 203,000,000
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 318,522,747 241,615,767
- --------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity (Deficit):
Preferred stock, $.01 par value; authorized 10,000,000 shares;
no shares issued and outstanding
Common stock, $.01 par value; authorized 100,000,000 shares;
issued and outstanding 58,393,105 and 56,361,117
at December 29, 1996 and December 31, 1995,
respectively 583,931 563,611
Additional paid-in-capital 218,787,643 199,697,889
Accumulated deficit (356,814,356) (7,971,736)
- --------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity (Deficit) (137,442,782) 192,289,764
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 181,079,965 $ 433,905,531
==============================================================================================================
</TABLE>
See notes to consolidated financial statements.
33
<PAGE> 34
CONSOLIDATED
STATEMENTS OF OPERATIONS STRATOSPHERE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 29, 1996, DECEMBER 31, 1995 AND 1994
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Casino $ 47,901,144 $ - $ -
Hotel 19,698,730 - -
Food and beverage 26,825,729 - -
Tower, retail and other income 25,541,729 59,864 107,132
- -----------------------------------------------------------------------------------------------------------------
Gross Revenues 119,967,332 59,864 107,132
Less: Promotional allowances 11,228,465 - -
- -----------------------------------------------------------------------------------------------------------------
NET REVENUES 108,738,867 59,864 107,132
- -----------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 21,474,255 - -
Hotel 7,082,100 - -
Food and beverage 22,416,703 - -
Other operating expenses 9,444,697 - -
Depreciation and amortization 11,477,925 - -
Pre-opening costs amortization 23,909,146 - -
Impairment of long-lived assets 295,946,633 - -
Selling, general and administrative 48,153,596 947,008 1,049,838
- -----------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 439,905,055 947,008 1,049,838
- -----------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (331,166,188) (887,144) (942,706)
- -----------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 3,992,108 8,361,087 664,540
Interest expense (21,761,565) (11,970,178) -
Gain (loss) on sale of assets 93,025 (166,815) -
- -----------------------------------------------------------------------------------------------------------------
Total Other Income (Expense), net (17,676,432) (3,775,906) 664,540
- -----------------------------------------------------------------------------------------------------------------
Loss before income taxes (348,842,620) (4,663,050) (278,166)
Provision for income taxes - - -
- -----------------------------------------------------------------------------------------------------------------
NET LOSS $ (348,842,620) $ (4,663,050) $ (278,166)
=================================================================================================================
LOSS PER COMMON SHARE $ (6.00) $ (0.12) $ (0.01)
=================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 58,134,811 37,583,065 30,000,000
=================================================================================================================
</TABLE>
See notes to consolidated financial statements.
34
<PAGE> 35
CONSOLIDATED
STRATOSPHERE CORPORATION AND SUBSIDIARIE
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional Total
Common Preferred Paid-in Accumulated Stockholders'
Stock Stock Capital Deficit Equity (Deficit)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $ 10 $ - $ 10,066,550 $ (3,030,520) $ 7,036,040
Net loss - - - (278,166) (278,166)
Contributions of capital (Note 9) - - 69,337 - 69,337
Proceeds from initial public offering 299,990 - 53,613,185 - 53,913,175
Cost of initial public offering - - (2,519,156) - (2,519,156)
Sale of common stock purchase
warrants - - 675 - 675
Preferential distribution to stockholder - - (20,209,840) - (20,209,840)
----------------------------------------------------------------------------
Balances at December 31, 1994 300,000 - 41,020,751 (3,308,686) 38,012,065
Net loss - - (4,663,050) (4,663,050)
Sale of preferred stock to parent - 82 33,524,778 - 33,524,860
Issuance of common stock in payment
of underwriting fees 8,000 - 3,992,000 - 4,000,000
Convert preferred to common stock 82,500 (82) (82,418) - -
Cost of initial public offering - - (23,570) - (23,570)
Adjustment to preferred distribution for
cash received in lieu of Vegas World equipment - - 736,116 - 736,116
Adjustment to preferential distribution for the
net book value of the gaming equipment
received in excess of purchase price - - 490,725 - 490,725
Exercise of 26,500 stock options 265 - 112,360 - 112,625
Exercise of 5,874,617 common stock
purchase warrants 58,746 - 34,132,741 - 34,191,487
Proceeds from secondary stock offering 112,600 - 89,199,400 - 89,312,000
Cost of secondary stock offering - - (4,841,904) - (4,841,904)
Purchase of land for common stock 1,500 - 1,292,250 - 1,293,750
Unrealized holding gain on investment - - 144,660 - 144,660
----------------------------------------------------------------------------
Balances at December 31, 1995 563,611 - 199,697,889 (7,971,736) 192,289,764
Net loss - - - (348,842,620) (348,842,620)
Exercise of 134,833 stock options 1,348 - 571,692 - 573,040
Exercise of 81,596 common stock 816 - 722,590 - 723,406
purchase warrants
Cost of secondary stock offering - - (248,047) - (248,047)
Purchase of land for common stock 18,156 - 18,186,604 - 18,204,760
Unrealized holding loss on investment - - (143,085) - (143,085)
----------------------------------------------------------------------------
Balances at December 29, 1996 $583,931 $ - $218,787,643 $(356,814,356) $(137,442,782)
============================================================================
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 36
CONSOLIDATED
STATEMENTS OF CASH FLOWS STRATOSPHERE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 29, 1996, DECEMBER 31, 1995 AND 1994 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (348,842,620) $ (4,663,050) $ (278,166)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,407,234 1,718,209 -
Amortization of pre-opening costs 23,909,146 - -
Provision for doubtful accounts 3,166,829 - -
Impairment of long-lived assets 295,946,633 - -
Loss on sale or disposal of assets 214,495 166,815 -
Changes in operating assets and liabilities:
Accounts receivable (278,951) (4,485,681) -
Other current assets (4,070,428) (2,051,650) (5,247)
Accounts payable - trade 912,041 499,630 90,823
Other accrued expenses 28,931,755 3,928,575 3,971
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 13,296,134 (4,887,152) (188,619)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to stockholder - (4,411,798) (42,396,686)
Change in cash and cash equivalents-restricted 112,592,006 (115,268,775) -
Change in securities available for sale 3,140,045 (5,140,950) -
Payments for property and equipment (224,526,056) (124,470,643) (27,431,080)
Change in construction payables (32,664,947) 29,883,865 3,639,747
Pre-opening costs (18,112,284) (5,796,862) -
Increase in related party receivable and other (3,777,687) - (55,000)
Cash proceeds from sale of property and equipment - 928,134 -
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (163,348,923) (224,277,029) (66,243,019)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock-net 1,296,446 84,470,097 53,913,175
Proceeds from exercise of stock options/common stock
purchase warrants - 34,304,112 675
Costs of secondary stock offering (248,046) - -
Debt issuance and deferred financing costs (760,707) (11,221,825) -
Change in prepaid offering costs - 935,395 (1,345,956)
Proceeds from issuance of long-term debt and capital lease obligations 34,394,550 216,493,456 25,596,513
Payments on long-term debt and capital lease obligations (5,741,272) (3,737,763) (5,582,920)
Proceeds from loans from related party - - 68,122
Payments of loans from related party - - (7,688,347)
Increase in affiliate payable 1,074,852 - -
Proceeds from issuance of debt to affiliate 50,000,000 - -
Capital contributions - - 69,337
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 80,015,823 321,243,472 65,030,599
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (70,036,966) 92,079,291 (1,401,039)
Cash and cash equivalents - beginning of period 92,595,770 516,479 1,917,518
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ 22,558,804 $ 92,595,770 $ 516,479
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
36
<PAGE> 37
CONSOLIDATED
STATEMENTS OF CASH FLOWS STRATOSPHERE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 29, 1996, DECEMBER 31, 1995 and 1994 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest-net of capitalized interest $ 2,014,243 $ - $ -
Income taxes $ - $ 275,877 $ -
Non-Cash Investing and Financing Activities:
Issuance of common stock in purchase of land $18,204,760 $ 1,293,750 $ -
Issuance of common stock in payment of underwriting fees in connection
with First Mortgage Notes $ - $ 4,000,000 $ -
Purchase of land, buildings, furniture and equipment from
stockholder (principally Vegas World assets) as follows:
Purchase price $ - $ 1,000,000 $51,225,000
Cash paid (5,496,516)
------------------------------------
Note payable to stockholder - 1,000,000 45,728,484
Preferential distribution to
stockholder - 1,226,841 (20,209,840)
------------------------------------
Predecessor cost of assets aquired for non-cash consideration $ - $ 2,226,841 $ 25,518,644
=====================================
Increase in furniture and equipment from
reduction in notes receivable from stockholder $ - $ 80,000 $ -
Offering costs recognized as a reduction in additional paid-in capital
in connection with initial public offering of common stock $ - $ 23,570 $ 2,519,156
Issuance of preferred stock to parent in payment of notes payable $ - $33,524,860 $ -
</TABLE>
See notes to consolidated financial statements.
37
<PAGE> 38
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The accompanying consolidated financial statements present the
financial position, results of operations and cash flows of Stratosphere
Corporation and its wholly-owned subsidiaries, Stratosphere Gaming Corp.,
Stratosphere Land Corporation, Stratosphere Advertising Agency and 2000 Las
Vegas Boulevard Retail Corporation (collectively the "Company"). Stratosphere
Corporation was incorporated in the State of Delaware on January 15, 1993,
under the name of Stratosphere Tower Corporation and on February 8, 1993, a
Certificate of Amendment was filed which changed the name of the Company to
Stratosphere Corporation. The Company is owned 41.9% by Grand Casinos Resorts,
Inc. ("Grand") which is in turn a wholly-owned subsidiary of Grand Casinos,
Inc.
The Company was organized for the purpose of completing the development and
construction of, and thereafter owning and operating, the Stratosphere Tower, a
1,149 foot, free-standing observation tower with integrated casino, hotel and
entertainment facilities in Las Vegas, Nevada (the "Stratosphere Tower"). The
Company commenced operations of the resort facility on April 29, 1996.
On January 27, 1997, Stratosphere Corporation and its wholly-owned subsidiary
Stratosphere Gaming Corporation ("SGC") filed voluntary petitions for Chapter 11
Reorganization pursuant to the United States Bankruptcy Code. As of that date,
the United States Bankruptcy Court for the District of Nevada assumed
jurisdiction over the assets of Stratosphere Corporation and SGC. Stratosphere
Corporation and SGC are acting as debtors in possession on behalf of their
respective bankrupt estates, and are authorized as such to operate their
business subject to bankruptcy court supervision (See Note 8). The fiscal 1996
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. These consolidated financial statements do
not include any adjustments that might result if the Company is unable to
successfully emerge from bankruptcy.
BASIS OF PRESENTATION
The accompanying consolidated financial statements through February 23, 1994,
the date of consummation of the Company's initial public offering ("IPO"),
represent a "carve out" of the activities and operations of the Stratosphere
Tower project from the accounting records of Bob Stupak Enterprises, Inc.
("BSE"), a company wholly-owned by Robert E. Stupak ("Stupak"), and certain
other affiliates (principally Vegas World Hotel and Casino, a sole
proprietorship owned by Stupak). The "carve out" through February 23, 1994,
was based on the following assumptions:
Acquisition of real estate for the project began in January 1989.
Accordingly, for purposes of these consolidated financial statements,
January 1, 1989, is considered to be the date of inception. All assets
acquired have been included in these consolidated financial statements at
the historical cost of the acquiror. The consolidated financial statements
assume that the Company purchased all the land, and improvements thereon,
and paid for all construction, and related activities, costs of the IPO and
other operating expenses.
Payroll and related expenses, comprised of officers' and directors'
compensation, are reflected at amounts based upon the anticipated
compensation to be paid to those levels subsequent to the consummation of
the IPO.
Professional fees are the actual amounts for legal, accounting and other
consulting services incurred on behalf of the Company.
Property taxes and interest are the actual expenses associated with the
acquired real estate and their financings.
General and administrative expenses are comprised of actual travel expenses
and an allocation of Vegas World Hotel and Casinos' ("Vegas World")
insurance, rent, supplies, telephone and utility expenses based on
management's estimate of a 1,000 square foot office. Management believes
that this estimate is reasonable.
The Company believes that the expenses recorded in the consolidated financial
statements through February 23, 1994, reflect the expenses that would have been
incurred had the consolidated Company operated on a stand alone basis during
the periods presented. Subsequent to February 23, 1994, the Company recorded
its own assets, liabilities and operations.
<PAGE> 39
The consolidated financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. While the
Chapter 11 cases are in process, Stratosphere Corporation and SGC continue
in possession of their properties and operates and manage their business as a
debtor-in-possession pursuant to the Bankruptcy Code.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Stratosphere
Corporation and all subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
REVENUES AND EXPENSES
The Company recognizes revenues in accordance with industry practice. Casino
revenue is the net win from gaming activities (the difference between gaming
wins and losses). Casino revenues are net of accruals for anticipated payouts
of progressive and certain other slot machine jackpots. Revenues include the
retail value of rooms, food and beverage, and other items that are provided to
customers on a complimentary basis. A corresponding amount is deducted as
promotional allowances. The cost of such complimentaries included as casino
expenses for the fiscal year 1996 was $458,000 for rooms, $3,339,000 for food
and beverage and $59,000 for other items.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and in banks, interest bearing
deposits, money market funds and investments purchased with an original
maturity of 90 days or less. Cash and cash equivalents-restricted in 1996
consist primarily of funds pledged for workers compensation benefits while the
long-term balance at December 31, 1995 related to the remaining proceeds from
the First Mortgage Notes restricted for funding the construction of the
facility.
SECURITIES AVAILABLE FOR SALE
The Company invests a portion of its Restricted Investments in short term
bond mutual funds which are classified as available for sale and valued at
market in the accompanying balance sheet. The cost of such investments at
December 29, 1996 was $2,000,905, while the market value was $2,002,480.
INVENTORIES
Inventories, consisting primarily of food and beverage, retail, and operating
supplies are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost (See Note 4) , except in the case of
capitalized lease assets, which are stated at the lower of the present value of
the future minimum lease payments or fair market value at the inception of the
lease. Expenditures for additions, renewals and improvements are capitalized.
Costs of repairs and maintenance are expensed when incurred. Leasehold
acquisition costs are amortized over the shorter of their estimated useful
lives or the term of the respective leases once the assets are placed in
service.
Depreciation and amortization of property and equipment is computed using the
straight-line method over the following useful lives:
Building and improvements 39 years
Furniture, fixtures and equipment 3-15 years
Land Improvements 15 years
The Company's policy is to capitalize interest incurred on debt during the
course of qualifying construction projects. Such costs are amortized over the
related assets' estimated useful lives. Capitalized interest totaled
$13,954,854, $13,223,121, and $97,000 during the fiscal years 1996, 1995, and
1994 respectively.
RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS
In 1996 the Company adopted Statement of Financial Accounting Standards No. 121
("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of." Pursuant to SFAS 121, the Company reviews its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset or a group of assets may not be
recoverable. The Company considered its default on its required debt service
payment and significant operating losses to be its primary indicator of
potential impairment. Assets are grouped and evaluated for impairment at the
lowest level for which there are identifiable cash flows that are largely
independent of the cash
<PAGE> 40
flows of other groups of assets. The Company deems an asset to be
impaired if a forecast of undiscounted future operating cash flows directly
related to the asset, including disposal value if any, is less than its
carrying amount. If an asset is determined to be impaired, the loss is
measured as the amount by which the carrying amount of the asset exceeds fair
value. The Company generally measures value by discounting estimated cash
flows. Considerable management judgment is necessary to estimate discounted
future cash flows. Accordingly, actual results could vary significantly from
such estimates.
DEBT ISSUANCE COSTS
Deferred debt issuance costs represent direct costs and expenses of $15,205,738
that were incurred in connection with the Company's offering of $203,000,000 14
1/4% First Mortgage Notes. Such amount is amortized using the straight line
method over the term of the Notes. For the fiscal years ended December 29,
1996, and December 31, 1995, $2,113,383 and $1,718,209 of debt issuance cost
was amortized. There was no amortization of deferred debt issuance costs for
the year ended December 31, 1994.
PRE-OPENING COSTS
Pre-opening costs incurred prior to the opening are capitalized and amortized
to expense using the straight line method over the six months following the
opening. These costs include payroll, training and marketing costs incurred
prior to commencement of operations. Amortization of pre-opening costs
totaled $23,909,146 for fiscal year ended December 29, 1996. There was no
amortization of pre-opening costs for the years ended December 31, 1995 and
1994. There were no amounts related to pre-opening costs included in asset
balances as of December 29, 1996.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes". SFAS 109 requires a change from the deferred method of accounting for
income taxes of APB Opinion No. 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. Under SFAS 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Effective January 1, 1993, the Company
adopted SFAS 109.
As the Company is a less than 80% owned subsidiary, its operations are not
included in the consolidated federal income tax return of Grand Casinos, Inc.
Accordingly, the Company files a separate federal income tax return.
USE OF ESTIMATES
The preparation of the consolidated 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. Based on the application of significant judgment, actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications, having no effect on net losses, have been made to
the prior years Consolidated Financial Statements to conform with the current
year presentation.
FISCAL YEAR-END
The Company has adopted a 52- or 53-week accounting period.
(2) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following as of December 29, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Hotel and related $3,691,103 $ -
Gaming 554,268 -
Construction build-out receivables - 4,209,804
Other 519,261 275,877
---------- ----------
</TABLE>
<PAGE> 41
<TABLE>
<S> <C> <C>
Total 4,764,632 4,485,681
Less allowance for doubtful accounts (189,142) -
---------- ----------
Accounts receivable net $4,575,490 $4,485,681
========== ==========
</TABLE>
(3) OTHER CURRENT ASSETS
Other current assets consists of the following as of December 29, 1996, and
December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Inventory $3,270,532 $ -
Prepaid expenses 2,407,852 213,451
Other 448,941 1,843,446
---------- ----------
Other Current Assets $6,127,325 $2,056,897
========== ==========
</TABLE>
(4) PROPERTY AND EQUIPMENT - NET
Property and equipment consist of the following as of December 29, 1996, and
December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
---- -----
<S> <C> <C>
Land and land improvements, including
land held for development $ 21,127,893 $ 24,336,016
Building and improvements 66,673,110 26,062,670
Furniture, fixtures and equipment 37,716,774 3,324,251
Construction in progress 15,919,491 141,185,300
------------ ------------
141,437,268 194,908,237
Less accumulated depreciation (11,437,268) -
------------ ------------
Property and Equipment - Net $130,000,000 $194,908,237
============ ============
</TABLE>
Included in property and equipment at December 29, 1996 are assets recorded
under capital leases of $33.5 million. Accumulated depreciation and
amortization at December 29, 1996 includes amounts recorded for capital leases
of $3,073,185.
In connection with the adoption of SFAS 121, the Company recorded a non-cash
impairment loss of $295.9 million or $5.09 loss per weighted average common
share. The impairment loss was measured as the amount by which the carrying
value of the long-lived assets exceeded their fair market value. Management has
made a preliminary assessment of the fair market value of each long-lived asset
category to reflect the impairment loss. Any changes in such fair market value
determination which would result from independent appraisal or other third party
sources are not expected to have a material impact on the Company's future
consolidated results of operations. As a result of the reduced carry amount of
the impaired assets, depreciation and amortization expense will be reduced
during future periods.
Future adjustment of asset carry amounts is possible with the anticipated
adoption of fresh-start reporting at the confirmation date upon bankruptcy court
approval of a plan of reorganization.
(5) OTHER ACCRUED EXPENSES
Other accrued expenses consists of the following as of December 29, 1996, and
December 31, 1995.
<TABLE>
<S> <C> <C>
Accrued liabilities $5,147,109 $ -
Deposits 443,914 30,000
Accrued taxes 1,436,719 107,403
Other 2,204,050 -
---------- --------
Other Accrued Expenses $9,231,792 $137,403
========== ========
</TABLE>
(6) LONG TERM DEBT
A summary of debt outstanding as of December 29, 1996 and December 31, 1995 is
as follows:
<PAGE> 42
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
14.25% First Mortgage Notes due April 1, 2002 $203,000,000 $203,000,000
(see description following)
Other 429,103 -
------------ ------------
203,429,103 203,000,000
Less current portion (429,103) -
------------ ------------
Long-term debt-less current portion $203,000,000 $203,000,000
============ ============
</TABLE>
The prime rate of interest was 8.25% and 8.5% at December 29, 1996 and December
31, 1995 respectively.
14.25% FIRST MORTGAGE NOTES
On March 9, 1995, the Company closed on its offering of $203,000,000 14 1/4%
First Mortgage Notes due 2002 with Contingent Interest; Contingent Interest is
equal to 10.8% of the Company's consolidated cash flow, up to a limit of $100
million during any two consecutive semiannual periods (as defined in the
Indenture) ending March 31, once operational. The fair value of the First
Mortgage Notes at December 29, 1996 was approximately $188,790,000. The
indenture relating to the First Mortgage Notes (the "Indenture") contains
covenants that include a requirement that the Company maintain certain
financial ratios. The proceeds of the offering were used to develop and
construct Phase I, an integrated casino/hotel and entertainment complex. The
Company did not make the required November 15, 1996 interest payment of $14.5
million. As of December 29, 1996 the Company accrued $18,251,244 of
interest expense related to these notes.
On January 27, 1997, the Stratosphere Corporation and its wholly-owned
subsidiary Stratosphere Gaming Corporation ("SGC") filed voluntary petitions for
Chapter 11 Reorganization pursuant to the United States Bankruptcy Code. As of
that date, the United States Bankruptcy Court for the District of Nevada assumed
jurisdiction over the assets of the Company and SGC. The Company and SGC are
acting as debtors in possession on behalf of their respective bankrupt estates,
and are authorized as such to operate their business subject to bankruptcy court
supervision.
The future aggregate annual maturities of non-affiliate long-term debt at
December 29, 1996, are as follows:
<TABLE>
<S> <C>
1997 $ 429,103
1998 -
1999 -
2000 -
2001 -
Thereafter 203,000,000
------------
Total $203,429,103
============
</TABLE>
(7) OPERATING LEASES AND CAPITAL LEASE OBLIGATIONS
The Company consummated a $37.5 million capital lease transaction on May 3,
1996. On October 30, 1996 the Company executed a Standstill Agreement as the
Company was in default with the lease agreement based on its failure to meet
certain financial covenants. Pursuant to the agreement the Company reduced the
principal by $4.2 million on a pro rata basis with funds held in an escrow
account. The Company subsequently made all required payments relating to the
capital lease obligations. The capital lease obligations currently yield
interest at 8.3%. The Standstill Agreement is no longer in effect as the
Company has filed bankruptcy as noted above.
The Company leases equipment under noncancelable operating and capital leases.
Future minimum lease payments, excluding contingent rentals, due under
noncancelable operating and capital leases for the five years subsequent to
December 29, 1996 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL LEASES OPERATING LEASES
- ----------- -------------- ----------------
<S> <C> <C>
1997 $10,757,582 $2,598,897
1998 10,037,899 1,189,980
1999 9,316,012 217,808
2000 2,216,213 163,835
2001 - 54,612
Thereafter -
</TABLE>
<PAGE> 43
<TABLE>
<S> <C>
Total minimum lease payments 32,327,706
Less: amounts representing
interest @ 8.30% (4,103,531)
-----------
Present value of minimum
capital lease payments 28,224,175
Less:current installment (8,684,360)
-----------
Obligations under capital leases $19,539,815
===========
</TABLE>
(8) RESTRUCTURING
On January 27, 1997, the Stratosphere Corporation and SGC (the "Debtors"), filed
voluntary petitions for Chapter 11 Reorganization pursuant to the United States
Bankruptcy Code. As of that date, the United States Bankruptcy Court for the
District of Nevada assumed jurisdiction over the assets of the Debtors. The
Debtors are acting as debtors in possession on behalf of their respective
bankrupt estates, and are authorized as such to operate their business subject
to bankruptcy court supervision. A Joint Plan of Reorganization (the "Plan")
was filed by the Debtors and Grand Casinos Inc. with the bankruptcy court.
The Plan includes several conditions of which none are currently satisfied.
Failure to meet the conditions could result in further negotiation of the
Plan or the development of a new plan. There can be no assurance that the
Plan on file will be confirmed.
Under the terms of the Plan, Stratosphere's $203 million 14 1/4% Notes
currently outstanding will be exchanged for $203 million of new Stratosphere
Notes bearing interest at 11 1/4%, due May 15, 2002. The Plan calls for
interest payable in kind at 14 1/4% per annum for the November 15, 1996,
interest payment, now in arrears, and a payment in kind at 11 1/4% per annum
for the May 15, 1997 interest payment, with all subsequent interest payments
paid in cash. The new Notes will also receive additional contingent interest
equal to 15% of Stratosphere's consolidated annual cash flow from $60.0 million
to $80.0 million, up to $3.0 million per year. The new Notes will be callable
at 110% of par (plus accrued interest) on May 15, 1999. Stratosphere also will
be permitted to issue up to $25.0 million in additional new Notes to fund its
working capital requirements.
In addition, the restructuring Plan will include a Rights Offering to all
existing holders of Stratosphere Common Stock, including Grand, which will
guarantee net proceeds of at least $75.0 million. The proceeds of the
Rights Offering will be used to finance completion of Phase II of the
Stratosphere resort complex. Existing Stratosphere shares will be canceled and
shareholders will receive transferable rights to purchase one share of Common
Stock in reorganized Stratosphere at $1.31 per share. Each purchaser of a share
pursuant to the Rights Offering, other than those subscribed for by Grand, as
its pro-rata share, also will receive a three-year warrant to purchase one-half
of a share of Common Stock at $3.00 per full share. As part of the
restructuring plan, Grand has agreed to purchase its pro-rata share of the
Rights Offering (approximately 42 percent) for approximately $31.9 million.
Additionally, Grand will provide a standby commitment to purchase any
unsubscribed portion of the Rights Offering not exercised by other Stratosphere
shareholders. Grand has also agreed to provide a new Completion Guarantee for
Phase II of the Stratosphere project, which includes a new hotel tower
consisting of approximately 1,000 room bays, a pool and recreation area,
landscaping and other improvements to the Stratosphere complex. The guarantee
will cover up to $25 million in cost overruns on completion of Phase II. Any
amounts paid by Grand pursuant to the Completion Guarantee would constitute
subordinated debt of Stratosphere with interest payable at 11 1/4 %.
The Rights Offering will result in the issuance of 58.0 million shares of
Stratosphere Common Stock, with net proceeds of at least $75.0 million.
Upon completion of the reorganization and Rights Offering, Stratosphere will
have approximately 96.8 million shares of Common Stock outstanding and warrants
outstanding to purchase an additional 17.0 million shares of Common Stock at
$3.00 per share.
Under the Plan, Grand will convert $50 million due from Stratosphere into 39.7%
(approximately 38.4 million shares) of the Common Stock of Stratosphere
Corporation outstanding upon the completion of the reorganization. Grand
previously loaned this amount to Stratosphere pursuant to its Completion
Guarantee on the construction of the Stratosphere casino, hotel and tower,
which opened in Las Vegas on April 29, 1996. Assuming full subscription by the
public shareholders in the Rights Offering, Grand will subscribe for
approximately 24.5 million shares of reorganized Stratosphere Corporation for
$32.1 million. These shares together with shares received from the conversion
of $50 million of debt, will result in Grand owning 65% of Stratosphere
Corporation (without giving effect to the warrants).
The Plan is subject to a number of conditions, including plan confirmation by
the United States Bankruptcy Court, District of Nevada, receipt of all necessary
regulatory approvals, including those required by Nevada gaming authorities,
completion of definitive Plan related documents, and other customary closing
conditions. In addition, Grand's obligations under the Plan are conditioned
upon resolution or discharge of certain pending securities litigation, receipt
by Grand of an investment banking fairness opinion, a two year Management
Agreement wherein Grand agrees to manage construction of Phase II and the day to
day operations of Stratosphere for $500,000 per year inclusive of all costs and
expenses, and Stratosphere's consolidated cash flows (as defined in the Plan)
for the months between October 1, 1996 and June 30, 1997, averaging not less
than $2,267,000 per month. The average for the five months ended February 23,
1997 was $1,615,736. Based on these conditions there can be no assurance that
the Plan on file will ultimately be confirmed. If the Plan or a similar
proposal is not confirmed the Company will likely be unable to continue as a
going concern.
<PAGE> 44
The Company plans to expense future restructuring expenses as incurred. All
professional fees and other restructuring charges related to the bankruptcy
filing will require United States Bankruptcy Court approval. During the fourth
quarter of fiscal 1996 the Company expensed approximately $1.0 million related
to professional fees incurred as the Company was developing a plan to
restructure its debt.
(9) STOCKHOLDERS' DEFICIT
CAPITAL CONTRIBUTIONS AND INITIAL PUBLIC OFFERING
On February 23, 1994, the Company consummated an Initial Public Offering
("IPO") of 11,700,000 Units (each $5.00 Unit consisting of one share of Common
Stock and a redeemable warrant to purchase one share of Common Stock). The
redeemable warrants, exercisable for a period of five years, had an exercise
price of $5.83 per share and could be redeemed by the Company for $.01 per
warrant upon 30 days' prior written notice in the event the closing bid price
of the Company's Common Stock equaled or exceeded $7.375 per share for 10
consecutive trading days ending not more than 30 days preceding the date of the
notice of redemption. The Company received proceeds of $53,913,175 from the
IPO, net of commissions and escrow fees but prior to other offering related
expenses of $2,519,156.
Prior to receipt of the net proceeds from the IPO, the Company met its capital
requirements through capital contributions and loans from BSE or its
affiliates, loans from Grand and mortgage financing. The Company used
$12,465,700 of the proceeds to repay amounts borrowed from BSE and Grand (see
Note 10).
On February 17, 1994, BSE transferred certain assets and services to the
Company with a historical cost of $15,689,347 representing a capital
contribution of $8,001,000 (18,299,000 shares of Common Stock) and a loan for
$7,688,347. The transfers made by BSE consisted principally of the following:
(i) real estate comprised of land upon which the Stratosphere Tower was
constructed and additional real estate, including certain existing rental
properties, upon which additional attractions and possible future projects will
be constructed: (ii) all plans, designs, contracts, concepts and construction
in progress relating to the Stratosphere Tower and (iii) certain direct costs
and expenses incurred in connection with the IPO and certain other reimbursable
expenses directly associated with the Stratosphere Tower project. In addition,
through February 17, 1994, BSE or its affiliates (principally Vegas World)
contributed services to the Company aggregating $2,134,887. These expenses
represent an allocation of expenses incurred by those affiliates on behalf of
the Company and management's estimate of other expenses that would have been
incurred had the Company operated on a stand alone basis during the periods
presented. As discussed in Note 1, for purposes of the accompanying
consolidated financial statements, the aforementioned capital contributions and
loans made by BSE or its affiliates are reflected in the periods the underlying
assets were acquired and services rendered.
In connection with the IPO, the Company, BSE, Stupak and Grand entered into
various agreements pursuant to which:
Grand purchased 5,750,000 of the 11,700,000 Units sold in the IPO for
$26,915,750.
At the close of the IPO, Grand acquired 5,357,132 shares of Common Stock
from BSE at BSE's cost of approximately $.44 per share.
Grand was granted the option to purchase certain assets of Vegas World
(See Note 10).
At the close of the IPO, BSE deposited into escrow an additional
4,119,572 shares of the Company's Common Stock then owned by BSE ("BSE
Escrow Shares"). Subsequent to the exercise of an option by the Company
to purchase certain assets of Vegas World (See Note 10), Grand acquired
the BSE Escrow Shares in August, 1994 at BSE's cost of approximately $.44
per share.
Concurrent with the closing of the First Mortgage Notes Offering, Grand
invested approximately $33.5 million in the Company by purchasing 8,250
unregistered shares of the Company's Series A Convertible Non-Voting Preferred
Stock for $4,063 per share (the "Series A Preferred Stock"). Each share of
Series A Preferred Stock was convertible into 1,000 shares of the Company's
Common Stock. At the Company's annual meeting of stockholders on May 19, 1995,
the Company's stockholders approved Grand's conversion of the Series A
Preferred Stock into the Common Stock.
Subsequently, Grand has converted the Series A Preferred Stock into 8,250,000
shares of the Common Stock. The shares of Common Stock issued upon conversion
of the Series A Preferred Stock are not transferable for a period of five years
from March 9, 1995. Grand has also agreed that it will not transfer or
exercise the 5,750,000 Redeemable Warrants beneficially owned by Grand.
On September 7, 1995, the Company called for redemption on October 10, 1995,
all of the outstanding Redeemable Warrants at a price of $0.01 per Redeemable
Warrant, for a total redemption price of $117,000. Each Redeemable Warrant
entitled the registered holder thereof to purchase one share of Common Stock at
$5.83 per share. The Company received approximately $34.2 million in net
proceeds from the issuance of the
<PAGE> 45
Common Stock upon exercise of all the Redeemable Warrants (excluding those
held by Grand). In addition the Company received $112,625 from the exercise of
26,500 Stock Options.
On December 22, 1995, the Company closed an offering (the "First Offering") of
10,000,000 shares of the Common Stock, resulting in proceeds to the Company of
$75,200,000. Of these shares, 8,400,000 shares were sold at $8.00 per share in
an underwritten public offering (the "Public Offering"), resulting in net
proceeds to the Company, after underwriting discounts, of $7.52 per share. The
remaining 1,600,000 shares (the "Direct Shares") of the First Offering were
sold directly by the Company for $7.52 per share to affiliates of the Company.
Of the Direct Shares, 1,000,000 were sold to Grand, 500,000 shares were sold to
Lyle Berman, Chief Executive Officer and a director of the Company and Chief
Executive Officer and Chairman of the Board of Grand, and 100,000 shares were
sold to Stanley Taube, a director of the Company and the Vice President and a
director of Grand. On December 29, 1995, the Company closed on the offering
(the "Second Offering," together with the First Offering, the "Equity
Offerings"), of 1,260,000 shares granted in an option to the underwriters of
the Equity Offerings. Proceeds to the Company from the Second Offering were
$9,475,200.
On January 11, 1996 the Company purchased approximately 3.5 acres across the
street from its property. The property was used to build a 500-car parking lot.
The Company issued 1,050,000 shares of Common Stock for the purchase of which
500,000 shares went directly to the owner of the land, 500,000 shares were sold
to an unrelated third party and 50,000 shares were paid as a fee to the broker
of the transaction.
During March 1996 the Company acquired approximately two acres through the
issuance of 765,559 shares to an unrelated third party. The property has been
used to stage Phase II construction materials and equipment, and may be used to
provide future additional parking.
On May 6, 1996 the Company received proceeds of $723,406 through the exercise
of 81,596 sales agent warrants that were issued in connection with the IPO.
The Company's Common Stock was delisted from the Pacific Stock Exchange on
December 3, 1996, and the Company has been notified by Nasdaq that because the
Company no longer satisfies Nasdaq's listing standards, the Company's Common
Stock will be delisted from the National Market System on March 31, 1997. The
Company has appealed Nasdaq's determination to delist the Company's Common
Stock, however, there can be no assurance that the Company's appeal will be
successful. If the Company's Common Stock is delisted from the National Market
System, the liquidity of the Common Stock will be adversely affected.
STOCK OPTION PLANS
The Company has reserved for issuance an aggregate of 3,125,000 shares of
Common Stock under the 1993 Stock Option Plan ("Stock Option Plan") and the
1993 Non-Employee Directors' Plan ("Directors Plan"). This amount includes
1,000,000 shares approved by shareholders at the annual meeting held May 22,
1996.
1993 STOCK OPTION PLAN
Officers (including officers who are members of the Board of Directors),
directors (other than members of the Stock Option Committee (the "Committee")
to be established to administer the Stock Option Plan and the Director' Plan)
and other employees of, and consultants to, the Company and its subsidiaries
will be eligible to receive options under the Stock Option Plan. The Committee
will administer the Stock Option Plan and will determine those persons to whom
options will be granted, the number of options to be granted, the provisions
applicable to each grant and the time periods during which the options may be
exercised. No options may be granted more than ten years after the date of the
adoption of the Stock Option Plan.
Unless the Committee, in its discretion, determines otherwise, nonqualified
stock options will be granted with an option price equal to the fair market
value of the shares of Common Stock on the date of grant. In no event may the
option price with respect to an incentive stock option granted under the Stock
Option Plan be less than the fair market value of such Common Stock on the date
of grant.
Options granted under the Stock Option Plan will be exercisable for a term of
not more than ten years after the date of grant. Certain other restrictions
will apply. In the event of a change of control (as defined in the Stock
Option Plan), the date on which all options outstanding under the Stock Option
Plan may first be exercised will be accelerated. Generally, all options
terminate 90 days after a change of control.
At December 29, 1996, 1,083,000 shares were available for granting further
options and options for 1,567,167 shares were outstanding at $4.00 to $8.00 per
share, of which options for 815,666 were exercisable. During 1996 options for
134,833 shares were exercised at $4.25 per share and options for 527,500 shares
became void upon employee separations. There was no exercise of stock options
during 1995 and 1994. The Company anticipates that all options will be
canceled upon United States Bankruptcy Court confirmation of a plan of
reorganization. The Company does not expect any issuance or exercise of
additional stock options.
NON-EMPLOYEE DIRECTORS' PLAN
The Directors' Plan provides for the grant of stock options to the persons who
are members of the Board of Directors and who at the time they joined the Board
of Directors were not employees of the Company or any of its affiliates
("Non-Employee Directors"). The Committee will administer the Directors' Plan.
Each of the Non-Employee Directors will receive an option to purchase 37,500
shares of Common Stock, provided that in the case of one director, the Company
has committed to grant options for the purchase of 75,000 shares. Such options
will vest in three equal annual installments commencing on the first
anniversary of such Non-Employee Director's election. The options of
<PAGE> 46
Non-Employee Directors who joined the Board prior to completion of the IPO are
exercisable at $4.25 per share, the fair market value of the Common Stock on
the date of grant and of those non-employee directors elected after the IPO are
exercisable at the fair market value of the Common Stock on the date of grant.
Options granted under the Directors' Plan may not be exercised more than ten
years after the date of adoption of the Directors' Plan. In the event of a
change of control (as defined in the Directors' Plan), the date on which all
options outstanding under the Directors' Plan may first be exercised is
accelerated.
At December 29, 1996, 1,083,000 shares were available for granting further
options and options for 340,000 shares were outstanding at $2.00 to $4.625 per
share, of which options for 90,000 were exercisable. Options for 10,000 shares
were exercised during 1996 and no options were exercised during 1995 and 1994.
On October 21, 1996 the Company granted 100,000 options at $2.00 to each of
the two Directors serving as the Committee of Independent Directors. Such
options vest over a five year period. The Company anticipates that all options
will be canceled upon United States Bankruptcy Court confirmation of a plan
of reorganization. The Company does not expect any issuance or exercise of
additional stock options prior to plan confirmation.
Accounting For Stock-Based Compensation
In accordance with the anticipated cancellation of all options pursuant to the
bankruptcy proceedings described in Note 8, no Financial Accounting Standards
Board No. 123 "Accounting for Stock-Based Compensation" proforma disclosures
have been made.
(10) PURCHASE OF VEGAS WORLD HOTEL & CASINO ASSETS
On June 1, 1994, Grand assigned to the Company and the Company then exercised
an option to acquire for $50.8 million ("Purchase Price") certain assets
("Vegas World Assets") of Vegas World, principally land, buildings, furniture
and equipment. On November 4, 1994, the Company closed on the purchase of the
Vegas World Assets. The Vegas World Assets were then leased back to Stupak
under a triple net lease. Rental payments under the lease, which expired upon
the closing of Vegas World, were de minimis. The Vegas World Assets were
recorded at the closing of the purchase of Vegas World's net book values. In
addition to the Vegas World Asset Purchase, on November 4, 1994, the Company
purchased $1,725,000 in additional land and buildings from Stupak. The excess
of the purchase prices over the net book values of the assets acquired, which
amounts to $20,209,840, was recorded as a preferential distribution to Stupak.
The Vegas World Assets purchased as described above, included certain gaming
equipment that was not transferred at the time of sale. A portion of this
equipment and cash received in lieu of the equipment was reflected in the
consolidated financial statements as a reduction in the preferential
distribution to Stupak.
In connection with the closing of the Vegas World Assets purchase, $5.1
million was disbursed for closing costs and to pay off existing mortgages and
the Company issued non-interest bearing promissory notes to Stupak in the amount
of $46,728,484. The Consolidated Financial Statements reflect the offset of the
Stupak advances and the non-interest bearing promissory notes.
The liabilities retained by Stupak in connection with the Vegas World Asset
Purchase were principally comprised of accounts payable and accrued expenses
and certain obligations for presold vacation packages consisting of goods and
services (cash, casino action, hotel room nights, beverages at casino bars,
show tickets, admissions to the Stratosphere Tower upon opening and certain
other goods and services), to be provided in the future.
Pursuant to an escrow agreement mandated by the Nevada Gaming Authorities, to
the extent that Stupak's assumed obligations to the vacation package holders
were not satisfied by the date of the closing of Vegas World (either through
use, refund or expiration), an amount equal to 100% of the obligation in cash
and, to the extent not covered in cash, 150% of the remaining obligation in
Company's Common Stock owned by Stupak is required to be placed in escrow by
Stupak.
The Company had agreed to provide the goods and services to customers holding
unused vacation packages upon the opening of the Stratosphere Tower project so
long as the escrow is in good standing. The Company will invoice and be
reimbursed by the escrow fund for "one visit" vacation package at an agreed upon
fixed cost, which may be more or less than the Company's actual cost to provide
such facilities and services. The escrow will further be used to service
"multiple visit" vacation packages at the actual cost of providing such goods
and services. Certain goods and services (agreed upon numbers of hotel room
nights, admissions to the Stratosphere Tower and beverages at casino bars) will
be provided by Stratosphere without reimbursement. The cost of providing these
services was not expected to be material to the Company's results of operations
in the periods the services are provided. The Company ceased servicing vacation
packages on January 13, 1997. The ability of the Company to provide its resort
as a facility for servicing the vacation packages in the future is dependent on
the Company and Bob Stupak being able to make adequate arrangements that would
be subject to Bankruptcy Court approval.
(11) GRAND AGREEMENT
In June 1994, Grand and the Company entered into an agreement (the "Management
and Development Agreement") which provided that Grand would, among other
things, supervise the design, development, construction and commencement of the
Company's operations (the "Opening"). Pursuant to the Management and
Development Agreement, prior to the opening, Grand provided the necessary
personnel to oversee and manage the development of the entire project. Since
the opening on April 29, 1996, upon the Company's request, Grand has continued
to provide consulting services. Reimbursement of Grand's costs will be subject
to United States Bankruptcy Court approval. The
<PAGE> 47
Company is currently negotiating a new agreement with terms that are
substantially similar to the existing agreement which will also require the
approval of the United States Bankruptcy Court.
(12) INCOME TAXES
The income tax benefit attributable to losses from continuing operations for
the years ended December 29, 1996, December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current $ - $ - $ -
Deferred benefit (122,094,917) (1,632,068) (97,358)
Increase in deferred tax asset
valuation allowance 122,094,917 1,632,068 97,358
------------- ----------- --------
$ - $ - $ -
============= =========== ========
</TABLE>
The tax effect of significant temporary differences representing deferred tax
assets and liabilities for the Company is as follows at December 29, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets (liabilities):
Current:
Allowance for doubtful accounts $ 66,200 $ -
Progressive jackpots 258,177 -
Accrued vacation, workers
compensation 1,752,766 -
Outstanding chip and token
liability 188,466 -
------------- -----------
2,265,609 -
------------- -----------
Long-term:
Depreciation (1,060,167) -
Pre-opening costs 7,252,441 -
Allowance for doubtful accounts 1,042,191 -
Excess of tax over book basis of
assets acquired in connection
with Vegas World Asset
Purchase 6,850,000 6,850,000
Excess of tax over book basis of
assets due to write down of
assets 103,581,322 -
Net operating loss carryforward 9,630,571 617,050
------------- -----------
127,296,358 7,467,050
------------- -----------
Total deferred taxes 129,561,967 7,467,050
Valuation allowance (129,561,967) (7,467,050)
------------- -----------
$ - $ -
============= ===========
</TABLE>
The Company recorded a valuation allowance at December 29, 1996, December 31,
1995, and 1994 relating to recorded tax benefits, because of the significant
uncertainty as to whether such benefits will ever be realized.
<PAGE> 48
As of December 29, 1996, the Company has a net operating loss carryforward of
approximately $27,486,000. The availability of the net operating loss
carryforward will be subject to the tax consequences of the final plan of
reorganization approved by the bankruptcy court.
(13) RELATED PARTY TRANSACTIONS
Pursuant to the Completion Guarantee under the Indenture to the First Mortgage
Notes, the Company borrowed $50.0 million from Grand Casinos Inc. as of
December 29, 1996. The loan is subordinate to the First Mortgage Notes and
Capital lease obligations and accrues interest at the rate of 14.25%. The
interest will accrue but will not be paid until the Company meets certain
financial covenants pursuant to the Indenture under the First Mortgage Notes.
The loan is due along with accrued interest in 2003. This debt is subject to
the outcome of the bankruptcy proceedings mentioned above.
Further, pursuant to the Memorandum of Agreement, Grand Casinos, Inc. also
entered into a Standby Equity Commitment with the Company pursuant to which
Grand Casinos, Inc., may contribute to the Company up to $20 million in new
equity through the purchase of Capital Stock (other than Disqualified Stock),
on non-cumulative bases, in each of the first three years following the time
that the Stratosphere Tower Project is operating. Such funds would be
contributed to the Company during each of the first three years Stratosphere
is operating as long as the Company's Consolidated Cash Flow does not reach
$50.0 million, subject to certain terms and conditions to cover, on a dollar
for dollar basis, any shortfall in the Company's consolidated cash flow.
The maximum commitment for the three years would be $60 million. Funds for
the Standby Equity Commitment would be made available, to the extent
necessary, through a rights offering of Common Stock, at a discount of
approximately 50% from the then-current market price, to all stockholders
of the Company; provided, however, that Grand Casinos, Inc. would be
obligated to purchase any such shares of Common Stock, in addition to
its pro rata share as a stockholder of the Company, not so purchased by
the other public stockholders. The Company will retain the right to
obtain the equity funds which would otherwise be provided by the Standby
Equity Commitment through other means deemed appropriate.
The ability of the Company to enforce the Standby Equity Commitment is
uncertain as the ultimate status of this claim in the bankruptcy proceedings is
not known at this time.
In connection with the Management and Development Agreement previously
discussed in Note 11, the Company paid Grand consulting fees and reimbursed
expenses totaling $2,318,873 and $414,000 during the fiscal years ended 1996
and 1995, respectively. No such fees were paid for the year ended December 31,
1994.
In connection with the construction of the Company's facility and its normal
operations, approximately $3,296,924 and $359,000 of fixed assets were
purchased from Grand Media & Electronics which is a wholly owned subsidiary of
Grand Casinos, Inc. during the years ended December 29, 1996 and December 31,
1995, respectively.
During 1996 the Company billed Bob Stupak $4,777,687 of which $1,000,000 was
paid for amounts related to the Company providing its facility to service Bob
Stupak's vacation packages. The Company has reserved the remaining unpaid
amount of $2,977,687 in 1996. Bob Stupak has disputed the billing and the
escrow account set up to satisfy these obligations remains under funded. The
amount of the net receivable is classified as a related party receivable under
other assets in the December 29, 1996 balance sheet. The Company ceased
servicing Bob Stupak's vacation packages on Janary 13, 1997.
(14) COMMITMENTS AND CONTINGENCIES
As a result of the restructuring plans and subsequent loss of certain
management, as well as the concern of further losses of management personnel
due to the opening of other new hotel-casinos, the Company has entered into
agreements with various key personnel, wherein these employees agreed to
remain employed by the Company for a period of one year in exchange for the
promise of severance pay should the employee be terminated as a result of the
restructuring or change in management or the board of directors.
On August 5, 1996, a complaint was filed in the United States District
Court for the District of Nevada (Michael Caesar, et al. v. Stratosphere
Corporation, et al.) against the Company, Lyle A. Berman (an officer and
director of the Company and Grand), Robert E. Stupak (a former officer and
director of the Company), Thomas A. Lettero (an officer of the Company"), Thomas
G. Bell (a director of the Company), Andrew S. Blumen (an officer and director
of the Company), and Grand. The complaint purports to seek relief on behalf of
a class of plaintiffs who purchased the Company's Common Stock during the period
from December 19, 1995, through July 2, 1996, inclusive. The complaint alleges
that the defendants made misrepresentations and engaged in other wrongdoings.
In addition to the Caesar case, eight additional cases making the same
claims against the same defendants (and in one instance also against Stanley
Taube - a director of the Company and also an officer and director of Grand)
have been filed by the following plaintiffs: Regina Peltz on August 13, 1996;
Ronald Stengel on August 13, 1996; Robert Johnson on September 19, 1996; David
Vallee on September 25, 1996; Anthony L. Poli on October 7, 1996; Darrell
Russell and Gail Russell on October 7, 1996; Mitchell Gordon on October 7,
1996; and James J. Enright, Jr., on October 28, 1996. These complaints purport
to seek relief on behalf of a class of plaintiffs who purchased the Company's
Common Stock during the period from December 19, 1995, through July 22, 1996,
inclusive. The complaints allege that the defendants made misrepresentations
and engaged in other wrongdoings. On January 15, 1997, the court ordered these
eight additional lawsuits to be consolidated with the Caesar lawsuit under the
caption "In re Stratosphere Corporation Securities Litigation."
On February 14, 1997, plaintiffs filed a Consolidated and Amended Class
Action Complaint naming as defendants Grand, Bob Stupak, Lyle A. Berman,
Stanley M. Taube, David R. Wirshing, Thomas A. Lettero, Andrew S. Blumen,
Thomas G. Bell, Bob Stupak Enterprises, BT Securities Corporation and
Montgomery Securities, Inc. The Consolidated and Amended Class Action
Complaint alleges causes of action under the federal securities laws and Nevada
law for purported misrepresentations during the period between December 19,
1995 and July 26, 1996. The litigation is brought on behalf of a putative
class of purchasers of Stratosphere Corporation securities during that time
period. The Consolidated and Amended Class Action Complaint does not name the
Company as a defendant, presumably due to the automatic stay imposed by the
Company's bankruptcy filing. On February 25, 1997, Grand and certain
individual defendants filed a motion to dismiss the complaint. The court has
scheduled a hearing on that motion on April 25, 1997. Discovery and other
proceedings have been stayed pending the court's ruling on that motion.
On March 14, 1997, the plaintiffs in the consolidated federal
litigation discussed above (the "Securities Litigation Claimants") filed a
complaint against the Company in an adversary proceeding in the context of the
Company's bankruptcy proceedings in the United Sates Bankruptcy Court for the
District of Nevada. The Securities Litigation Claimants allege that the
Company made misrepresentations and engaged in other wrongdoings during the
period between December 19, 1995 and July 22, 1996 in violation of the federal
securities laws and Nevada law. These claims are scheduled to be determined in
an estimation proceeding in the bankruptcy court. A hearing in the estimation
proceeding is currently scheduled to begin on May 5, 1997.
On August 16, 1996, a complaint was filed in District Court, Clark
County, Nevada (Victor Opitz, et al. v. Stratosphere Corporation, et al.)
against the Company, Grand, Robert B. Stupak (a former officer and director of
the Company), Lyle A. Berman (an officer and director of the Company and Grand)
and Stanley Taube (a director of the Company and Grand). The complaint purports
to seek relief on behalf of a class of plaintiffs who purchased stock during the
period from December 19, 1995, to July 22, 1996. The complaint alleges the
defendants made misrepresentations and engaged in other wrongdoing. The court
has granted the Company's motion to stay this litigation pending the outcome of
the federal shareholder litigation.
On April 3, 1994, a complaint was filed in the United States District
Court for the District of Nevada (Harvey J. Cohen, et al. v. Stratosphere
Corporation, et al.) against the Company, Mr. Stupak, Lyle Berman, Grand and
others. By Order filed April 10, 1995, the district court dismissed the federal
securities law claims with prejudice and dismissed the common law claims without
prejudice. On May 3, 1995, the plaintiffs filed a notice of appeal of the
district court's order with the United States Court of Appeals for the Ninth
Circuit. The complaint purported to seek relief in connection with the Company's
initial public offering (the "IPO"), each consisting of one share of Common
Stock and one warrant, on behalf of two classes of plaintiffs for unspecified
monetary damages. The complaint alleged that the defendants made
misrepresentations, breached a contract and engaged in other wrongdoing in
connection with the IPO, so that the defendants and their affiliates, associates
and friends could, while avoiding all economic risk, purchase IPO Units in the
IPO rather than one plaintiff class, and that this alleged conduct caused a
second dealer class to lose out on other profits it allegedly deserved. The
Company has asked the Court of Appeals to affirm the district court's order.
On or about August 29, 1995, a complaint was filed in the District Court,
Clark County, Nevada (Harvey J. Cohen, et al. vs. Stratosphere Corporation, et
al.) against the Company, Mr. Stupak, Lyle Berman, Grand and others. The
complaint purports to represent a class of plaintiffs and seeks relief for
misrepresentation, breach of contract and tortious interference with contract
regarding the IPO.
On or about December 20, 1995, a complaint was filed in the District
Court, Clark County, Nevada (Vegas Market Place, Inc. vs. Bob Stupak,
Individually dba Vegas World Hotel and Casinos, et al) against the Company, Mr.
Stupak and others. The complaint seeks damages arising out of a lease executed
between Bob Stupak, dba Vegas World Hotel and Casino and Vegas Market Place,
Inc. Among the causes of action brought in the complaint are quiet title,
breach of contract, specific performance, constructive eviction, declaratory
judgment, breach of implied covenant of good faith and fair dealing, intentional
interference with perspective economic advantage, intentional interference with
contractual relationships, preliminary injunction and permanent injunction. The
Company has filed a motion to dismiss several of the claims for relief brought
in this complaint.
<PAGE> 49
The Company is also a defendent in various pending litigation. In management's
opinion, the ultimate outcome of such litigation will not have a material
effect on the results of operations or financial position of the Company.
On August 19, 1996 the Company engaged a financial advisor to provide services
to related to an overall restructuring of the Company's debt. Pursuant to the
engagement letter the financial advisor would be compensated $2,030,000 upon
the successful restructuring of the Company's debt. The Company has advanced
a non-refundable financial advisory fee of $550,000 as of January 26, 1997 that
would off-set the success fee leaving a contingent claim of $1,480,000. Any
additional payments will require the approval of the United States Bankruptcy
Court.
<PAGE> 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE> 51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the executive officers and directors of
the Company
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lyle A. Berman 55 Chairman of the Board of Directors
Richard Schuetz 46 President and Chief Executive Officer
Andrew S. Blumen 44 Executive Vice President, General Counsel, Secretary and
Director
Thomas A. Lettero 40 Senior Vice President Administration and Chief Financial
Officer
Robert A. Maheu 79 Vice Chairman of the Board of Directors
Thomas G. Bell 70 Director
Stanley M. Taube 60 Director
Neil I. Sell 55 Director
</TABLE>
Lyle A. Berman has been a director of the Company since March 1994,
Chief Executive Officer from July 1994 through October 1996 and Chairman since
July 1996. Mr. Berman has been the Chief Executive Officer and the Chairman of
the Board of Directors of the Grand Casinos, Inc. since October 1991. Mr.
Berman is also a director of G-III Apparel Group Ltd ("G- III"), Innovative
Gaming Corporation of America ("IGCA"), New Horizon Kids Quest, Inc. ("Kids
Quest"), and Wilsons The Leather Experts Inc. ("Wilsons"). Mr. Berman is
Chairman of the Board and Chief Executive Officer of Rainforest Cafe, Inc.
("Rainforest"). The Company and Stratosphere Gaming Corp., the Company's
wholly-owned subsidiary, filed for reorganization under Chapter 11 of the
Bankruptcy Code on January 27, 1997.
Richard Schuetz has been President, Director and Chief Executive
Officer of the Company since October, 1996. Mr. Schuetz served as interim
President of the Company from July 1996 through October 1996. Prior to July
1996, Mr. Schuetz operated a marketing consulting firm, Schuetz, Inc. From
November 1991 to September 1995, Mr. Schuetz was Vice President of Corporate
Marketing for Grand Casinos, Inc. Mr. Schuetz is a director of Shuffle Master
Gaming Inc. and Casino Publishing Corporation Mr. Schuetz has been in the
gaming industry for over 20 years. Stratosphere Corporation and Stratosphere
Gaming Corp., the Company's wholly-owned subsidiary, filed for reorganization
under Chapter 11 of the Bankruptcy Code on January 27, 1997.
Andrew S. Blumen has been Vice President, General Counsel, Secretary and a
director of the Company since its formation in January 1993 and, in November
1993, became Executive Vice
<PAGE> 52
President. From April 1989 until February 1, 1995, he was the Director of
Operations and General Counsel for Vegas World and all enterprises owned by Mr.
Stupak. From 1983 through 1989, he was engaged in the private practice of law
in the State of Nevada. Mr. Blumen was granted a Nevada gaming license in 1994.
Stratosphere Corporation and its wholly-owned subsidiary, Stratosphere Gaming
Corp., filed for reorganization under Chapter 11 of the Bankruptcy Code on
January 27, 1997.
Thomas A. Lettero has been Senior Vice President Administration and
Chief Financial Officer of the Company since December 1994. From March 1994
until December 1994, Mr. Lettero was the Vice President and Chief Financial
Officer at Palace Casinos, Inc. ("Palace") in Las Vegas, Nevada. Palace filed
for Chapter 11 Bankruptcy in December 1994. From February 1993 until March
1994, Mr. Lettero served as Vice President of Casino Marketing Administration
of MGM Grand Hotel Casino in Las Vegas, Nevada. From March 1992 until February
1993, Mr. Lettero served as Executive Vice President and Chief Financial
Officer of HP Casino Management L.P. ("HP") in Golden, Colorado, the owner and
operator of three Bullwacker casinos in Central City and Blackhawk, Colorado.
At HP, as a licensed operator, Mr. Lettero was responsible for opening the
properties, all marketing efforts and daily operations. From September 1990
until March 1992, Mr. Lettero served as Chief Financial Officer of Main Street
Station in Las Vegas, Nevada. Main Street Station filed for Chapter 11
Bankruptcy in December 1991, which was converted into a Chapter 7 liquidation
in September 1992. From May 1989 until September 1990, Mr. Lettero served as
Director of Operational Accounting of Mirage Hotel and Casino in Las Vegas,
Nevada. The Company and Stratosphere Gaming Corp., the Company's wholly-owned
subsidiary, filed for reorganization under Chapter 11 of the Bankruptcy Code on
January 27, 1997.
Robert A. Maheu has been Vice Chairman of the Board of Directors since
March 1993. For more than the past five years, Mr. Maheu has been the owner and
President of Robert A. Maheu Associates, a specialized management consulting
firm based in Las Vegas, Nevada. Mr. Maheu has been responsible for the
operation of seven Las Vegas casino/hotels. Mr. Maheu is a director of Crowne
Ventures, Inc. and has served as its Chairman of the Board since October 1995.
Thomas G. Bell has been a director of the Company since December 1993.
For more than the past five years, Mr. Bell has been engaged in the private
practice of law, principally in the State of Nevada.
Stanley M. Taube has been a director of the Company since March 1994.
Mr. Taube has been a director of Grand since October 1991. Mr. Taube is a
director of Innovative Gaming Corporation of America and New Horizons Kids
Quest, Inc. and since 1973 has been President of S.M. Taube & Co., Inc.
Neil I. Sell has been a director of the Company since August 1994.
Mr. Sell is also a director of Grand and Rykoff-Sexton, Inc. Since 1968, Mr.
Sell has been engaged in the practice
<PAGE> 53
of law in Minneapolis, Minnesota with the firm Maslon Edelman Borman & Brand, a
Professional Limited Liability Partnership, which has rendered legal services
to the Company.
<PAGE> 54
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation for services rendered by the Chief Executive Officer of the
Company, for each executive officer of the Company and for a former executive
officer of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
------ COMPENSATION
COMPENSATION -------------
------------- AWARDS
------------
SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL YEAR ($) ($) OPTIONS (#) ($)
------------------ ---- ------------------ --- ----------- ------------
POSITION
---------
<S> <C> <C> <C> <C> <C>
Lyle Berman, 1996 -- -- -- --
Chairman of the Board(a) 1995 -- -- -- --
1994 -- -- -- --
Richard Schuetz 1996 173,077 57,692 -- --
President and Chief Executive
Officer(b)
David R. Wirshing 1996 233,331 120,000 -- 200,000(d)
Former President(c) 1995 400,000 -- -- --
1994 89,231 -- 500,000 --
Andrew S. Blumen 1996 225,000 55,000 -- --
Executive Vice President 1995 199,039 -- 200,000 --
and General Counsel 1994 84,584 -- 100,000 --
Thomas A. Lettero 1996 188,462 55,000 -- --
Chief Financial Officer and 1995 159,615 -- -- --
Senior Vice President 1994 4,615 -- 100,000 --
Administration
</TABLE>
(a) Mr. Berman was Chief Executive Officer from July 1994 through October
1996. Mr. Berman became Chairman of the Board of the Company in June
1996. Mr. Berman is a director, executive officer and principal
stockholder of Grand.
(b) Mr. Schuetz became Interim President in July 1996 and became
President and Chief Executive Officer in October 1996.
(c) Mr. Wirshing resigned as President and member of the Board of
Directors in July 1996.
<PAGE> 55
(d) Represents severance payable pursuant to the Separation Agreement.
Approximately $167,000 of severance was paid in fiscal 1996, and the
remaining $33,000 will be paid during fiscal 1997.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
----------------------------------------------------------
Potential Realizable
Value of Assumed
Annual Rates of
Stock Price
Percentage of Appreciation for
Number of Total Options Option Term(2)
Securities Granted to Exercise of --------------------
Underlying Employees Base Price Expiration
Name Option Granted (#) in Fiscal Year ($/share)(3) Date 5% ($) 10%($)
- ---- ------------------ -------------- ------------ ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Lyle Berman -- -- -- -- -- --
Richard Schuetz -- -- --
David R. Wirshing 400,000 -- $3.00 8/15/06 754,674 $1,912,491
Andrew S. Blumen -- -- -- -- --
Thomas A. Lettero -- -- -- -- --
</TABLE>
(1) The option grant reported above, which was fully vested on the date of
grant, was made in consideration of Mr. Wirshing's Separation Agreement
and the cancellation of a previously granted option to purchase 500,000
shares of the Company's common stock at $3.875 per share. The option
exercise price of $3.00 per share represents the fair market value of
the Company's Common Stock on the date of grant.
(2) Amounts shown in these columns have been derived by multiplying the
exercise price by the annual appreciation rate shown (compounded for the
term of the options), multiplying the result by the number of shares
covered by the options, and subtracting the aggregate exercise price of
the options. The dollar amounts set forth under this heading are the
result of calculations at the 5% and 10% rates set by the SEC, and
therefore are not intended to forecast possible future appreciation, if
any, of the Company's stock price.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS
AT FY-END (#)
-----------------------------
NAME EXERCISABLE/UNEXERCISABLE
-------------- --------------------------------
<S> <C>
Lyle Berman 0 / 0
Richard Schuetz 0 / 0
David R. Wirshing 400,000 / 0
Andrew S. Blumen 80,000 / 220,000
Thomas A. Lettero 40,000 / 60,000
</TABLE>
<PAGE> 56
10-YEAR OPTION REPRICINGS
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Securities
Underlying Market Price of Exercise Price Length of Original
Options/ SARs Stock at Time of At Time of Option Term
Repriced or Repricing or Repricing or New Exercise Remaining at Date
Amended Amendment Amendment Price of Repricing or
Name Date (#) ($) ($) ($) Amendment
- ------------ --------- ------------- ---------------- --------------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Lyle Berman -- -- -- -- -- --
Richard Schuetz -- -- -- -- -- --
David R. Wirshing 08/15/96 400,000 3.00 3.875 3.00 10 years
Andrew S. Blumen -- -- -- -- -- --
Thomas A. Lettero -- -- -- -- -- --
</TABLE>
Effective August 15, 1996, the Company and Mr. Wirshing entered into a
Separation Agreement (the "Separation Agreement"), pursuant to which options to
purchase 500,000 shares of the Company's common stock at $3.875 per share (the
"Old Options") originally granted in connection with Mr. Wirshing's employment
agreement, as to which 300,000 of such stock options had vested, were canceled.
In consideration of the cancellation of the Old Options and the other terms and
conditions contained in the Separation Agreement, the Company granted Mr.
Wirshing fully vested options for 400,000 shares at an exercise
price of $3.00 per share, representing the fair market value of the Company's
common stock on the date of grant.
Lyle Berman
Neil I. Sell
Members of the Compensation Committee
EMPLOYMENT AGREEMENTS, SEPARATION AGREEMENT AND SEVERANCE AGREEMENTS
The Company and Mr. Wirshing entered into a three-year employment
agreement effective as of September 26, 1994 (the "Wirshing Agreement"). The
Wirshing Agreement provided that Mr. Wirshing would serve as President of the
Company and be paid base annual compensation of $400,000. Pursuant to the
Wirshing Agreement, the Company granted Mr. Wirshing options to purchase
500,000 shares of the Common Stock at an exercise price of $3.875 per share,
the fair market value of the Common Stock on the date of grant. Of such
options, 200,000 vested immediately, the remaining options vesting ratably over
three years. The Wirshing Agreement also provided that the Company would
advance to Mr. Wirshing the amount (up to $500,000) of any note payable issued
to Mr. Wirshing by his former employer in payment of his equity interest in
such former employer, provided such note was assignable. Mr. Wirshing's former
employer has not issued, nor will issue, a note payable to Mr. Wirshing. The
Wirshing Agreement further provided that Mr. Wirshing would be entitled to
receive other employee benefits of the Company, including incentive
compensation as determined by the Company's Board of Directors. The Wirshing
Agreement was terminable by either the Company or Mr. Wirshing at
any time or for any reason. Effective August 15, 1996, the Company and Mr.
Wirshing entered
<PAGE> 57
into a Separation Agreement (the "Separation Agreement"). Pursuant to the
Separation Agreement, substantially all the terms of the Wirshing Agreement were
terminated and the Company paid Mr. Wirshing approximately $167,000 of severance
during the fiscal year ended December 29, 1996, and $33,000 of severance
compensation will be paid to Mr. Wirshing during fiscal 1997, subject to
reduction under certain circumstances. The Separation Agreement also contains
limited mutual releases from liability and provides for the cancellation of
options to purchase 500,000 shares of the Company's common stock originally
granted in connection with the Wirshing Agreement, of which 300,000 of such
stock options had vested, in exchange for the granting of fully vested options
to purchase 400,000 shares of the Company's common stock at an exercise price of
$3.00, (the fair market value of the Company's common stock on the date of
grant.)
The Company and Mr. Blumen entered into a one year employment agreement
effective as of January 2, 1995. Such agreement provided that Mr. Blumen would
serve as Executive Vice President and be paid base compensation of $225,000
annually. Pursuant to such agreement the Company granted Mr. Blumen options to
purchase 200,000 shares of the Common Stock at an exercise price of $4.00 per
share, the fair market value of the Company's Common Stock on the date of the
grant. Mr. Blumen previously received options to purchase 100,000 shares of
Common Stock at an exercise price of $4.25 per share. The options vest ratably
over five years. Under the agreement, Mr. Blumen was to be entitled to receive
other employee benefits of the Company, including incentive compensation as
determined by the Company's Board of Directors. The agreement was terminable by
either the Company or Mr. Blumen at any time for any reason, and if such
termination was for any reason other than cause (as defined in such agreement)
prior to January 2, 1996, Mr. Blumen would have been entitled to receive his
base compensation for a period of twelve months from the date of such
termination.
Messrs. Schuetz, Blumen and Lettero each have entered into Senior
Executive Severance Agreements with the Company that provide that if the
Company terminates such executive's employment or materially either diminishes
or reduces his title, compensation, authority, responsibility, functions or
duties with the Company for any reason other than "for cause" (as is defined in
the agreements) within one year following a financial restructuring or
reorganization or a change in control of the Board of Directors of the Company,
then the Company will pay such executive an amount in cash equal to six months
of his base salary.
DIRECTOR COMPENSATION
Each director of the Company who is not an employee of the Company,
Grand or any of their affiliates receives $1,000 for any board meeting or
committee meeting attended. Employees of the Company, Grand or any of their
affiliates will receive no additional compensation for service as a director or
committee member. All directors will be reimbursed for expenses incurred in
attending Board or committee meetings. In addition to meeting fees, beginning
in 1996, Messrs. Bell and Maheu each received $10,000 per quarter for their
service on the Committee of Independent Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 29, 1996, the Compensation
Committee consisted of Lyle Berman and Neil I. Sell. Mr. Berman is an
executive officer and a director of the Company and Grand, and Neil I. Sell, a
director of the Company, is a director of Grand.
<PAGE> 58
In 1994 the Company purchased substantially all of the assets of the Vegas
World Hotel & Casino (the "Vegas World Assets") from Mr. Bob Stupak, a former
director and principal stockholder of the Company. The liabilities retained by
Mr. Stupak in connection with the purchase of the Vegas World Assets were
principally comprised of accounts payable and accrued expenses and obligations
for presold vacation packages consisting of goods and services (cash, casino
chips and slot tokens, hotel room nights, beverages at casino bars, show
tickets, admissions to the Stratosphere Tower and certain other goods and
services). The Company did not assume nor did it agree to assume the
obligations related to presold vacation packages pursuant to the acquisition of
the Vegas World Assets, and such obligations remain the obligation of Mr.
Stupak. The Company has agreed, however, for the account of Mr. Stupak and at
his expense, to continue to provide facilities (but only to the extent the
Company operates such facilities), for Vegas World to fulfill its obligation
under an agreement between Vegas World and Vacation Club, Inc. Mr. Stupak is
the sole stockholder of Vacation Club, Inc. Mr. Stupak agreed to provide
sufficient funds, pursuant to an escrow agreement executed by the parties, to
compensate the Company for providing benefits to holders of vacation packages
Stupak previously sold. During 1996 the Company billed Mr. Stupak $4,777,687 of
which $1,000,000 was paid for amounts related to the Company providing its
facility to service Mr. Stupak's vacation packages. Accordingly, the Company has
reserved the underfunded amount of $3,777,687 in 1996. Bob Stupak has disputed
the billing and the escrow account set up to satisfy these obligations is under
funded. As a result of the currently underfunded escrow account, and no
apparent ability or intent on the part of Mr. Stupak to adequately fund the
escrow, the Company ceased providing a facility to service the vacation
packages on January 13, 1997.
On January 27, 1997, Stratosphere Corporation and its wholly-owned
subsidiary Stratosphere Gaming Corporation ("SGC") (collectively the "Debtors"),
filed voluntary petitions for Chapter 11 Reorganization pursuant to the United
States Bankruptcy Code. As of that date, the United States Bankruptcy Court for
the District of Nevada assumed jurisdiction over the assets of the Debtors. The
Debtors are acting as debtors in possession on behalf of their respective
bankruptcy estates, and are authorized as such to operate their business subject
to bankruptcy court supervision. A Joint Plan of Reorganization (the "Plan")
was filed by the Debtors and Grand Casinos, Inc. ("Grand") with the court. The
Plan includes several conditions of which none are currently satisfied. Failure
to meet the conditions could result in further negotiation of the Plan or the
development of a new plan. There can be no assurance that the conditions
contained in the Plan will be satisfied or that the Plan will be confirmed. Lyle
Berman, Stanley M. Taube and Neil I. Sell, directors of Stratosphere
Corporation, are directors of Grand. Lyle Berman and Stanley M. Taube are
executive officers of Grand.
Under the terms of the Plan, Stratosphere Corporation's $203 million 14
1/4% First Mortgage Notes currently outstanding will be exchanged for $203
million of new Stratosphere Notes (the "New Notes") bearing interest at 11 1/4%,
due May 15, 2002. The Plan calls for interest payable in kind at 14 1/4% per
annum for the November 15, 1996, interest payment, now in arrears, and a payment
in kind at 11 1/4% per annum for the May 15, 1997, interest payment, with all
subsequent interest payments paid in cash. The New Notes will also receive
additional contingent interest equal to 15% of Stratosphere Corporation's
consolidated annual cash flow from $60.0 million to $80.0 million, up to $3.0
million per year. The New Notes will be callable at 110% of par (plus accrued
interest) on May 15, 1999. Stratosphere Corporation will also be permitted to
issue up to $25.0 million in additional New Notes to fund its working capital
requirements.
In addition, the Plan will include a Rights Offering to all existing
holders of the Stratosphere Corporation's Common Stock, including Grand, which
will guarantee net proceeds of at least $75.0 million. The proceeds of the
Rights Offering will be used to finance completion of Phase II of the
Stratosphere resort complex. Existing shares of Stratosphere Corporation's
Common Stock will be canceled and shareholders will receive transferable rights
to purchase one share of Common Stock in the reorganized company at $1.31 per
share. Each purchaser of a share
<PAGE> 59
pursuant to the Rights Offering, other than those subscribed for by Grand, as
its pro-rata share, also will receive a three-year warrant to purchase one-half
of a share of Common Stock at $3.00 per full share. As part of the Plan, Grand
has agreed to purchase its pro-rata share of the Rights Offering (approximately
42 percent) for approximately $31.9 million. Additionally, Grand will provide
a standby commitment to purchase any unsubscribed portion of the Rights
Offering not exercised by other shareholders. Grand has also agreed to provide
a new Completion Guarantee for Phase II of the Stratosphere project, which
includes a new hotel tower consisting of approximately 1,000 room bays, a pool
and recreation area, landscaping and other improvements to the Stratosphere
complex. The guarantee will cover up to $25 million in cost overruns on
completion of Phase II. Any amounts paid by Grand pursuant to the Completion
Guarantee would constitute subordinated debt of the Company with interest
payable at 11 1/4 %.
Under the Plan, Grand will convert $50 million due from Stratosphere
Corporation into 39.7% (approximately 38.4 million shares) of Common Stock.
Grand previously loaned this amount to Stratosphere pursuant to its Completion
Guarantee given in connection with Stratosphere Corporation's March 1995
public offering of First Mortgage Notes.
The Plan is subject to a number of conditions, including plan
confirmation by the Federal Bankruptcy Court in Nevada, receipt of all
necessary regulatory approvals, including those required by Nevada Gaming
authorities, completion of definitive Plan related documents, and other
customary closing conditions. In addition, Grand's obligations under the Plan
are conditioned upon resolution or discharge of certain pending securities
lawsuits, receipt by Grand of an investment banking fairness opinion, a two
year Management Agreement wherein Grand agrees to manage construction of Phase
II and the day to day operations of the Company for $500,000 per year inclusive
of all costs and expenses, and Stratosphere Corporation's consolidated cash
flows (as defined in the Plan) for the months between October 1, 1996 and June
30, 1997, averaging not less than $2,267,000 per month. The average for the
five months ended February 23, 1997 was $1,615,736. Based on these conditions
there can be no assurance that the Plan on file will ultimately be confirmed.
If the Plan or a similar proposal is not confirmed Stratosphere Corporation
will likely be unable to continue as a going concern.
Grand is actively involved in the gaming industry. Casinos owned or
managed by Grand may directly or indirectly compete with the Company. In
addition, the potential for conflicts of interest exists among the Company and
Grand for future business opportunities. While the Company and Grand intend to
pursue other business opportunities, there is no agreement regarding conflicts
of interest, and such additional business opportunities available to Grand may
not be presented to the Company.
On July 1, 1994, Grand and the Company entered into a Management and
Development Agreement, which provided that Grand would among other things,
supervise the design, development, construction and opening of Stratosphere.
Pursuant to the Management and Development Agreement, prior to the opening of
Stratosphere, Grand provided the necessary personnel to oversee and manage
the development of the entire project. The Company reimbursed Grand for the
"cost" of providing such services, which for purposes of the Management and
Development Agreement, was defined as two times the hourly rate of Grand
personnel (calculated on an hourly basis) who are not directors of the Company,
and for any out-of-pocket expenses at cost. No reimbursement was made for
directors of the Company who are also employees of Grand. In connection with the
Management and Development Agreement the Company paid Grand consulting fees and
reimbursed expenses totaling $2,318,873 during the fiscal
<PAGE> 60
year ended 1996. In connection with the construction of the Company's facility
and its normal operations, approximately $3,296,924 of fixed assets were
purchased from Grand Media & Electronics, a wholly owned subsidiary of Grand
Casinos, Inc. during the year ended December 29, 1996.
Grand also entered into a Standby Equity Commitment with the Company
pursuant to which Grand may contribute to the Company up to $20 million in new
equity through the purchase of certain equity securities, on non- cumulative
bases, in each of the first three years following the time that the
Stratosphere project is operating. Such funds would be contributed to the
Company, up to $20.0 million of additional equity during each of the first
three years Stratosphere is operating as long as the Company's Consolidated
Cash Flow does not reach $50.0 million, subject to certain terms and conditions
to cover, on a dollar for dollar basis, any shortfall in the Company's
consolidated cash flow. The maximum commitment for the three years would be
$60 million. Funds for the Standby Equity Commitment would be made available,
to the extent necessary, through a rights offering of Common Stock, at a
discount of approximately 50% from the then-current market price, to all
stockholders of the Company; provided, however, that Grand would be obligated
to purchase any such shares of Common Stock, in addition to its pro rata share
as a stockholder of the Company, not so purchased by the other public
stockholders. The Company will retain the right to obtain the equity funds
which would otherwise be provided by the Standby Equity Commitment through
other means deemed appropriate. Grand has announced that as a result of the
Company's Chapter 11 filing and the application of the federal bankruptcy laws,
the continued enforceability of the Standby Equity Commitment is in question.
If the Plan is approved and implemented, the Standby Equity Commitment would be
cancelled.
Neil I. Sell director of the Company, is a partner in the law firm of
Maslon Edelman Borman & Brand, a Professional Limited Liability Partnership,
which has rendered legal services to the Company.
<PAGE> 61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 24, 1997, certain
information regarding the beneficial ownership of shares of Common Stock by
each director of the Company, each of the executive officers listed in the
Summary Compensation Table, each person known to the Company to be the
beneficial owner of more than 5% of the outstanding shares and all directors
and executive officers as a group. Except as otherwise indicated, each
stockholder has sole voting and investment power with respect to the shares
beneficially owned.
<TABLE>
<CAPTION>
NAME NUMBER OF PERCENT
SHARES
<S> <C> <C>
Grand Casinos, Inc. 24,476,704 41.9
130 Cheshire Lane
Minnetonka, MN 55305
Bob Stupak 5,316,200(a) 9.1
2015 Paradise Road
Las Vegas, NV 89104
Robert A. Maheu 85,000(b) *
David R. Wirshing 400,000(c) *
Andrew S. Blumen 140,000(d) *
Thomas G. Bell 27,500(e) *
Lyle A. Berman 580,000(f) *
Stanley M. Taube 166,000(g) *
Neil I. Sell 65,000(h) *
Thomas A. Lettero 40,000(i) *
Richard Schuetz -- *
All directors and executive officers as 1,103,500(j) 2.4
a group eight persons)
- ------------
*Less than 1%
</TABLE>
<PAGE> 62
(a) Based on the most recent Schedule 13D on file with the Securities and
Exchange Commission.
(b) Includes 75,000 shares issuable upon exercise of stock options that
are exercisable within 60 days and 10,000 shares held by Mr. Maheu's
family trust.
(c) Represents 400,000 shares issuable upon exercise of stock options that
are exercisable within 60 days.
(d) Represents 140,000 shares issuable upon exercise of stock options that
are exercisable within 60 days.
(e) Represents 27,500 shares issuable upon exercise of stock options that
are exercisable within 60 days.
(f) Includes 200,000 shares held by Mr. Berman's profit sharing plan and
150,000 shares owned by Mr. Berman's spouse. Mr. Berman disclaims
beneficial ownership of the shares beneficially owned by his spouse.
Does not include shares beneficially owned by Grand. Mr. Berman is a
director, executive officer and principal stockholder of Grand.
(g) Includes 14,000 shares owned by Mr. Taube's spouse and children. Mr.
Taube disclaims beneficial ownership of shares beneficially owned by
his spouse and children. Does not include shares beneficially owned
by Grand. Mr. Taube is a director, executive officer and principal
stockholder of Grand.
(h) Includes 25,000 shares issuable upon exercise of stock options that
are exercisable within 60 days. Does not include shares beneficially
owned by Grand. Mr. Sell is a director of Grand.
(i) Includes 40,000 shares issuable upon exercise of stock options
exercisable within 60 days.
(j) Includes 307,500 shares issuable upon exercise of stock options that
are exercisable within 60 days. Does not include shares beneficially
owned by Grand. Certain directors and executive officers of the
Company are also directors, executive officers or principal
stockholders of Grand. If the shares beneficially owned by Grand are
included in the shares beneficially owned by all directors and
executive officers as a group, the number of shares would be
25,580,204 and the percent of class would be 43.6%.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC") and the Nasdaq National Market System. Officers, directors and
greater than ten percent shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file. Based solely on
review of the copies of such forms furnished to the Company, or written
representations that no Forms 5 were required, the Company believes that during
the fiscal year ended December 29, 1996, all Section 16(a) filing requirements
applicable to its officers, directors and greater than ten-percent beneficial
owners were satisfied other than one report on Form 4 reporting an option
exercise and subsequent sale by Thomas Bell. In addition, based upon a review
of Form 3, 4 and 5 filings and a review of Schedule 13D filings, the Company has
reason to believe that Bob Stupak, a holder of more than 10% of the Company's
common stock (based on his most recent Schedule 13D on file with the SEC) and a
former director and executive officer of the Company, may not have filed one or
more Form 4s.
<PAGE> 63
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1994 the Company purchased substantially all of the assets of the
Vegas World Hotel & Casino (the "Vegas World Assets") from Mr. Bob Stupak, a
former director and principal stockholder of the Company. The liabilities
retained by Mr. Stupak in connection with the purchase of the Vegas World
Assets were principally comprised of accounts payable and accrued expenses and
obligations for presold vacation packages consisting of goods and services
(cash, casino chips and slot tokens, hotel room nights, beverages at casino
bars, show tickets, admissions to the Stratosphere Tower and certain other
goods and services). The Company did not assume nor did it agree to assume the
obligations related to presold vacation packages pursuant to the acquisition of
the Vegas World Assets, and such obligations remain the obligation of Mr.
Stupak. The Company has agreed, however, for the account of Mr. Stupak and at
his expense, to continue to provide facilities (but only to the extent the
Company operates such facilities), for Vegas World to fulfill its obligation
under an agreement between Vegas World and Vacation Club, Inc. Mr. Stupak is
the sole stockholder of Vacation Club, Inc. Mr. Stupak agreed to provide
sufficient funds, pursuant to an escrow agreement executed by the parties, to
compensate the Company for providing benefits to holders of vacation packages
Stupak previously sold. During 1996 the Company billed Mr.
Stupak $4,777,687 of which $1,000,000 was paid for amounts related to the
Company providing its facility to service Mr. Stupak's vacation packages.
Accordingly, the Company has reserved the underfunded amount of $3,977,687 in
1996. Bob Stupak has disputed the billing as a result of a currently
underfunded escrow account, and no apparent ability or interest on the part of
Mr. Stupak to adequately fund the escrow, and the escrow account set up to
satisfy these obligations is underfunded. As a result of a currently
underfunded escrow account, and no apparent ability or intent on the part of Mr.
Stupak to adequately fund the escrow, the Company ceased providing a facility to
service the vacation packages on January 13, 1997.
On January 27, 1997, Stratosphere Corporation and its wholly-owned
subsidiary Stratosphere Gaming Corporation ("SGC") (collectively the
"Debtors"), filed voluntary petitions for Chapter 11 Reorganization pursuant to
the United States Bankruptcy Code. As of that date, the United States
Bankruptcy Court for the District of Nevada assumed jurisdiction over the
assets of the Debtors. The Debtors are acting as debtors in possession on
behalf of their respective bankruptcy estates, and are authorized as such to
operate their business subject to bankruptcy court supervision. A Joint Plan
of Reorganization (the "Plan") was filed by the Debtors and Grand Casinos, Inc.
("Grand") with the court. The Plan includes several conditions of which none
are currently satisfied. Failure to meet the conditions could result in
further negotiation of the Plan or the development of a new plan. There can
be no assurance that the conditions contained in the Plan will be satisfied or
that the Plan will be confirmed. Lyle Berman, Stanley M. Taube and Neil I.
Sell, directors of Stratosphere Corporation, are directors of Grand. Lyle
Berman and Stanley M. Taube are executive officers of Grand.
Under the terms of the Plan, Stratosphere Corporation's $203 million
14 1/4% First Mortgage Notes currently outstanding will be exchanged for $203
million of new Stratosphere Notes (the "New Notes") bearing interest at 11
1/4%, due May 15, 2002. The Plan calls for interest payable in kind at 14
1/4% per annum for the November 15, 1996, interest payment, now in arrears,
and a payment in kind at 11 1/4% per annum for the May 15, 1997, interest
payment, with all subsequent interest payments paid in cash. The New Notes
will also receive additional contingent interest equal to 15% of Stratosphere
Corporation's consolidated annual cash flow from $60.0 million to $80.0
million, up to $3.0 million per year. The New Notes will be callable at 110%
of par (plus accrued interest) on May 15, 1999. Stratosphere Corporation will
also be permitted to issue up to $25.0 million in additional New Notes to fund
its working capital requirements.
In addition, the Plan will include a Rights Offering to all existing
holders of Stratosphere Corporation's Common Stock, including Grand, which will
guarantee net proceeds of at least $75.0 million. The proceeds of the Rights
Offering will be used to finance completion of Phase II of the Stratosphere
resort complex. Existing shares of Stratosphere Corporation's Common Stock will
be canceled and shareholders will receive transferable rights to
<PAGE> 64
purchase one share of Common Stock in the reorganized company at $1.31 per
share. Each purchaser of a share pursuant to the Rights Offering, other than
those subscribed for by Grand, as its pro-rata share, also will receive a
three-year warrant to purchase one-half of a share of Common Stock at $3.00
per full share. As part of the Plan, Grand has agreed to purchase its pro-rata
share of the Rights Offering (approximately 42 percent) for approximately $31.9
million. Additionally, Grand will provide a standby commitment to purchase any
unsubscribed portion of the Rights Offering not exercised by other
shareholders. Grand has also agreed to provide a new Completion Guarantee for
Phase II of the Stratosphere project, which includes a new hotel tower
consisting of approximately 1,000 room bays, a pool and recreation area,
landscaping and other improvements to the Stratosphere complex. The guarantee
will cover up to $25 million in cost overruns on completion of Phase II. Any
amounts paid by Grand pursuant to the Completion Guarantee would constitute
subordinated debt of Stratosphere Corporation with interest payable at 11 1/4 %.
Under the Plan, Grand will convert $50 million due from
Stratosphere Corporation into 39.7% (approximately 38.4 million shares) of
Common Stock. Grand previously loaned this amount to Stratosphere pursuant to
its Completion Guarantee given in connection with Stratosphere Corporation's
March 1995 public offering of First Mortgage Notes.
The Plan is subject to a number of conditions, including plan
confirmation by the Federal Bankruptcy Court in Nevada, receipt of all necessary
regulatory approvals, including those required by Nevada gaming authorities,
completion of definitive Plan related documents, and other customary closing
conditions. In addition, Grand's obligations under the Plan are conditioned
upon resolution or discharge of certain pending securities lawsuits, receipt by
Grand of an investment banking fairness opinion, a two year Management Agreement
wherein Grand agrees to manage construction of Phase II and the day to day
operations of Stratosphere Corporation for $500,000 per year inclusive of all
costs and expenses, and Stratosphere Corporation's consolidated cash flows (as
defined in the Plan) for the months between October 1, 1996 and June 30, 1997,
averaging not less than $2,267,000 per month. The average for the five months
ended February 23, 1997 was $1,615,736. Based on these conditions there can be
no assurance that the Plan on file will ultimately be confirmed. If the Plan or
a similar proposal is not confirmed Stratosphere Corporation will likely be
unable to continue as a going concern.
Grand is actively involved in the gaming industry. Casinos owned or
managed by Grand may directly or indirectly compete with the Company. In
addition, the potential for conflicts of interest exists among the Company and
Grand for future business opportunities. While the Company and Grand intend to
pursue other business opportunities, there is no agreement regarding conflicts
of interest, and such additional business opportunities available to Grand may
not be presented to the Company.
On July 1, 1994, Grand and the Company entered into a Management and
Development Agreement, which provided that Grand would, among other things,
supervise the design, development, construction and opening of Stratosphere.
Pursuant to the Management and Development Agreement, prior to the opening of
Stratosphere, Grand provided the necessary personnel to oversee and manage the
development of the entire project. The Company reimbursed Grand for the "cost"
of providing such services, which for purposes of the Management and Development
Agreement, was defined as two times the hourly rate of Grand personnel
(calculated on an hourly basis) who are not directors of the Company, and for
any out-of-pocket expenses at cost. No reimbursement was made for directors of
the Company who are also employees of Grand. In connection with the Management
and Development
<PAGE> 65
Agreement the Company paid Grand consulting fees and reimbursed expenses
totaling $2,318,873 during the fiscal year ended 1996. In connection with the
construction of the Company's facility and its normal operations, approximately
$3,296,924 of fixed assets were purchased from Grand Media & Electronics, a
wholly owned subsidiary of Grand Casinos, Inc. during the year ended December
29, 1996.
Grand also entered into a Standby Equity Commitment with the Company,
pursuant to which Grand may contribute to the Company up to $20 million in new
equity through the purchase of certain equity securities, on non- cumulative
bases, in each of the first three years following the time that the
Stratosphere project is operating. Such funds would be contributed to the
Company, up to $20.0 million of additional equity during each of the first
three years Stratosphere is operating as long as the Company's Consolidated
Cash Flow does not reach $50.0 million, subject to certain terms and conditions
to cover, on a dollar for dollar basis, any shortfall in the Company's
consolidated cash flow. The maximum commitment for the three years would be
$60 million. Funds for the Standby Equity Commitment would be made available,
to the extent necessary, through a rights offering of Common Stock, at a
discount of approximately 50% from the then-current market price, to all
stockholders of the Company; provided, however, that Grand would be obligated
to purchase any such shares of Common Stock, in addition to its pro rata share
as a stockholder of the Company, not so purchased by the other public
stockholders. The Company will retain the right to obtain the equity funds
which would otherwise be provided by the Standby Equity Commitment through
other means deemed appropriate. Grand has announced that as a result of the
Company's Chapter 11 filing and the application of the federal bankruptcy laws,
the contiued enforceability of the Standby Equity Commitment is in question.
If the Plan is approved and implemented, the Standby Equity Commitment would be
cancelled.
Neil I. Sell director of the Company, is a partner in the law firm of
Maslon Edelman Borman & Brand, a Professional Limited Liability Partnership,
which has rendered legal services to the Company.
<PAGE> 66
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements:
Included in Part II:
Report of Independent Public Accountants
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 29, 1996 and December 31,
1995
Consolidated Statements of Operations for the fiscal years ended
December 29, 1996, December 31, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the period from
January 1, 1994 through December 29, 1996
Consolidated Statements of Cash Flows for the fiscal years ended
December 29, 1996, December 31, 1995 and 1994
Notes to Consolidated Financial Statements
(a)(2) Supplemental Financial Statement Schedules
All financial statement schedules have been omitted because either they are not
required or the information required to be set forth therein is included in the
Consolidated Financial Statements or in the Notes thereto.
(a)(3) Exhibits
Exhibit Description of Document
- ------- -----------------------
3(1) Certificate of Incorporation of the Company, as amended.(a)
3(2) Bylaws of the Company, as amended and restated.(b)
3(3) Articles of Incorporation of the Operating Subsidiary.(c)
3(4) Bylaws of the Operating Subsidiary.(c)
3(5) Certificate of Designation of Series A Convertible Non-Voting
Preferred Stock of the Company.(e)
4(1) Indenture dated March 9, 1995 between the Company, the Operating
Subsidiary and American Bank National Association.(e)
4(2) Disbursement and Escrow Agreement dated March 9, 1995 among First
Interstate Bank of Nevada, N.A., Lawyers Title of Nevada, Inc.,
American Bank National Association, the Company and Stratosphere
Gaming Corp.(e)
<PAGE> 67
4(3) Security Agreement dated March 9, 1995 between Stratosphere Gaming
Corp. and American Bank National Association.(e)
4(4) Pledge Agreement dated March 9, 1995 between the Company and American
Bank National Association.(e)
4(5) Collateral Assignment between the Company and American Bank National
Association.(e)
4(6) Contracting Party's Consent to Assignment.(e)
4(7) Notes Completion Guarantee dated March 9, 1995 between Grand Casinos,
Inc. and American Bank National Association.(e)
4(8) Completion Guarantor Subordination Agreement March 9, 1995 between
Grand Casinos, Inc. and American Bank National Association.(e)
10(1) Consulting Agreement, dated October 8, 1992, between Vegas World and
Space Needle Corporation.(a)
10(2) Design Agreement, dated December 7, 1992, between Vegas World and
Bullock, Smith Partners, Inc.(a)
10(3) Agreement, dated February 10, 1993, between the Company and Perini
Building Company, Inc.(a)
10(4) Amended and Restated Subscription Agreement dated February 17, 1994
between the Company and BSE.(b)
10(5) Agreement dated February 17, 1994 between the Company and Vegas World
concerning parking facilities.(b)
10(6) Agreement dated February 17, 1994 between the Company and Vegas World
concerning group sales and related matters.(b)
10(7) Agreement dated February 17, 1994 between the Company and Vegas World
concerning lease of gaming operations.(b)
10(8) Lease dated February 17, 1994 between the Company and Vegas World.(b)
10(9) First Refusal Agreement dated February 17, 1994 between the Bob
Stupak and the Company.(b)
10(10) 1993 Stock Option Plan.(b)
10(11) 1993 Stock Option Plan for Non-Employee Directors.(b)
10(12) Termination of Promotional Shares Agreement.(a)
10(13) Agreement dated November 15, 1993 among the Company, Bob Stupak, Bob
Stupak Enterprises, Inc. and Grand Casinos Resorts, Inc.(a)
10(15) Amendment to Agreement dated December 22, 1993 among the Company, Bob
Stupak, Bob Stupak Enterprises, Inc. and Grand Casinos Resorts,
Inc.(a)
10(16) Letter Agreement dated January 25, 1994 among the Company, Bob
Stupak, Bob Stupak Enterprises, Inc. and Grand Casinos Resorts,
Inc.(a)
10(17) Easement Agreement dated February 17, 1994 between the Company and
Bob Stupak.(b)
10(18) Agreement dated March, 1994 between the Company and Taylor
International Corporation.(b)
10(19) Warrant Agreement dated February 22, 1994 between the Company and
American Stock Transfer & Trust Company.(b)
10(20) Sales Agent's Warrant Agreement dated February 23, 1994 by and
between Yeager Securities, Inc. and the Company.(b)
10(21) Letter Agreement dated as of June 1, 1994 between the Company, Grand
Casinos, Inc., Grand Casinos Resorts, Inc., Bob Stupak Enterprises,
Inc. and Bob Stupak.(c)
10(22) Deed of Trust, Assignment of Rents and Security Agreement dated as of
March 9, 1995 by the Company in favor of American Bank National
Association.(e)
10(23) Owner Participation Agreement between the City of Las Vegas Downtown
Redevelopment Agency and the Company.(c)
10(24) Asset Purchase Agreement between Bob Stupak d/b/a Vegas World Hotel &
Casino and the Company dated
<PAGE> 68
November 1, 1994.(d)
10(25) Purchase Agreement dated November 1, 1994 between Bob Stupak d/b/a
Vegas World Hotel & Casino and the Company.(d)
10(26) Unsecured Non-Negotiable Promissory Note dated November 4, 1994
payable to Bob Stupak from the Company.(c)
10(27) Escrow Agreement dated November 4, 1994 among the Company, Bob Stupak
d/b/a Vegas World Hotel & Casino, and First Interstate Bank of
Nevada, N.A.(d)
10(28) Amendment to Purchase Agreement dated November 16, 1994 between Bob
Stupak, d/b/a Vegas World & Casino and the Company.(c)
10(29) Amendment to June 1, 1994 Letter Agreement dated November 16, 1994
between the Company, Grand Casino Resorts, Inc., Grand Casino, Inc.,
Bob Stupak Enterprises, Inc. and Bob Stupak.(c)
10(30) Management and Development Agreement dated July 1, 1994, by and
between the Company and Grand.(c)
10(31) Employment Agreement effective as of September 26, 1994 by and
between the Company and David R. Wirshing.(c)
10(32) Employment Agreement by and between the Company and Andrew S.
Blumen.(c)
10(33) Memorandum of Agreement dated as of the 16th of February, 1995 by and
among the Company and Grand Casinos, Inc.(c)
10(34) Letter Agreement effective February 14, 1995 between the Company and
The Gordon Company.(c)
10(35) Standby Equity Commitment dated March 9, 1995 by and between Grand
Casinos, Inc. and the Company.(c)
10(36) Registration Rights Agreement dated March 9, 1995 by and among the
Company and Donaldson, Lufkin & Jenrette Securities Corporation and
Ladenburg, Thalmann & Co. Inc.(e)
10(37) Assignment and Consent dated March 9, 1995 by the Company in favor of
American Bank National Association consented to by Robert Stupak and
Grand Casinos, Inc.(e)
10(38) Unsecured Indemnity Agreement dated March 9, 1995 among the Company
and American Bank National Association.(e)
10(39) Development and Lease Agreement, dated March 11, 1996, by and between
Strato-Retail, LLC and the Company.(f)
10(40) Participation Agreement, dated as of April 29, 1996, by and among
Stratosphere Gaming Corp., First Security Trust Company of Nevada,
The Persons Listed on Schedule II, Bank of Scotland, First Interstate
Bank of Nevada, Societe Generale, Credit Lyonnais, Los Angeles
Branch, BA Leasing & Capital Corporation and the Company. (g)
10(41) Lease Agreement, dated as of April 29, 1996, by and between First
Security Trust Company of Nevada and Stratosphere Gaming Corp.(g)
10(42) Loan Agreement, dated as of April 29, 1996, by and among First
Security Trust Company of Nevada, BA Leasing & Capital Corporation,
Bank of Scotland, First Interstate Bank of Nevada, Societe Generale,
Credit Lyonnais, Los Angeles Branch, and the Persons Listed on
Schedule I. (g)
10(43) Promissory Notes from the Borrower to the Various Lenders.(g)
10(44) Trust Agreement, dated as of April 29, 1996, between Stratosphere
Gaming Corp., as Grantor, and First Security Trust Company of Nevada,
as Trustee.(g)
10(45) Security Agreement and Assignment of Lease, dated as of April 29,
1996, between First Security Trust Company of Nevada and BA Leasing &
Capital Corporation.(g)
10(46) Guaranty, dated as o April 29, 1996, by the Company in favor of the
Beneficiaries named therein.(g)
10(47) Subordination Agreement, entered into as of April 29, 1996, by and
among Stratosphere Gaming Corp., the
<PAGE> 69
Company, Grand Casinos, Inc., First Security Trust Company of
Nevada , and BA Leasing & Capital Corporation.(g)
10(48) Landlord Waiver and Consent.(g)
10(49) Facility Lease by and Between Parent and Lessee.(g)
10(50) Standstill and Amendment Agreement, dated as of October 30, 1996,
by and among Stratosphere Gaming Corp., First Security Trust
Company of Nevada, Bank of Scotland, Wells Fargo Bank, National
Association, Societe Generale, Credit Lyonnais, Los Angeles Branch,
BA Leasing & Capital Corporation and the Company. (h)
10(51) Funding Agreement, dated as of September 27, 1996, by and among
Grand Casinos, Inc., Stratosphere Gaming Corp. and the Company.(h)
10(52) Letter Agreement, dated as of September 27, 1996, by and among
Grand Casinos, Inc., Stratosphere Gaming Corp. and the Company.(h)
10(53) Senior Executive Severance Agreement, dated as of September 27,
1996, by and between Andrew Blumen and the Company.(h)
10(54) Senior Executive Severance Agreement, dated as of September 27,
1996, by and between Thomas Lettero and the Company.(h)
10(55) Separation Agreement, dated effective as of August 15, 1996, by and
between David R. Wirshing and the Company
10(56) Senior Executive Severance Agreement, dated as of November 19,
1996, by and between Richard Schuetz and the Company.
10(57) Restructuring Agreement Regarding Pre-Negotiated Plan of
Reorganization, dated January 6, 1997, by and among Grand Casinos,
Inc., Stratosphere Gaming Corp. and the Company.(i)
21 Subsidiaries
27 Financial Data Schedule
- -------------
(a) Incorporated herein by reference to the Company's Registration
Statement on Form S-1, as amended, (No. 33-58616).
(b) Incorporated herein by reference to the Company's Annual Report on
form 10-K for the year ended December 31, 1993.
(c) Incorporated herein by reference to the Company's Registration
Statement on Form S-1, as amended, (No. 33-81286).
(d) Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1994.
(e) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
(f) Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1996.
(g) Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1996.
(h) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 29, 1996.
(i) Incorporated herein by reference to the Company's Current Report on
Form 8-K dated January 6, 1997.
<PAGE> 70
+ Relates to Executive Compensation.
(b) Reports on Form 8-K.
The Company did not file any Reports on Form 8-K during the fiscal
quarter ended December 29, 1996.
<PAGE> 71
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STRATOSPHERE CORPORATION
Registrant
Date: March 31, 1997 By: /s/ Thomas A. Lettero
-------------------------
Name: /s/ Thomas A. Lettero
-------------------------
Title: Chief Financial Officer
-------------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated
on March 31, 1997.
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
/s/ Lyle Berman Chief Executive Officer and Director
- ------------------------------------------ (Principal Executive Officer)
Lyle Berman
/s/ Robert A. Maheu Vice Chairman of the Board of Directors
- ---------------------------------------
Robert A. Maheu
/s/ Richard S. Schuetz President and Chief Executive Officer
- ----------------------------------------
Richard S. Schuetz
/s/ Andrew S. Blumen Executive Vice President, General Counsel,
- -------------------------------------- Secretary and Director
Andrew S. Blumen
/s/ Thomas A. Lettero Chief Financial Officer (Principal Financial and
- --------------------------------------- Accounting Officer)
Thomas A. Lettero
/s/ Thomas G. Bell Director
- ----------------------------------------
Thomas G. Bell
/s/ Stanley M. Taube Director
- ---------------------------------------
Stanley M. Taube
/s/ Neil I. Sell Director
- ----------------------------------------
Neil I. Sell
</TABLE>
<PAGE> 1
EXHIBIT 10(55)
SEPARATION AGREEMENT
This Agreement dated effective as of August 15, 1996 by and between
David R. Wirshing ("Wirshing") and Stratosphere Corporation, a Delaware
Corporation (the "Company").
RECITALS
A. Wirshing has been employed by the Company pursuant to that
certain Employment Agreement dated September 26, 1994 by and between the
Company and Wirshing (the "Employment Agreement"), and has also served as an
officer and director of the Company.
B. Wirshing and the Company entered into that certain Stock
Option Grant Agreement dated as of September 26, 1994, whereby the Company
granted Wirshing stock options to acquire 500,000 shares of the Company's
Common Stock, $.01 par value per share, at an exercise price of $3.875 per
share (the "Old Option Agreement").
C. Wirshing and the Company have agreed that it is in the best
interest of each of Wirshing and the Company that the Employment Agreement be
terminated and that Wirshing resign as an officer, director and employee of the
Company.
NOW, THEREFORE, based on the foregoing premises and the terms
and conditions set forth below, the parties hereby agree as follows.
AGREEMENT
1. Termination of Employment Agreement. Except as expressly set
forth herein, the Employment Agreement is hereby terminated and Wirshing hereby
resigns as an officer, director and employee of the Company effective
immediately. The parties' rights and obligations under the Employment
Agreement are extinguished, except for Wirshing's obligations regarding
Confidentiality under Article V.
2. Confidential Information. Article V of the Employment
Agreement, which sets forth Wirshing's obligations and covenants intended to
safeguard the Company's Confidential Information (as defined therein) shall
survive the termination of the Employment Agreement and remain in full force
and effect and is hereby incorporated by reference. The Company acknowledges
that Wirshing will likely obtain new employment as an executive in the gaming
industry and that this provision is not intended to prohibit
<PAGE> 2
Wirshing from complying with a valid subpoena on a matter pertaining to the
Company.
3. Payment of Base Salary and Benefits. From the date hereof
until the earlier of (i) six months from the date hereof (the "Maximum
Period"), or (ii) Wirshing obtains other employment providing compensation
equivalent to his annualized Base Salary (as defined in the Employment
Agreement), the Company shall continue to pay Wirshing his annualized Base
Salary pursuant to Section 2.1 of the Employment Agreement payable in equal
installments at same time that the Company pays its employees, and shall
provide the same benefits, including life and health insurance benefits, as he
received pursuant to the Employment Agreement (the "Benefits"); provided,
however, that Wirshing shall notify the Company of any employment, either as a
full or part time employee or as a consultant, during the Maximum Period, which
notification shall specify the terms of such employment. The value of any cash
compensation so received shall be a reduction to any amounts payable by the
Company to Wirshing hereunder. Wirshing shall also have the right to elect to
receive COBRA benefits at his own expense commencing on the last day that he
receives Base Salary and the Benefits hereunder.
4. Stock Options. The Parties hereto agree that the Old Option
Agreement is hereby terminated and no longer of any force and effect.
Concurrent with the execution of this Agreement, and in further consideration
of the provisions of this Agreement, the parties hereto are entering into a new
Stock Option Grant Agreement in the form of Exhibit A hereto, whereby the
Company is granting Wirshing stock options to acquire 400,000 shares of the
Company's Common Stock, $.01 par value per share, at an exercise price of $3.00
per share (the "New Option Agreement").
5. Release by Wirshing. In consideration of the payment of
Base Salary, entering into the New Option Agreement and providing the other
benefits set forth in this Agreement, Wirshing hereby fully and finally
releases, holds harmless, and forever discharges the Company of and from any
and all legal claims which he now has, whether or not he now knows about the
claims. These claims Wirshing releases hereunder include all of his rights to
any relief of any kind from the Company of any nature whatsoever, including,
without limitation, contract claims; tort claims; claims arising under any
federal, state or local law, including, but not limited
-2-
<PAGE> 3
to, rights and claims of age discrimination under the Age Discrimination in
Employment Act of 1987 ("ADEA"); and claims for any other form of remuneration.
Wirshing will not bring any lawsuits, file any charges, make any demands, or
otherwise commence any type of legal proceeding against the Company except as
necessary to enforce this Agreement. The rights and benefits Wirshing will
receive as set forth in this Agreement constitute full and fair payment for the
release of all of his claims, and are of greater value than anything to which
Wirshing is entitled. The Company does not owe Wirshing anything in addition
to what he will receive under this Agreement.
As used in this section, the "Company" means Stratosphere Corporation,
and all and each of its past and present parent, affiliated, and subsidiary
corporations; and all and each of the past and present officers, directors,
employees, insurers, indemnitors, attorneys, agents, successors and assigns of
all and each of the foregoing entities.
As used in this section, "Wirshing" means David R. Wirshing, and all
and each of his heirs, administrators, representatives, attorneys, agents, and
anyone else who has or obtains legal rights through David R. Wirshing.
6. Rights to Counsel, Consider and Revoke. The Company has
advised Wirshing to obtain legal counsel of his choice prior to executing this
Agreement, and Wirshing has done so. Wirshing has twenty-one (21) days to
consider his release of rights and claims of age discrimination under the ADEA,
beginning the date on which he receives this Agreement. If he signs this
Agreement, he is entitled to revoke his release of any rights or claims of age
discrimination under the ADEA within seven (7) days of executing it, and that
release shall not become effective or enforceable until the seven-day period
has expired.
If Wirshing exercises his right to revoke as provided above, this
Agreement shall be null and void and of no further force and effect.
7. Release by the Company. In consideration of promises by
Wirshing in this Agreement, the Company hereby fully and finally releases,
holds harmless, and forever discharges Wirshing of and from any and all legal
claims which it now has, whether or not the
-3-
<PAGE> 4
Company now knows about the claims. These claims the Company releases
hereunder include all of its rights to any relief of any kind from Wirshing of
any nature whatsoever, including, without limitation, contract claims; tort
claims; or claims arising under any federal, state or local law, provided,
however, that the Company in no way releases Wirshing from any claims resulting
(i) from his commission of a felony, (ii) from any theft or embezzlement by
Wirshing of Company property or (iii) from Wirshing's commission of similar
acts involving moral turpitude.
8. Voluntary Release. The parties enter into this
Agreement only after having been advised by counsel of his/its choice. Each
enters into the Agreement voluntarily, without coercion or duress.
9. Confidentiality. Wirshing shall keep the existence and terms
of this Agreement confidential. No disclosures shall be made, except that
Wirshing may disclose the existence and terms of this Agreement to his family,
attorney, and tax advisors. All persons to whom such disclosures are made
shall agree as a condition of such disclosures to comply with this provision on
confidentiality. In the event the Company makes any public disclosures
regarding this Agreement, this section shall no longer apply to any of the
specific information so disclosed by the Company.
10. Rights and Remedies Upon Breach. Each of the parties hereto
shall have the right and remedy to have the terms of this Agreement
specifically enforced by any court of competent jurisdiction or to exercise all
other equitable remedies, it being agreed that any breach of this Agreement
would cause irreparable injury to the parties hereto and that money damages
would not provide adequate remedy to the parties, which right and remedy shall
be independent of, in addition to, and not in lieu of, any other rights and
remedies available to the parties hereto under law or equity. It being agreed
by both parties hereto, that in any successful action by a party hereunder, the
party against whom such successful action is brought shall be responsible for
all costs and expenses (including attorney's fees and legal expenses) incurred
by the party bringing such successful action.
-4-
<PAGE> 5
11. Complete Agreement. This Agreement and the New Option
Agreement are the sole and exclusive agreements between the parties as to the
matters set forth herein. There are no other agreements between them. This
Agreement may not be modified in any manner except in a document signed by both
parties hereto.
12. Indemnification. The Company shall defend, indemnify and hold
Wirshing harmless for actions taken in his official capacity while Wirshing was
an officer and a director of the Company as required under the Company's
Certificate of Incorporation and Bylaws and the Delaware General Corporation
Law.
13. Waiver. The failure of either party to insist, in any one or
more instances, upon performance of the terms or conditions of this Agreement
shall not be construed as a waiver or a relinquishment of any right granted
hereunder or of the future performance of any such term, covenant, or
condition.
14. Notices. Any notice to be given hereunder shall be deemed
sufficient if addressed in writing, and delivered by registered or certified
mail or delivered personally (i) in the case of the Company, to the Company's
principal business office, and (ii) in the case of Wirshing, to his address
appearing on the current records of the Company, or to such other address as he
may designate in writing to the Company.
15. Severability. In the event that any provision shall be held
to be invalid or unenforceable for any reason whatsoever, such invalidity or
unenforceability shall not affect any other provision of this Agreement, and
the remaining covenants, restrictions and provisions hereof shall remain in
full force and effect, and any court of competent jurisdiction may so modify
the objectionable provision as to make it valid, reasonable and enforceable.
16. Amendment. This Agreement may be amended only by an agreement
in writing signed by the parties hereto.
17. Benefit. This Agreement shall be binding upon and inure to
the benefit of and shall be enforceable by and against Wirshing's heirs,
beneficiaries and legal representatives and the Company's successors and
assigns. The rights and obligations of Wirshing may not be delegated or
assigned except as specifically set forth in this Agreement.
-5-
<PAGE> 6
18. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of Nevada.
-6-
<PAGE> 7
In witness whereof, the undersigned have caused this Agreement to be
executed effective as of the date first above written.
s/ David R. Wirshing
__________________________
David R. Wirshing
STRATOSPHERE CORPORATION
Andrew Blumen
By:_______________________
Executive Vice President
General Counsel
Its:____________________
-7-
<PAGE> 1
EXHIBIT 10(56)
SENIOR EXECUTIVE SEVERANCE AGREEMENT
THIS AGREEMENT, by and between STRATOSPHERE CORPORATION, a Delaware
corporation (the "Corporation'), and RICHARD SCHUETZ (the "Executive"),
WITNESSETH:
WHEREAS, the Board of Directors of the Corporation (the "Board") has
determined that the Executive is a key executive of the Corporation and/or one
or more of its Subsidiaries and it is the desire of the Board to assure itself
of the availability of the services of the Executive and to provide assurances
to the Executive of employment in the event of a financial restructuring or
reorganization or in the event of a change in control of the Board
(collectively an "Event");
WHEREAS, in the event that there occurs an Event, the Board believes it
imperative that the Corporation and the Board be able to rely upon the
Executive to continue in his position and, if required, to assess any proposal
or transaction which would cause an Event and advise management and the Board
as to whether such proposal or transaction would be in the best interest of the
Corporation and its stockholders, free from concern that his recommendations
may adversely affect his continued employment:
NOW, THEREFORE, to assure the Corporation that it will have the continued
dedication of the Executive and the availability of his advice and counsel
notwithstanding the possibility, threat or occurrence of an Event and to
induce the Executive to remain in the employ of the Corporation and/or one or
more of its Subsidiaries, and for other good and valuable consideration, the
receipt, adequacy and sufficiency of which are hereby acknowledged, the
Corporation and the Executive agree as follows:
1. Services During Certain Events. In the event that any steps are taken
which may constitute the possibility, threat or occurrence of an Event, the
Executive agrees that he will not voluntarily leave the employ of the
Corporation or any of its Subsidiaries and will continue to render services to
the Corporation and its Subsidiaries until, in the opinion of the Board, either
efforts to effect an Event have been abandoned or terminated or until one (1)
year after an Event has occurred. Any decision by the Board that efforts to
effect an Event have been abandoned or terminated shall be conclusive and
binding on the Executive.
2. Severance Payments. In the event that the Corporation terminates the
Executive's employment or materially either diminishes or reduces his title,
compensation, authority, responsibility, functions or duties with the
Corporation and its Subsidiaries within one (1) year after an Event for any
reason other than "for cause" (as defined herein) or as a consequence of his
death or disability, then, within thirty (30) days after such termination of
employment, the Corporation shall pay to the Executive as compensation for
services rendered to the Corporation and its Subsidiaries cash in an amount
equal to six (6) months of his aggregate base salary (excluding bonus or
options) for the six (6) month period immediately preceding the date of
termination plus any and all accrued salary and accrued vacation pay.
<PAGE> 2
3. Definitions.
(a) "Change of control of Board" means Grand Casino Inc. for whatever
reason not being able to elect a majority of the members of the Board of the
Corporation.
(b) "For cause" shall mean (1) the commission of fraud, embezzlement or
theft against the Corporation or any of its Subsidiaries or against any
employee, customer or business associate of the Corporation or any of its
Subsidiaries or (2) a conviction of, or guilty plea to, a felony.
(c) "Person" shall have the same meaning as such term has under section
13(d) of the Act and the regulations promulgated thereunder.
(d) "Subsidiary" shall mean any domestic or foreign corporation,
partnership or entity, a majority of whose equity securities is owned directly
or indirectly by the Corporation or by other Subsidiaries.
4. Indemnification. If litigation shall be brought to enforce or
interpret any provision contained herein or to recover from the Executive any
moneys paid pursuant to this Agreement, the Corporation, to the extent
permitted by applicable law and the Corporation's Articles of Incorporation
hereby agrees to indemnify the Executive for his or her reasonable attorneys'
fees and disbursements incurred in such litigation, and hereby agrees to pay
any money judgment obtained from the Executive and prejudgment interest on any
money judgment obtained from the Executive.
5. Payment Obligations Absolute. The Corporation's obligation to pay the
Executive the compensation and to make the arrangements provided for herein
shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right which the Corporation may have against him
or anyone else. All amounts payable by the Corporation hereunder shall be paid
without notice or demand. Each and every payment made hereunder by the
Corporation shall be final, and the Corporation will not seek to recover all or
any part of such payment from the Executive or from whosoever may be entitled
thereto, for any reason whatsoever. The Executive shall not be obligated to
seek other employment in mitigation of the amounts payable or arrangements made
under any provision of this Agreement, and the obtaining of any such other
employment shall in no event effect any reduction of the Corporation's
obligations to make the payments and arrangements required to be made under
this Agreement.
6. Continuing Obligations. The Executive shall retain in confidence any
confidential information known to him concerning the Corporation and its
Subsidiaries and their respective businesses so long as such information is not
publicly disclosed.
7. Successors. This Agreement shall be binding upon and inure to the
benefit of the Executive and his estate and the Corporation and any successor
of the Corporation, but neither this Agreement nor any rights arising hereunder
may be assigned or pledged by the Executive.
<PAGE> 3
8. Severability. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
9. Prior Agreements. This Agreement supersedes any prior severance
agreement between the Executive and the Corporation, which shall be of no
further force and effect whatsoever.
10. Controlling Law. This Agreement shall in all respects be governed by
and construed in accordance with the laws of the State of Nevada.
11. Termination. This Agreement shall terminate if the Board determines
that the Executive is no longer a key executive and so notifies the Executive;
except that such determination shall not be made, and if made shall have no
effect within one (1) year after the effectuation of an Event.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
19th day of November, 1996.
STRATOSPHERE CORPORATION
By /s/ Lyle Berman
-------------------------
LYLE BERMAN
Its: Chairman of the Board
EXECUTIVE
By /s/ Richard Schuetz
---------------------------
RICHARD SCHUETZ
<PAGE> 1
EXHIBIT 21
Subsidiaries
Stratosphere Gaming Corp., a Nevada Corporation
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> DEC-29-1996
<CASH> 25,237,148
<SECURITIES> 2,000,905
<RECEIVABLES> 4,764,632
<ALLOWANCES> 189,142
<INVENTORY> 3,270,532
<CURRENT-ASSETS> 2,856,793
<PP&E> 141,437,269
<DEPRECIATION> 11,437,269
<TOTAL-ASSETS> 181,079,965
<CURRENT-LIABILITIES> 45,982,932
<BONDS> 0
0
0
<COMMON> 583,931
<OTHER-SE> (138,026,713)
<TOTAL-LIABILITY-AND-EQUITY> 181,079,965
<SALES> 117,555,128
<TOTAL-REVENUES> 119,967,332
<CGS> 15,200,292
<TOTAL-COSTS> 60,417,755
<OTHER-EXPENSES> 379,580,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,761,565
<INCOME-PRETAX> (348,842,620)
<INCOME-TAX> 0
<INCOME-CONTINUING> (348,842,620)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (348,842,620)
<EPS-PRIMARY> (6.00)
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