<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 29, 1997
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)
<TABLE>
<S><C>
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)
</TABLE>
(702) 382-4446
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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.
YES X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING FOR EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: 58,393,105 AS OF AUGUST 8,
1997.
<PAGE> 2
STRATOSPHERE CORPORATION
(DEBTOR-IN-POSSESSION)
FORM 10-Q
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 29, 1997 AND DECEMBER 29, 1996 3
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 29, 1997 AND JUNE 30, 1996 (UNAUDITED) 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 29, 1997 AND JUNE 30, 1996 (UNAUDITED) 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 29, 1997 AND JUNE 30, 1996 (UNAUDITED) 6-7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 12-14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15-16
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
BALANCE SHEETS (DEBTORS-IN-POSSESSION)
- -------------------------------------------------------------------------------------------------------------
JUNE 29, DECEMBER 29,
1997 1996
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 21,273,961 $ 22,558,804
Cash and cash equivalents-restricted 2,737,250 2,678,344
Securities available for sale -0- 2,000,905
Accounts receivable 3,185,052 4,575,490
Other current assets 6,820,783 6,127,325
- ------------------------------------------------------------------------------------------------------
Total Current Assets 34,017,046 37,940,868
- ------------------------------------------------------------------------------------------------------
Property and Equipment, Net 127,610,775 130,000,000
- ------------------------------------------------------------------------------------------------------
Other Assets:
Deferred financing costs-net 780,235 12,339,097
Related party receivable-net 800,000 800,000
- ------------------------------------------------------------------------------------------------------
Total Other Assets 1,580,235 13,139,097
- ------------------------------------------------------------------------------------------------------
TOTAL Assets $ 163,208,056 $ 181,079,965
======================================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable-trade $ 921,889 $ 1,250,786
Accounts payable-construction -- 858,665
Current installments of long-term debt 702 429,103
Current installments of capital lease obligations -- 8,684,360
Accrued interest 359,489 18,644,462
Accrued payroll and related expenses 4,385,549 5,005,047
Affiliate payable 6,594 1,878,717
Other accrued expenses 6,653,893 9,231,792
- ------------------------------------------------------------------------------------------------------
Total Current Liabilities 12,328,116 45,982,932
- ------------------------------------------------------------------------------------------------------
Long-Term Liabilities:
Long-Term debt-less current installments -- 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
- ------------------------------------------------------------------------------------------------------
Liabilities Subject to Compromise 305,887,844 --
- ------------------------------------------------------------------------------------------------------
Total Liabilities 318,215,960 318,522,747
- ------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' 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 at
June 29, 1997 and December 30, 1996 583,931 583,931
Additional paid-in-capital 218,786,069 218,787,643
Accumulated deficit (374,377,904) (356,814,356)
- ------------------------------------------------------------------------------------------------------
Total Shareholders' Deficit (155,007,904) (137,442,782)
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 163,208,056 $ 181,079,965
======================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS (DEBTORS-IN-POSSESSION)
THREE MONTHS ENDED JUNE 29, 1997 AND JUNE 30, 1996 (UNAUDITED) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Casino $ 15,844,639 $ 12,310,040
Hotel 6,079,461 5,005,218
Food and beverage 8,342,389 7,235,360
Tower, retail and other income 7,797,665 7,221,066
- ------------------------------------------------------------------------------------------------------------------------
Gross Revenues 38,064,154 31,771,684
Less: Promotional allowances 3,738,586 1,882,982
NET REVENUES 34,325,568 29,888,702
- ------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
- ------------------------------------------------------------------------------------------------------------------------
Casino 7,270,383 5,992,036
Hotel 2,252,954 2,120,199
Food and beverage 6,822,978 5,504,968
Other operating expen 2,861,722 2,347,734
Depreciation and amor 1,768,501 2,250,614
Pre-opening costs amortization -- 7,652,258
Selling, general and administrative 13,812,400 11,776,922
- ------------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 34,788,938 37,644,731
- ------------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (463,370) (7,756,029)
- ------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income -- 934,357
Interest expense (Contractual Interest Estimated at $ 4,514,217) (640,644) (4,361,515)
- ------------------------------------------------------------------------------------------------------------------------
Total Other Expense, net (640,644) (3,427,158)
- ------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE REORGANIZATION ITEMS AND INCOME TAXES (1,104,014) (11,183,187)
- ------------------------------------------------------------------------------------------------------------------------
REORGANIZATION ITEMS: (1,253,864) --
LOSS BEFORE INCOME TAXES (2,357,878) (11,183,187)
- ------------------------------------------------------------------------------------------------------------------------
Provision for Income Taxes -- (78,807)
- ------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (2,357,878) $ (11,104,380)
========================================================================================================================
LOSS PER COMMON SHARE $ (0.04) $ (0.19)
========================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 58,393,105 58,332,097
========================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS (DEBTORS-IN-POSSESSION)
THREE MONTHS ENDED JUNE 29, 1997 AND JUNE 30, 1996 (UNAUDITED) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Casino $ 33,247,625 $ 12,310,040
Hotel 12,509,635 5,005,218
Food and beverage 17,045,682 7,235,360
Tower, retail and other income 15,100,706 7,229,943
- ------------------------------------------------------------------------------------------------------------------------
Gross Revenues 77,903,648 31,780,561
Less: Promotional allowances 6,675,350 1,882,982
- ------------------------------------------------------------------------------------------------------------------------
NET REVENUES 71,228,298 29,897,579
- ------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
- ------------------------------------------------------------------------------------------------------------------------
Casino 14,722,314 5,992,036
Hotel 4,631,192 2,120,199
Food and beverage 13,633,790 5,504,968
Other operating expen 5,674,538 2,347,734
Depreciation and amor 3,795,345 2,489,017
Pre-opening costs amortization 0 7,652,258
Selling, general and administrative 28,690,241 11,814,608
- ------------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 71,147,420 37,920,820
- ------------------------------------------------------------------------------------------------------------------------
LOSS (LOSS) FROM OPERATIONS 80,878 (8,023,241)
- ------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 47,674 3,301,999
Interest expense (Contractual Interest Estimated at $14,610,975) (4,342,844) (4,467,159)
Loss on sale of assets (1,190) --
- ------------------------------------------------------------------------------------------------------------------------
Total Other Expense, net (4,296,360) (1,165,160)
- ------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE REORGANIZATION ITEMS AND INCOME TAXES (4,215,482) (9,188,401)
- ------------------------------------------------------------------------------------------------------------------------
REORGANIZATION ITEMS: (13,348,068) --
LOSS BEFORE INCOME TAXES (17,563,550) (9,188,401)
- ------------------------------------------------------------------------------------------------------------------------
Provision for Income Taxes -- --
- ------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (17,563,550) $ (9,188,401)
========================================================================================================================
LOSS PER COMMON SHARE $ (0.30) $ (0.16)
========================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 58,393,105 57,875,097
========================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (DEBTORS-IN-POSSESSION)
- -------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 29, 1997 AND JUNE 30, 1996 (UNAUDITED) 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (17,563,550) $ (9,188,401)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,149,725 2,908,855
Amortization of pre-opening costs -- 7,652,258
Reorganization Items :
Write-off of debt issuance costs 11,210,108 --
Professional Fees 2,500,000 --
Interest Earned on Accumulated Cash During
Chapter 11 Proceedings (362,040) --
Provision for doubtful accounts 589,219 --
Loss on sale or disposal of assets 1,190 --
Changes in operating assets and liabilities:
Accounts receivable 969,917 (2,716,677)
Other current assets (693,458) (23,612,444)
Accounts payable - trade (pre-petition) 449,551 --
Accounts payable - trade (post-petition) (315,478) 3,128,869
Other accrued expenses (pre-petition) (2,609,857) --
Other accrued expenses (post-petition) 4,403,669 6,584,658
----------------------------------
Net Cash Provided by (Used in) Operating Activities
Before Reorganization Items 2,728,996 (15,242,882)
----------------------------------
Reorganization Items
Professional fees -- --
Interest Earned on Accumulated Cash During
Chapter 11 Proceedings 362,040 --
----------------------------------
Net Cash Provided by Reorganization Items 362,040 --
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,091,036 (15,242,882)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in cash and cash equivalents-restricted (60,480) 104,079,491
Change in securities available for sale 2,000,905 (3,750,510)
Payments for property and equipment (1,410,113) (184,637,079)
Change in construction payables (544,133) (12,947,178)
Increase in related party receivable and other (168,698) --
Cash proceeds from sale of property and equipment 3,427 --
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (179,092) (97,255,276)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock-net -- 1,296,446
Costs of secondary stock offering -- (242,243)
Debt issuance and deferred financing costs (6,250) --
Proceeds from issuance of long-term debt and capital lease obligations -- 38,670,375
Payments on long-term debt (428,400) --
Payments on capital lease obligations subject to compromise (4,342,180)
Increase in affiliate payable 580,043 1,839,770
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,196,787) 41,564,348
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,284,843) (70,933,810)
Cash and cash equivalents - beginning of period 22,558,804 92,595,770
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 21,273,961 $ 21,661,960
===============================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (DEBTORS-IN-POSSESSION)
- -----------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 29, 1997 AND JUNE 30, 1996 (UNAUDITED) 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest-net of capitalized interest $ 1,147,186 $ 3,255,453
Income taxes $ -- $ --
Non-Cash Investing and Financing Activities:
Issuance of common stock in purchase of land $ -- $ 18,204,760
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS (UNAUDITED) (DEBTORS-IN-POSSESSION )
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
The accompanying Condensed 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"). The Company
commenced operations on April 29, 1996, with an integrated casino, hotel and
entertainment facility and a 1,149 foot, free-standing observation tower.
On January 27, 1997 ("Petition Date"), Stratosphere Corporation and its
wholly-owned subsidiary Stratosphere Gaming Corp. ("SGC" and collectively with
Stratosphere Corporation, 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
("Bankruptcy Court") 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. The Condensed Consolidated Financial Statements have been
prepared assuming that the Company will continue as a going concern. These
Condensed Consolidated Financial Statements do not include any adjustments that
might result if the Company is unable to successfully emerge from bankruptcy.
Principles of Presentation
The Condensed Consolidated Financial Statements have been prepared in
accordance with the accounting policies described in the Company's 1996 Annual
Report on Form 10-K. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, it is suggested that
these financial statements be read in conjunction with the Notes to the
Consolidated Financial Statements which appear in that report.
In addition, as a result of the restructuring (see Note 2), the Company has
implemented the guidance provided by Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" in the
preparation of the accompanying June 29, 1997, Condensed Consolidated Financial
Statements.
In the opinion of management, the accompanying Condensed Consolidated Financial
Statements include all adjustments (consisting of a normal recurring nature)
which are necessary for a fair presentation of the results for the interim
periods presented. Certain information and footnote disclosures normally
included in financial statements have been condensed or omitted pursuant to
such rules and regulations of the Securities and Exchange Commission. Interim
results are not necessarily indicative of results to be expected for any future
interim period or for the entire fiscal year. Significant intercompany
accounts and transactions have been eliminated.
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. Inventories totaled $2.9 million and $3.3
million as of June 29, 1997, and December 29, 1996, respectively.
Reclassifications
Certain amounts in the 1996 Condensed Consolidated Financial Statements have
been reclassified to conform with the 1997 presentation. These
reclassifications had no effect on the Company's net income.
8
<PAGE> 9
(2) RESTRUCTURING
In connection with the bankruptcy petitions filed by the Debtors an Amended and
Restated Reorganization Agreement was entered into with Grand Casinos, Inc. and
an Amended Plan of Reorganization was filed on June 20, 1997. Information
relating to the Amended and Restated Reorganization Agreement and Amended Plan
of Reorganization is included in the Form 8-K filed on June 25, 1997.
On July 15, 1997, the Company received a proposal and entered into negotiations
with High River Limited Partnership and American Real Estate Partners, L.P.
with respect to a restructuring plan. The Company's Board of Directors (acting
through its independent directors) has preliminarily determined that such
proposal is more favorable than the previous proposal made by Grand Casinos,
Inc. If the current negotiations with High River and American Real Estate
Partners are successful and the resulting reorganization plan is confirmed by
the Bankruptcy Court and implemented, the Company's noteholders would have the
option to make an additional investment in Stratosphere and would own all of
the equity of the Company. High River and American Real Estate Partners have
advised Stratosphere that they collectively own $94 million principal amount of
the $203 million outstanding Stratosphere First Mortgage Notes and are prepared
to enter into a standby commitment to guarantee the availability of the
additional investment.
Under the High River Limited Partnership/American Real Estate Partners, L.P.
(as under the proposal made by Grand Casinos, Inc.) the existing common stock
of the Company would be cancelled and would have no value.
The Company plans to expense future restructuring costs as incurred. Accrued
professional fees since the Petition Date totaled $2.5 million of which
approximately $1.3 million (fees through April 30, 1997) has been approved for
payment by the Bankruptcy Court. The Company incurred approximately $450,000
of professional fees during January 1997 prior to the Petition Date resulting
in total professional fees during the six months ended June 29, 1997, of
approximately $3.0 million or $0.05 per common share. Estimated professional
fees for the second quarter were $1.5 million or $0.03 per common share. All
professional fees require approval by the Bankruptcy Court prior to the Company
making payment.
The Company expensed unamortized deferred debt issuance costs as of the
Petition Date. The total write-off included in "Reorganization Items" on the
Condensed Consolidated Statements of Operations for the six months ended June
29, 1997, was $11.2 million or $0.19 per common share. Prior to the Petition
Date, deferred debt issuance costs were amortized over the term of the 14 1/4%
First Mortgage Notes and included in interest expense. There was no write down
of unamortized debt issuance costs during the second quarter.
Under Chapter 11 Reorganization, actions to enforce claims against the Debtors
or Debtors' property are stayed pending further order of the Bankruptcy Court
if those claims arose, or are based on events that occurred, on or before the
Petition Date, and such claims can not be paid or restructured prior to the
conclusion of the Chapter 11 proceedings or approval of the Bankruptcy Court.
Other liabilities may arise or be subject to compromise as a result of
rejection of executory contracts, including leases, or the Bankruptcy Court's
resolution of claims for contingencies and other disputed amounts. Liabilities
subject to compromise included in the accompanying consolidated condensed
balance sheets represent the Company's estimate of the Debtors' pre-petition
liabilities which are subject to compromise (see Note 3).
(3) LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise under reorganization proceedings consist of
the following as of June 29, 1997 (In Thousands):
<TABLE>
<S> <C>
Accounts Payable Trade $ 463
Accrued Payroll and Related Expenses 478
Affiliate Payable 2,452
Other Accrued Expenses 5,038
Capital Lease Obligations 23,882
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C>
14 1/4% First Mortgage Notes - Including accrued interest through 1/27/97 223,575
Note Payable to Affiliate 50,000
-------
Total Liabilities Subject to Compromise $305,888
========
</TABLE>
The Company ceased accruing interest on the 14 1/4% First Mortgage Notes and
the note payable to affiliate as of the Petition Date. Although classified as
a liability subject to compromise, the Company anticipates the continuation of
payments on its capital lease obligations pursuant to a pre-petition standstill
agreement and an order entered by the Bankruptcy Court on March 4, 1997,
approving a stipulation for adequate protection.
On July 17, 1997, the Company reduced its Capital Lease obligations by an
additional $1.6 million. The funds were generated by the sale of 410
warehoused slot machines which were not needed to conduct the Company's
operations. The net sales proceeds were applied to future principal payments
on a pro rata basis pursuant to the terms of the lease agreement.
(4) REORGANIZATION ITEMS
Reorganization items consisted of the following for the six month period ended
June 29, 1997 (In Thousands):
<TABLE>
<S> <C>
Write-off of Debt Issuance Costs $11,210
Professional Fees 2,500
Interest Earned on Accumulated Cash During Chapter 11 Proceedings (362)
-------
Net Reorganization Items $13,348
=======
</TABLE>
Cash interest earned since the Petition Date was $375,795.
(5) COMMITMENTS
On July 30, 1997, the Bankruptcy Court approved management retention agreements
(Retention Agreements) for eleven of the Company's executives. The executives
are divided into two groups for purposes of computing retention compensation
pursuant to the Retention Agreements. Group one consists of nine individuals
which will receive additional monthly retention compensation of 5% of their
annual salary effective May 1, 1997. The first three months of retention
compensation is placed in escrow for the executive and is payable on the
earlier of (i) an involuntary termination and, (ii) ninety days after a sale of
the Company or confirmation of a plan of reorganization by the Bankruptcy
Court. After the initial three month period, the amount of continuing
retention compensation is accrued monthly and paid quarterly until the earlier
of the termination of the executive, the sale of the Company or confirmation of
a plan of reorganization by the Bankruptcy Court. In addition, the executive
is entitled to receive three months base salary upon an involuntary termination
or if the executive's title or job responsibilities are substantially
diminished upon conclusion of a change in ownership.
The group two executives (two individuals) will have an amount equal to 75% of
their annual compensation placed in escrow as additional compensation payable
on the earlier of (i) an involuntary termination and, (ii) ninety days after a
sale of the Company or confirmation of a plan of reorganization by the
Bankruptcy Court. An amount equal to an additional 25% of their annual
compensation will be paid if a plan of reorganization is confirmed prior to
March 1, 1998. Consistent with group one, the executives are not entitled to
the compensation upon a voluntary termination.
The Company will reflect the costs associated with the Retention Agreements in
its consolidated financial statements beginning July 30, 1997, at which time
the Company believes the benefits of such agreements began to be realized.
10
<PAGE> 11
(6) CONTINGENCIES
On July 25, 1997, the U.S. District Court for the District of Nevada ("District
Court") has amended its May 21, 1997, order dismissing a purported class action
lawsuit brought by shareholders of the Company against various defendants
including Stratosphere Corporation and certain officers and directors of the
Company. The May 21, 1997, order included the District Court's findings that
the plaintiffs' complaint failed to specifically allege facts supporting claims
made by the plaintiffs' in connection with certain documents issued and certain
public statements made by the Company.
After the District Court dismissed the plaintiffs' complaint, the plaintiffs
asked the District Court to reconsider its dismissal order. By order dated
July 18, 1997, the District Court amended its dismissal order to provide the
plaintiffs with the opportunity to submit an amended complaint. The plaintiffs
have until August 22, 1997, to file an amended complaint with the District
Court. The defendants named in the amended complaint will then be required to
respond to the amended complaint.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 ("Petition Date"), Stratosphere Corporation and its
wholly-owned subsidiary Stratosphere Gaming Corp. (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 ("Bankruptcy Court") 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.
In connection with the bankruptcy petitions filed by the Debtors an Amended and
Restated Reorganization Agreement was entered into with Grand Casinos, Inc. and
an Amended Plan of Reorganization was filed on June 20, 1997. Information
relating to the Amended and Restated Reorganization Agreement and Amended Plan
of Reorganization are included in a Form 8-K filing on June 25, 1997.
On July 15, 1997, the Company received a proposal and entered into negotiations
with High River Limited Partnership and American Real Estate Partners, L.P.
with respect to a restructuring plan. The Company's Board of Directors (acting
through its independent directors) has preliminarily determined that such
proposal is more favorable than the previous proposal made by Grand Casinos,
Inc. If the current negotiations with High River and American Real Estate
Partners are successful and the resulting reorganization plan is confirmed by
the Bankruptcy Court and implemented, Stratosphere's noteholders would make an
additional investment in Stratosphere and would own all of the equity of the
Company. High River and American Real Estate Partners have advised
Stratosphere that they collectively own $94 million principal amount of the
$203 million outstanding Stratosphere First Mortgage Notes and are prepared to
enter into a standby commitment to guarantee the availability of the additional
investment.
Under the High River Limited Partnership/American Real Estate Partners, L.P.
(as under the proposal made by Grand Casinos, Inc.) the existing common stock
of the Company would be cancelled and would have no value.
Due to the short operating period during fiscal year 1996 (62 days), historical
result comparisons have been omitted from the following discussion regarding
the results of operations as such information would not be indicative of future
trends.
RESULTS OF OPERATIONS
Three Months Ended June 29, 1997
The Company produced gross revenues of $38.1 million during the second quarter
of 1997. Casino revenue represented 42% of gross revenue, hotel 16%, food and
beverage 22%, and tower, retail and other revenue 20%. The net loss for the
quarter was $2.4 million or $0.04 per common share.
The Company experienced hotel occupancy of 91% at an average daily rate of $51
for the quarter. Tower visitation totaled 743,917 for the period inclusive of
guests dining at the Top of The World revolving restaurant.
12
<PAGE> 13
Six Months Ended June 29, 1997
The Company produced gross revenues of $77.9 million during the six months
ended June 29, 1997. Casino revenue represented 43% of gross revenue, hotel
16%, food and beverage 22%, and tower, retail and other revenue 19%. The net
loss for the six months ended June 29, 1997, was $17.6 million or $0.30 per
common share.
The Company experienced hotel occupancy of 89% at an average daily rate of $53
for the period. Tower visitation totaled 1,428,984 for the period inclusive of
guests dining at the Top of The World revolving restaurant.
Other Factors Affecting Earnings
The Company has incorporated the requirements of Statement of Position 90-7
"Financial Reporting By Entities in Reorganization Under the Bankruptcy Code."
Accordingly, the Company has reflected professional fees accrued since the
Petition Date in the separate category "Reorganization Items" in the
accompanying Condensed Consolidated Statements of Operations. Professional
fees incurred since the Petition Date totaled $2.5 million. When combined with
professional fees related to the restructuring efforts undertaken prior to the
Petition Date, which are included as selling, general and administrative
expenses, the total is approximately $2.95 million or $0.05 per common share.
The Company plans to expense such costs as incurred during the term of the
bankruptcy proceedings. All professional fees related to the restructuring,
since the Petition Date, must be approved by the Bankruptcy Court prior to
payment. Professional fees totaled $1.5 million or $0.03 per common share
during the second quarter. Approximately $1.3 million of professional fees
were approved for payment by the Bankruptcy Court on June 24, 1997.
The Company expensed unamortized deferred debt issuance costs as of the
Petition Date. The total write-off included in "Reorganization Items" on the
Condensed Consolidated Statements of Operations for the six month period ended
June 29, 1997 was $11.2 million or $0.19 per common share. Prior to the
Petition Date, deferred debt issuance costs were amortized over the life of the
14 1/4% First Mortgage Notes and included in interest expense.
Interest expense was approximately $.6 million for the quarter and $4.3 million
for the six months ended June 29, 1997. The Company ceased accruing interest
on the 14 1/4% First Mortgage Notes and the note payable to affiliate as of the
Petition Date.
The Company currently employs approximately 2,175 full-time equivalents.
Management continues to assess the appropriate staffing levels.
LIQUIDITY AND CAPITAL RESOURCES
The Company had unrestricted cash balances of approximately $21.3 million as of
June 29, 1997. The Company relies on its ability to generate funds from
operations and current cash balances to continue its operations during the term
of the bankruptcy proceedings as the Company does not have the availability of
working capital credit lines. The Company generated cash from operating
activities of approximately $3.1 million during the six months ended June 29,
1997. The Company's operations used approximately $0.4 million during the
second quarter.
On July 17, 1997, the Company reduced its Capital Lease obligations by an
additional $1.6 million. The funds were generated by the sale of 410
warehoused slot machines which were not needed to conduct the Company's
operations. The amount of payment was applied to principal on a pro rata basis
pursuant to the terms of the lease agreement.
13
<PAGE> 14
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-Q
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). See the Company's Annual
Report on Form 10-K for the fiscal year ended 1996 for certain other factors
that could impact future results.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 25, 1997, the U.S. District Court for the District of Nevada
("District Court") has amended its May 21, 1997, order dismissing a purported
class action lawsuit brought by shareholders of the Company against various
defendants including Stratosphere Corporation and certain officers and
directors of the Company. The May 21, 1997, order included the District
Court's findings that the plaintiffs' complaint failed to specifically allege
facts supporting claims made by the plaintiffs' in connection with certain
documents issued and certain public statements made by the Company.
After the District Court dismissed the plaintiffs' complaint, the plaintiffs
asked the District Court to reconsider its dismissal order. By order dated
July 18, 1997, the District Court amended its dismissal order to provide the
plaintiffs with the opportunity to submit an amended complaint. The plaintiffs
have until August 22, 1997, to file an amended complaint with the District
Court. The defendants named in the amended complaint will then be required to
respond to the amended complaint.
See the Company's Annual Report on Form 10-K for the fiscal year ended December
29, 1996, for information regarding other pending legal proceedings.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company defaulted on its 14 1/4% interest payment obligation of
approximately $14.5 million which was due on November 15, 1996, to holders of
the Mortgage Notes. The Company does not anticipate meeting future payment
obligations during the term of the bankruptcy proceedings. The total principal
and interest accrued as of June 29, 1997, was approximately $223.6 million.
Interest has not been accrued since the Petition Date.
The Company is also in default on its capital lease obligations due to its
inability to meet certain financial covenants. The Company anticipates it will
continue payment on this obligation during the term of the bankruptcy
proceedings. The Company was current on this payment obligation as of June 29,
1997. The balance of principal and accrued interest as of June 29, 1997, was
$23.9 million.
ITEM 5. OTHER INFORMATION
On July 25, 1997, Richard Schuetz, President and Chief Executive Officer of the
Company, resigned as a director and officer of the Company. Mr. Schuetz agreed
to stay in his position for a period up to thirty days to assist the Board of
Directors in the development of a succession plan. Mr. Schuetz's final day
served with the Company was July 31, 1997.
On July 31, 1997, Lyle Berman, Stanley Taube and Neil Sell resigned from the
Company's Board of Directors. Each resigning director was also a director of
Grand Casinos, Inc. Subsequently, on the same date the Board of Directors
appointed Thomas A. Lettero and Thomas Hantges as directors of the Company.
Mr. Lettero has served as the Company's Chief Financial Officer since December
1994.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed one report on Form 8-K during the fiscal quarter
ended June 29, 1997.
Date Filed Items Listed
June 25, 1997 5, 7
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
STRATOSPHERE CORPORATION
Date: August 8, 1997 By: /s/ Thomas A. Lettero
------------------------------------
Name: Thomas A. Lettero
-------------------------
Title: Chief Financial Officer
-----------------------
17
<PAGE> 17
EXHIBIT INDEX
STRATOSPHERE CORPORATION
<TABLE>
<CAPTION>
Exhibit
No.
- -------
<S> <C>
27 Financial Data Schedule
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> JUN-29-1997
<CASH> 21,273,961
<SECURITIES> 0
<RECEIVABLES> 6,941,100
<ALLOWANCES> (609,663)
<INVENTORY> 2,914,098
<CURRENT-ASSETS> 6,820,783
<PP&E> 142,835,792
<DEPRECIATION> 15,225,017
<TOTAL-ASSETS> 163,208,056
<CURRENT-LIABILITIES> 12,328,118
<BONDS> 0
0
0
<COMMON> 583,931
<OTHER-SE> (155,591,837)
<TOTAL-LIABILITY-AND-EQUITY> 163,208,056
<SALES> 71,228,298
<TOTAL-REVENUES> 77,903,648
<CGS> 9,114,719
<TOTAL-COSTS> 58,447,310
<OTHER-EXPENSES> 12,700,110
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,342,844
<INCOME-PRETAX> (17,563,550)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,215,482)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,215,482)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> 0
</TABLE>
