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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 28, 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)
DELAWARE 88-029318
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2000 LAS VEGAS BOULEVARD SOUTH 89104
LAS VEGAS, NEVADA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (702) 382-4446
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.01 per share
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 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 13, 1998, 58,393,105 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the voting and non-voting Common
Stock held by non-affiliates of the Registrant on such date, based upon the last
sale price of the Common Stock as reported on the over the counter bulletin
board on March 13, 1998, was $4,541,992. 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") which 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 almost 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 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").
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 1,925
slot machines, 53 table games, a sports book, a keno lounge, a 160,000 square
foot second level containing a retail center of approximately 46 shops and a 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.
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 Debtors. 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 Casinos, Inc. ("Grand") filed a Joint Plan of
Reorganization (the "Plan") on January 27, 1997. The Plan and the various
underlying agreements upon which it was predicated, included several conditions
for it to become effective, some of which the Debtors could not ultimately
satisfy. Because certain closing conditions could not be satisfied, the Debtors
and Grand commenced discussions in early May 1997 regarding possible
alternatives to the Plan. Grand and the Debtors ultimately agreed upon the terms
of an alternative restructuring plan. On June 20, 1997, the Debtors filed their
First Amended Plan of Reorganization ("First Amended Plan") to implement the
terms of this agreement.
The First Amended Plan reserved the right for the Company's Board of
Directors to entertain and accept competing proposals which would be
economically more advantageous to the creditors of the Debtors. On or about July
15, 1997, the Debtors received a competing restructuring proposal from High
River Limited Partnership and American Real Estate Partners, L.P. (collectively,
"High River"), holders of a substantial portion of the Company's First Mortgage
Notes. High River is controlled and managed by New York financier, Carl Icahn.
After analyzing the High River proposal and negotiating certain modifications
thereto, the independent members of the Company's Board of Directors
preliminarily concluded that the High River proposal was a higher and better
proposal than the First Amended Plan and thereafter determined not to proceed
with the First Amended Plan. On November 7, 1997, the Debtors filed their Second
Amended Plan of Reorganization ("Second Amended Plan"). The filing of the Second
Amended Plan followed substantial negotiation among the Debtors, High River and
Grace Brothers, Ltd. (the remaining representative of the official committee of
First Mortgage Note Holders). High River and Grace Brothers, Ltd. could not
reach agreement amongst themselves on the terms of a plan of reorganization
which they would find to be mutually acceptable. Rather than wait for the
outcome of protracted negotiations between High River and Grace Brothers, Ltd.,
with no guarantee that such negotiations would result in a proposal acceptable
to such parties and to the Debtors, the Debtors filed the Second Amended Plan.
On February 13, 1998, the Debtors filed their Restated Second Amended Plan of
Reorganization ("Restated Second Amended Plan") which included the
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results of subsequent negotiations between High River and Grace Brothers, Ltd.
Among other things, under the Restated Second Amended Plan, the secured portion
of the Company's 14 1/4% First Mortgage Notes (the "First Mortgage Notes")
(estimated at $120.0 million) would be converted into one hundred percent (100%)
of the equity of reorganized Stratosphere Corporation, and all currently
outstanding Common Stock of the Company and all other existing equity interests
(including stock options and warrants) of the Company would be canceled. The
remaining portion of the First Mortgage Notes claim (approximately $104.0
million) would be treated as a general unsecured claim. In addition to the First
Mortgage Note deficiency claim, the general unsecured class of claims would
include the balance of the Grand note (approximately $52.4 million) and other
general unsecured claims. The Restated Second Amended Plan assumes that the
general unsecured class of claims would participate in a pro rata share of
approximately $6.0 million in full settlement of their related claims. In
addition, the Restated Second Amended Plan assumes that reorganized Stratosphere
Corporation will continue to make payments pursuant to its capital lease and
operating lease agreements. A copy of the Restated Second Amended Plan and
disclosure statement is included herein as an exhibit. The disclosure statement
was approved, with certain modifications, by the Bankruptcy Court on February
26, 1998, and a confirmation hearing has been scheduled on May 15, 1998. There
can be no assurance that the Restated Second Amended Plan will be confirmed by
the Bankruptcy Court or that required approvals of the Nevada Gaming Authorities
(as defined) will be obtained, or that if obtained, will be obtained on a timely
basis. In the event a plan of reorganization cannot be confirmed, the Company
may be forced to liquidate its assets.
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
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
can make as many as 22.5 round trips per hour and can 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
currently open from 10:00 a.m. to 1:00 a.m. Sunday through Thursday and 10:00
a.m. to 2:00 a.m. on Friday and Saturday.
The Pod's third and fourth levels contain conference and meeting rooms that
are rented out for business or social occasions. Level six contains a 360-seat
revolving restaurant. Levels seven, eight and nine feature a 220-seat cocktail
lounge and indoor and outdoor 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 CASINO AREA
Stratosphere's casino contains approximately 97,000 square foot of gaming
space, with 1,925 slot machines, 53 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 features state of the art slot machines and video games
offering, in total, the best odds on the Las Vegas Strip. Some of the games
offered include 98% return on one hundred and fifty $1 slot machines, 100%
return on one hundred $.25 video poker machines, 100x odds on craps and 99.5%
return on blackjack.
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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 are
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 currently 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 themed
restaurants, The Top of The World located in the Pod, the 434-seat "Stratosphere
Buffet," a 200-seat "Big Sky Cafe and Steakhouse," "Roxy's 50's Diner," and
"Tower of Pasta," an Italian cuisine restaurant. Stratosphere has parking for
over 4,000 cars.
BUSINESS AND MARKETING STRATEGY
The Company's business development strategy utilizes 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 Strip 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. The Las Vegas market
includes several world class destination resorts, 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, Luxor and the Rio.
Each of these resorts compete with the Company in its ability to attract
visitors to the Tower.
The Company's hotel and food and beverage operations compete directly with
the Excalibur, Circus Circus, Stardust, Sahara, Riviera and Palace Station as
each of these properties target the budget-minded mid-market Las Vegas visitor.
Management believes that its ability to expand its target market is limited due
to the lack of recreational facilities (pool and spa), meeting and convention
facilities.
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.
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EMPLOYEES
The Company currently employs approximately 2,100 full and part-time
associates, of which approximately 1,000 are covered by a collective bargaining
agreement.
The existing collective bargaining agreements between the Culinary Worker's
Union, Local 226 and Bartenders, Local 165 expired June 1, 1997. Since that
time, the parties have agreed to honor the terms and conditions of that contract
until such time as a new agreement is reached. Active negotiations between the
parties should commence once other agreements have been reached with other Las
Vegas casinos. Management does not anticipate any disruption of its business
during negotiations with these unions.
On December 21, 1997, an election was held in which facilities and ride
engineers voted in favor of representation by the Operating Engineers, Local 501
union. Management anticipates commencing contract negotiations with this union
during the first quarter of 1998. Management does not anticipate any business
disruption as a result of these negotiations.
The Company generally enjoys good relations with all of its employees.
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 proposed 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 SGC. SGC 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 SGC have obtained the various registrations,
approvals, permits, findings of suitability and licenses required 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 which the Nevada Commission may require. In addition, no
person may become a stockholder of, or receive, any percentage of profits from
SGC 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 SGC in
order to determine whether such individual is suitable or should be licensed as
a business associate of SGC. Officers, directors and certain key employees of
SGC must file applications with the Nevada Gaming Authorities and may be
required to 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 SGC 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
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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 SGC, the companies involved would have to sever
all relationships with such person. In addition, the Nevada Commission may
require the Company or SGC 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 SGC are 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 SGC are required to be
reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by SGC, 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, SGC 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 SGC could (and revocation of
any gaming license of SGC 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.
The Nevada Act requires any person who acquires beneficial ownership of
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, or
more than 10% of a Registered Corporation's voting securities as a result of a
proceeding under the United States Bankruptcy Code, 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
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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 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 if 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 is
also required to disclose to the Nevada Commission, upon its request, the
identities of any of their security holders, including the holders of the First
Mortgage Notes and holders of any Common Stock 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, to date,
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
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involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction. Any
acquisition of control of the Company, as a result of the Restated Second
Amended Plan, will require the prior approval of the Nevada Commission upon the
recommendation of the Nevada Board.
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 serving or selling of food or refreshments or
the selling of 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 at 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
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 on Form
10-K, the following are important factors that could cause results or events to
differ materially from those contained in any forward-looking statement made by
or on behalf of the Company.
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BANKRUPTCY. Stratosphere Corporation and its wholly owned subsidiary SGC
filed voluntary petitions on January 27, 1997, for Chapter 11 Reorganization
pursuant to the United States Bankruptcy Code and 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 February 13, 1998, the Debtors filed the Restated Second Amended
Plan which included the results of subsequent negotiations between High River
and Grace Brothers, Ltd. Among other things, under the Restated Second Amended
Plan, the secured portion of the Company's First Mortgage Notes (estimated at
$120.0 million) would be converted into one hundred percent (100%) of the equity
of reorganized Stratosphere, and all currently outstanding Common Stock of the
Company and all other existing equity interests (including stock options and
warrants) of the Company would be canceled. The remaining portion of the First
Mortgage Notes claim (approximately $104.0 million) would be treated as a
general unsecured claim. In addition to the First Mortgage Note deficiency
claim, the general unsecured class of claims would include the balance of the
Grand note (approximately $52.4 million) and other general unsecured claims. The
Restated Second Amended Plan assumes that the general unsecured class of claims
would participate in a pro rata share of approximately $6.0 million in full
settlement of their related claims. In addition, the Restated Second Amended
Plan assumes that reorganized Stratosphere Corporation will continue to make
payments pursuant to its capital lease and operating lease agreements. A copy of
the Restated Second Amended Plan and disclosure statement are included herein as
an exhibit. The disclosure statement was approved, with certain modifications,
by the Bankruptcy Court on February 26, 1998, and a confirmation hearing has
been scheduled on May 15, 1998. There can be no assurance that the Restated
Second Amended 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. Completion of the unfinished 1,000 bay hotel
tower and other amenities (Phase II) of the project remains on hold. Completion
of Phase II (approximately $75.0 million) is not a requirement of the Second
Amended Plan as management does not believe such completion is necessary for the
confirmation of the Second Amended Plan by the Bankruptcy Court. Therefore,
funding arrangements for Phase II have not been included in the Second Amended
Plan.
Completion of Phase II may be critical for the Company to remain
competitive in the long-term. The Company estimates that the construction to
complete Phase II will take approximately ten months and cost approximately
$75.0 million.
RISKS OF NEW CONSTRUCTION. Major construction projects (and particularly on
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 non-availability 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.
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 currently owns 39.4% of Stratosphere Common Stock. 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. Grand will have no effective control over reorganized
Stratosphere Corporation and will not own any equity in the reorganized entity.
9
<PAGE> 10
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
Owner Participation Agreement, 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 was determined to be invalid in
Nevada District Court and is currently on appeal to the Nevada Supreme Court. On
January 23, 1998, the Nevada Supreme Court issued an Order of Limited Remand
ordering the District Court to hold an evidentiary hearing within sixty (60)
days of the date of the Order on the issues of the Debtors intent to accept or
reject the Owner Participation Agreement and, if the Owner Participation
Agreement is rejected, whether the City of Las Vegas Downtown Redevelopment
Agency intends to acquire the property independently of Company. The Company
believes that, if necessary, it can independently acquire the remaining parcels
although the asking price may be more than the Company is willing to pay or, in
the alternative, continue operating with the facility and property it currently
owns.
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. There currently exists no
written agreement between Stupak and the Company requiring Stupak to sell the
community center. The Company previously donated $100,000 to the Agency pursuant
to the Owner Participation 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, as part of the Restated Second Amended Plan, must determine whether
to accept or reject the Owner Participation Agreement prior to confirmation.
The Company has entered into a Development and Lease Agreement (the "Master
Lease") with Strato Retail LLC pursuant to which Strato Retail LLC was required
to develop 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. Strato Retail
has failed to pay any portion of the Phase II expansion costs resulting in
construction of Phase II being halted prior to completion. The Company, as part
of the Restated Second Amended Plan, must determine whether to accept or reject
the Master Lease.
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 bankrupt estates,
and are authorized as such to operate their business subject to bankruptcy court
supervision.
10
<PAGE> 11
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 (a former officer and
director of the Company and officer and director of Grand), Robert E. Stupak (a
former officer and director of the Company), Thomas A. Lettero (an officer and
current director 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 22, 1996, inclusive. The complaint alleges that the defendants made
misrepresentations and engaged in other wrongdoings.
In addition to the Caesar case above, eight additional cases making the
same claims against the same defendants (and in one instance also against
Stanley Taube, a former director of the Company and also a former 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
and because any claims of plaintiffs against the Company will be resolved in the
bankruptcy proceedings. On February 25, 1997, Grand and certain individual
defendants filed a motion to dismiss the complaint. The court on May 21, 1997,
dismissed the complaint finding that plaintiffs complaint failed to specifically
allege facts supporting claims made by plaintiffs in connection with certain
documents issued as certain public statements made by the Company. On July 25,
1997, the court amended its May 21 order providing plaintiffs with the
opportunity to submit an amended complaint. The plaintiffs have since filed an
amended complaint and the defendants named in the amended complaint have again
filed a motion to dismiss complaint. 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 States 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 was scheduled to begin on May 5, 1997, but was canceled.
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 (a former officer and director of the Company and an officer and
director of Grand) and Stanley Taube (a former director of the Company and a
former director of 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
11
<PAGE> 12
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 the IPO Units in the IPO rather than one
plaintiff class, and that this alleged conduct caused a second dealer to lose
out on other profits it allegedly deserved. The Court of Appeals affirmed 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. The parties have stipulated to dismiss this suit.
On or about June 15, 1995, the case of City of Las Vegas Downtown
Redevelopment Agency vs. Crockett et al. and on or about November 8, 1995, the
court in the case of City of Las Vegas Downtown Redevelopment Agency vs. Mouldon
et al. dismissed these complaints based upon the City's lack of legal
justification to condemn these properties. Both cases were appealed to the
Nevada Supreme Court where a decision is pending. On January 23, 1998, the
Supreme Court issued an Order of Limited Remand ordering an evidentiary hearing
on whether the Company intends to reject or accept the Owner Participation
Agreement and should the Company reject, whether the City intends to purchase
the subject properties.
Management intends to vigorously defend the above legal actions still
pending. In addition, in the ordinary course of business, the Company is party
to various legal actions. In management's opinion, the ultimate outcome of such
legal actions will not have a material effect on the results of operations or
the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
12
<PAGE> 13
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 Company's Common Stock was delisted
from the Pacific Stock Exchange on December 3, 1996, and was delisted from the
National Market System on March 31, 1997, and began trading on the over the
counter bulletin board. Trading information has not been available since the
Company was delisted from the National Market System. 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 prior to being delisted.
<TABLE>
<CAPTION>
PRICE RANGE
OF COMMON
STOCK
--------------------------------
HIGH LOW
---- ---
<S> <C> <C> <C> <C>
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
YEAR ENDED DECEMBER 28, 1997:
First Quarter............................................... 1 3/8 1/2
Second Quarter.............................................. N/A N/A
Third Quarter............................................... N/A N/A
Fourth Quarter.............................................. N/A N/A
</TABLE>
The Company has never paid any cash dividends with respect to the Common
Stock. Under the terms and conditions of the Restated Second Amended Plan, all
currently outstanding Common Stock and all other existing equity interests of
the Company would be canceled. The Company had 2,716 stockholders of record as
of March 2, 1998.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
YEAR ENDED DECEMBER 31, ENDED ENDED
-------------------------- DECEMBER 29, DECEMBER 28,
STATEMENT OF OPERATIONS DATA: 1993 1994 1995 1996 1997
- ----------------------------- ---- ---- ---- ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenues(a)............................ $ -- $ 107 $ 60 $ 108,739 $137,516
Costs and expenses......................... 1,281 1,050 947 439,905 134,711
------- ------ ------- --------- --------
Income (loss) from operations.............. (1,281) (943) (887) (331,166) 2,805
Other expense (income) -- (665) 3,776 17,677 22,120
------- ------ ------- --------- --------
Net Loss................................... $(1,281) $ (278) $(4,663) $(348,843) $(19,315)
======= ====== ======= ========= ========
Loss per share............................. $(0.01) $ (0.12) $ (6.00) $ (0.33)
====== ======= ========= ========
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF AS OF
----------------------------- DECEMBER 29, DECEMBER 28,
BALANCE SHEET DATA: 1993 1994 1995 1996 1997
------------------- ---- ---- ---- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total assets......................... $20,459 $111,841 $433,906 $181,080(c) $155,976
Long-term capital lease
obligations........................ -- -- -- 19,540 --(b)
Long-term debt....................... -- -- 203,000 253,000 --(b)
</TABLE>
<TABLE>
<CAPTION>
1996 QUARTERS 1997 QUARTERS
----------------------------------------- --------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue(a)............ $ 9 $ 29,889 $ 35,319 $ 43,522 $ 36,903 $34,326 $33,068 $33,219
Costs and expenses........ 37 37,645 54,853 347,370 36,359 34,789 32,640 30,923
------- -------- -------- --------- -------- ------- ------- -------
Income (loss) from
operations.............. (28) (7,756) (19,534) (303,848) 544 (463) 428 2,296
Other expense (income).... (1,944) 3,348 6,492 9,781 15,750 1,895 2,314 2,161
------- -------- -------- --------- -------- ------- ------- -------
Net income (loss)......... $ 1,916 $(11,104) $(26,026) $(313,629) $(15,206) $(2,358) $(1,886) $ 135
======= ======== ======== ========= ======== ======= ======= =======
Income (loss) per share... $ 0.03 $ (0.19) $ (0.45) $ (5.37) $ (0.26) $ (0.04) $ (0.03) $ --
======= ======== ======== ========= ======== ======= ======= =======
</TABLE>
- ---------------
(a) The Company began operations on April 29, 1996.
(b) As a result of the restructuring and implementation of the guidance provided
by the AICPA Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," all pre-petition liabilities
including long-term debt and obligations under capital leases have been
included in liabilities subject to compromise since the Petition Date.
Liabilities subject to compromise totaled $299,208,988 on December 28, 1997.
(c) The reduction of total assets is the result of a $295.9 million write-down
of fixed assets recorded pursuant to adoption of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," for the year ended
December 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 income (loss)
per share amounts for the year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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."
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 entertainment
complex. 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.
14
<PAGE> 15
As of the Petition Date, the 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.
Due to the short operating period during fiscal year 1996, year to year
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
FINANCIAL HIGHLIGHTS
The following is a summary of quarterly operating results since the quarter
ended September 29, 1996, which was the first full quarter since operations
began.
<TABLE>
<CAPTION>
1997 QUARTERS 1996 QUARTERS
-------------------------------------- --------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Casino........................... $14,833 $14,900 $15,845 $ 17,403 $ 21,331 $ 14,260
Hotel............................ 6,103 5,394 6,080 6,430 7,662 7,031
Food and beverage................ 8,093 8,005 8,342 8,704 9,775 9,815
Tower, retail and other income... 7,053 8,186 7,798 7,303 9,196 9,116
------- ------- ------- -------- --------- --------
Gross Revenues..................... 36,082 36,485 38,065 39,840 47,964 40,222
Less: Promotional allowances..... 2,863 3,417 3,739 2,937 4,442 4,903
------- ------- ------- -------- --------- --------
Net Revenues....................... 33,219 33,068 34,326 36,903 43,522 35,319
------- ------- ------- -------- --------- --------
Costs and Expenses:
Casino........................... 6,399 6,717 7,270 7,452 7,970 7,512
Hotel............................ 2,035 1,889 2,253 2,378 2,335 2,627
Food and beverage................ 5,823 6,095 6,823 6,811 7,942 8,970
Other operating expenses......... 2,926 3,155 2,862 2,813 3,340 3,995
Depreciation and amortization.... 1,942 2,106 1,769 2,027 5,759 3,230
Pre-opening costs amortization... -- -- -- -- 4,022 12,235
Impairment of long-lived
assets........................ -- -- -- -- 295,947 --
Selling, general and
administrative................ 11,798 12,678 13,812 14,878 20,055 16,284
------- ------- ------- -------- --------- --------
Total Costs and Expenses...... 30,923 32,640 34,789 36,359 347,370 54,853
------- ------- ------- -------- --------- --------
Income (Loss) From Operations...... 2,296 428 (463) 544 (303,848) (19,534)
------- ------- ------- -------- --------- --------
Total Other Expense, net........... (506) (627) (641) (3,656) (9,781) (6,492)
------- ------- ------- -------- --------- --------
Reorganization Items............... (1,655) (1,687) (1,254) (12,094) -- --
Provision for Income Taxes......... -- -- -- -- -- --
------- ------- ------- -------- --------- --------
Net Income (Loss).................. $ 135 $(1,886) $(2,358) $(15,206) $(313,629) $(26,026)
======= ======= ======= ======== ========= ========
Income (Loss) per Common Share..... $ 0.00 $ (0.03) $ (0.04) $ (0.26) $ (5.37) $ (0.45)
======= ======= ======= ======== ========= ========
Weighted Average Common Shares
Outstanding...................... 58,393 58,393 58,393 58,393 58,393 58,393
======= ======= ======= ======== ========= ========
Other Information:
Tower Visitations (including Top
of the World Dining).......... 586,393 698,179 743,917 685,067 777,281 881,861
Hotel occupancy percentage....... 86.47% 89.58% 91.00% 87.00% 88.45% 86.98%
Average rate per guest room...... $ 52.54 $ 45.57 $ 51.00 $ 56.00 $ 65.30 $ 62.09
</TABLE>
15
<PAGE> 16
REVENUES
Since initial revenues were substantially less than anticipated, management
began to reposition the Company's gaming products. On October 1, 1996, the
Company completed a partial remodel and reconfiguration of the casino product
and launched a new casino marketing campaign. The campaign and casino changes
positioned the casino product as the best gaming value in Las Vegas by offering
favorable rules on table games and liberal paybacks on slot machines. The
initial impact of the campaign was significant as casino revenues increased $7.0
million (49%) from $14.3 million for the quarter ended September 29, 1996, to
$21.3 million for the quarter ended December 29, 1996.
By the beginning of fiscal year 1997, the campaign lost momentum as many
competitors began marketing similar casino products and two new mega resorts
opened on the Las Vegas Strip (the Monte Carlo Resort and Casino and The New
York New York Hotel & Casino). Casino revenues declined to slightly below $15.0
million during the third and fourth quarters of 1997. Since the decline in
casino revenues, management has directed its efforts at increasing the size of
its customer database and has begun an aggressive direct mail campaign in
addition to the continued advertising and promoting of the Company's products.
Casino revenues averaged 42% and 40% of gross revenues during the fiscal years
1997 and 1996 respectively.
Although hotel occupancy has remained consistent during fiscal years 1997
and 1996, the average rate per guest room has declined each quarter during
fiscal year 1997 as compared to the same quarter in fiscal year 1996. The
average rate per guest room declined 19.5% from $65.30 for the fourth quarter of
1996 to $52.54 for the fourth quarter of 1997. Management believes the decline
in room rates is primarily due to increased room capacity in the market place
associated with the opening of the two new mega resorts located on the strip,
other expansions of existing casino properties and a lack of sufficient visitor
volume growth to absorb the increased capacity. Management believes this trend
may continue through 1999 and possibly beyond as several mega resorts are
currently under construction and are anticipated to open during the fourth
quarter of fiscal year 1998 and throughout 1999. Hotel revenues averaged 16% of
total gross revenues, hotel occupancy was 88.3% and the average rate per guest
room was $51.31 during fiscal year 1997 as compared to 16%, 87% and $64.00 for
fiscal year 1996.
Food and beverage revenues declined during fiscal year 1997 as compared to
the same quarters during fiscal year 1996 primarily as a result in a reduction
in promotional programs which offered discounts and complimentary meals to
potential casino patrons. Food and beverage revenues averaged 22% of total gross
revenues during the fiscal years 1997 and 1996.
Tower visitation has declined each quarter during 1997 as compared to the
same quarters in fiscal year 1996. Total Tower visitation declined 24.6% from
777,281 visitors for the fourth quarter of 1996 to 586,393 for the fourth
quarter 1997. Management believes that the decline is primarily due to increased
competition related to the addition of the two new mega resorts on the strip and
enhanced facilities at several existing mega resorts (e.g., expanded Forum shops
at Caesars and Masquerade Village/Voodoo Lounge addition at the Rio). Tower,
retail and other income averaged 20% and 21% of total gross revenues during
fiscal years 1997 and 1996 respectively. The Tower attracted 2.7 million
visitors during fiscal year 1997.
COSTS AND EXPENSES
Management reevaluated several promotional programs during fiscal year 1997
in an effort to more efficiently target potential customers. Through these
efforts, promotional allowances have declined each quarter during 1997 as
compared to the same quarters in fiscal year 1996. Promotional allowances were
reduced $1.5 million (34%) from $4.4 million for the fourth quarter 1996 to $2.9
million for the fourth quarter 1997.
Profit enhancement programs, designed to increase operational efficiency,
have been implemented in all operating departments during fiscal year 1997.
These programs have resulted in reduced operating costs for each quarter during
1997 as compared to the same quarters during fiscal year 1996. Operating costs
decreased $4.4 million (20.4%) from $21.6 million for the fourth quarter of 1996
to $17.2 million for the fourth quarter of 1997.
16
<PAGE> 17
Similar programs have been implemented in administrative departments
resulting in substantial cost savings during fiscal year 1997 as compared to
fiscal year 1996. Selling, general and administrative expenses were reduced $4.2
million (26%) from $16.0 million (after adjusting for $4.0 million of
non-recurring charges and reorganization items) for the fourth quarter 1996 to
$11.8 million for the fourth quarter 1997.
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" ("SFAS 121"), at 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 Company's long-lived assets exceeded their fair market value. Based
on management's further assessment of the fair market value of each long-lived
asset category, no impairment loss was incurred during fiscal year 1997. Future
adjustment of asset values is anticipated with the adoption of fresh-start
reporting upon Bankruptcy Court confirmation of the Restated Second Amended Plan
and such plan of reorganization becoming effective.
Pre-opening costs of $23.9 million were fully amortized during fiscal year
1996. There were no pre-opening costs incurred during fiscal year 1997.
Depreciation and amortization was $7.8 million for fiscal year 1997 and
$11.5 million for fiscal year 1996. The $3.7 million reduction in depreciation
and amortization was due to the application of SFAS 121 at December 29, 1996.
Future adjustment of asset values is anticipated with the adoption of
fresh-start reporting upon Bankruptcy Court confirmation of the Restated Second
Amended Plan and such plan of reorganization becoming effective. Such
adjustments may impact depreciation expense in future periods.
IMPACT ON INCOME (LOSS) FROM OPERATIONS
Management believes that the profit enhancement programs have resulted in
improved efficiency and operating margins during fiscal year 1997 and have
significantly offset the decline in revenues. Income from operations was $2.3
million for the fourth quarter 1997 as compared to $.1 million (as adjusted for
non-recurring items such as the $295.9 million impairment loss for long-lived
assets, $4.0 million in pre-opening expenses, $3.0 million for a non-recurring
charge to the bad debt reserve and $1.0 million for reorganization items) for
the fourth quarter 1996. A portion of the improved results for the fourth
quarter 1997 was due to a $3.9 million reduction in depreciation and
amortization from $5.8 million for the fourth quarter 1996 to $1.9 million for
the fourth quarter 1997. There can be no assurance that revenues have stabilized
or that there is further opportunities to reduce costs and expenses in future
periods.
OTHER FACTORS AFFECTING EARNINGS
Interest income since the Petition Date has been classified as a
reorganization item on the statement of operations. Total interest earned during
fiscal year 1997 was $.9 million and $4.0 million for the fiscal year 1996. This
reduction is due to lower cash balances during fiscal year 1997.
Interest expense was $5.5 million for fiscal year 1997 and $21.8 million
for fiscal year 1996. The Company ceased accruing interest on the First Mortgage
Notes commencing with the Petition Date. Interest expense for fiscal year 1997
consisted primarily of $2.4 million and $2.0 million for interest related to the
First Mortgage Notes and capital lease obligations, respectively.
The Company expenses costs related to the bankruptcy and reorganization
proceedings as incurred. Such costs include professional fees, management
retention compensation, interest earned since the Petition Date, expenses
arising from rejected leases and other costs and expenses deemed to result from
the reorganization efforts. During fiscal year 1997 such costs included an $11.2
million write-off of previously unamortized deferred debt issuance costs. During
the fourth quarter of fiscal year 1996, approximately $1.0 million of
professional fees relating to reorganization efforts was classified as selling,
general and administrative expense in the statement of operations.
As of December 28, 1997, the Company had a net operating loss carryforward
of approximately $102.7 million. The availability of the carryforward will be
subject to the tax treatment accorded the final plan of reorganization.
17
<PAGE> 18
The Company currently employs approximately 1,850 full time equivalents of
which approximately 900 are covered by a collective bargaining agreement.
The existing collective bargaining agreements between the Culinary Worker's
Union, Local 226 and Bartenders, Local 165 expired June 1, 1997. Since that
date, the parties have agreed to honor the terms and conditions of that contract
until such time as a new agreement is reached. Active negotiations between the
parties should commence once other agreements have been reached with other Las
Vegas casinos. Management does not anticipate any disruption of its business
during negotiations with these unions.
On December 21, 1997, an election was held in which facilities and ride
engineers voted in favor of representation by the Operating Engineers, Local 501
union. Management anticipates commencing contract negotiations with this union
during the first quarter of 1998. Management does not anticipate any business
disruption as a result of these negotiations.
YEAR 2000 ISSUES
The Company is currently in the process of finalizing its plans regarding
the year 2000 computer systems issues. Based on its preliminary assessment of
its most critical systems, management believes it will be required to upgrade
its existing casino operating system and will most likely replace its current
hotel operating system. Management expects to be complete with its casino
upgrades by the end of the first quarter of 1999. A similar implementation
schedule will be planned for the hotel operating system upon final product
selection. Management is currently in the process of assessing all other
information support systems throughout the Company as well as those systems it
relies on from its primary vendors. Although a full assessment regarding all
systems is not complete, management currently estimates that the combined
upgrades and purchases of new systems may total approximately $3.0 million.
There can be no assurance based on future assessment or other changed
circumstances that the amount estimated will represent the actual costs
incurred.
LIQUIDITY AND CAPITAL RESOURCES
RESTRUCTURING
The Debtors and Grand jointly filed a Plan on January 27, 1997. The Plan
and the various underlying agreements upon which it was predicated, included
several conditions for it to become effective, some of which the Debtors could
not ultimately satisfy. Because certain closing conditions could not be
satisfied, the Debtors and Grand commenced discussions in early May 1997
regarding possible alternatives to the Plan. Grand and the Debtors ultimately
agreed upon the terms of an alternative restructuring plan. On June 20, 1997,
the Debtors filed their First Amended Plan to implement the terms of this
agreement.
The First Amended Plan reserved the right for the Company's Board of
Directors to entertain and accept competing proposals which would be
economically more advantageous to the creditors of the Debtor's estates. On or
about July 15, 1997, the Debtors received a competing restructuring proposal
from High River, holders of a substantial portion of the Company's First
Mortgage Notes. High River is controlled and managed by New York financier, Carl
Icahn. After analyzing the High River proposal and negotiating certain
modifications thereto, the independent members of the Company's Board of
Directors preliminarily concluded that the High River proposal was preferable to
the First Amended Plan and thereafter determined not to proceed with the First
Amended Plan. On November 7, 1997, the Debtors filed the Second Amended Plan.
The filing of the Second Amended Plan followed substantial negotiation among the
Debtors, High River and Grace Brothers, Ltd. (the remaining representative of
the official committee of First Mortgage Note Holders). High River and Grace
Brothers, Ltd. could not reach agreement amongst themselves on the terms of a
plan of reorganization which they would find to be mutually acceptable. Rather
than wait for the outcome of protracted negotiations between High River and
Grace Brothers, Ltd., with no guarantee that such negotiations would result in a
proposal acceptable to such parties and to the Debtors, the Debtors filed the
Second Amended Plan. On February 13, 1998, the Debtors filed the Restated Second
Amended Plan of Reorganization which included the results of subsequent
negotiations between High River and Grace Brothers, Ltd. Among other things,
under the Restated Second Amended Plan, the secured portion of the Company's
First Mortgage Notes (estimated at $120.0 million) would be converted into one
hundred percent (100%) of the equity of
18
<PAGE> 19
reorganized Stratosphere, and all currently outstanding Common Stock of the
Company and all other existing equity interests (including stock options and
warrants) of the Company would be canceled. The remaining portion of the First
Mortgage Notes claim (approximately $104.0 million) would be treated as a
general unsecured claim. In addition to the First Mortgage Note deficiency
claim, the general unsecured class of claims would include the balance of the
Grand note (approximately $52.4 million) and other general unsecured claims. The
Restated Second Amended Plan assumes that the general unsecured class of claims
would participate in a pro rata share of approximately $6.0 million in full
settlement of their related claims. In addition, the Restated Second Amended
Plan assumes that reorganized Stratosphere Corporation will continue to make
payments pursuant to its capital lease and operating lease agreements. A copy of
the Restated Second Amended Plan and disclosure statement is included herein as
an exhibit. The disclosure statement was approved, with certain modifications,
by the Bankruptcy Court on February 26, 1998, and a confirmation hearing has
been scheduled on May 15, 1998. There can be no assurance that the Restated
Second Amended 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.
DEBT
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. Since the Petition Date, the
principal and interest balance of $223.7 million has been reclassified to
liabilities subject to compromise on the consolidated balance sheet (see
restructuring discussion above for potential impact of the Restated Second
Amended Plan).
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 a 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 (as defined in the agreement) 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 would retain the right to obtain the equity funds
which would otherwise be provided by the Standby Equity Commitment through other
means deemed appropriate.
On February 19, 1998, the Bankruptcy Court determined that the Standby
Equity Commitment was an executory contract that the Company could not assume
due to its inability to perform and, therefore, it was determined that the
Company could not compel Grand to perform under its obligation pursuant to the
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 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. 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. The net proceeds were applied to future principal payments on a
pro rata basis pursuant to the terms of the lease agreement. Since the Petition
Date, the capital lease obligation has been classified as a liability subject to
compromise. The Company anticipates the continuation of payments on its capital
lease obligations pursuant to the pre-petition Standstill Agreement and an order
entered by the Bankruptcy Court on March 4, 1997, approving a stipulation for
adequate protection. Under the terms of the Restated Second Amended Plan,
payments would continue as required by the lease agreement. There can be
19
<PAGE> 20
no assurance that the Restated Second Amended Plan will be confirmed by the
Bankruptcy Court. The capital lease obligations bear interest at approximately
8.4%.
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 1/4% per annum. The interest
would 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. Since the Petition Date, this
liability has been reclassified to liabilities subject to compromise and no
additional interest has been accrued. Principal and interest totaled $52.4
million as of December 28, 1997. Under the Restated Second Amended Plan this
debt would be treated as an unsecured claim and receive its pro rata share with
other unsecured creditors (total unsecured claims are estimated at approximately
$164.0 million including the deficiency claim related to the holders of the
First Mortgage Notes) of approximately $6.0 million.
SHAREHOLDERS' DEFICIT
The Company had a shareholders' deficit as of December 28, 1997, of $157.0
million. The Company anticipates that shareholders' deficit will be subject to
future adjustments with the adoption of fresh-start reporting upon confirmation
of the Restated Second Amended Plan and it becoming effective.
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 commission 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 Bob Stupak
Enterprises ("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.
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. For purposes of the accompanying consolidated financial statements,
the aforementioned capital contributions and loans made by BSE or its affiliates
were 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.
20
<PAGE> 21
- 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 13), 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 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 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 former director of the Company and a former 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 was delisted from the National Market System on March 31,
1997, and began trading on the over the counter bulletin board.
The Company has never paid any cash dividends with respect to the Common
Stock. Under the Second Amended Plan, all currently outstanding Common Stock and
all other existing equity interests of the Company would be canceled. Although,
there can be no assurance that the Restated Second Amended Plan
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<PAGE> 22
will be confirmed by the Bankruptcy Court. Management believes it is very
unlikely that an alternative plan would be confirmed in which the existing
equity interests would not be canceled.
CASH FLOW, WORKING CAPITAL AND CAPITAL EXPENDITURES
The Company's unrestricted cash balances totaled approximately $20.3
million as of February 18, 1998. Since the Petition Date, the Company has relied
on current cash balances and its ability to generate cash flow from operations
to fund its working capital needs.
During fiscal year 1997 the Company generated $7.6 million from operations
and $1.6 million from investing activities through the sale of 410 warehoused
slot machines. These funds and existing cash were used primarily for $1.4
million of capital expenditures, $10.3 million principal payments on capital
lease obligations, $.4 million for payment on long-term debt related to the
initial funding of the Company's retail operations. During fiscal year 1996, the
primary funding sources were $13.3 million from operations, $46.8 million from
financing activities (consisting primarily from funds generated by the Grand
note) and $92.6 million of cash balances remaining from the First Mortgage Note
offering. The combined funds were primarily used to complete construction of
Phase I ($162.5 million) and a portion of Phase II ($62.0 million).
The Company estimates that its current level of cash and anticipated funds
from operations will be adequate to fund cash requirements through the term of
the bankruptcy proceedings.
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).
22
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... 24
Consolidated Balance Sheets at December 28, 1997 and
December 29, 1996......................................... 25
Consolidated Statements of Operations for the fiscal years
ended December 28, 1997, December 29, 1996 and December
31, 1995.................................................. 26
Consolidated Statements of Shareholders' Equity for the
period from January 1, 1995 to December 28, 1997.......... 27
Consolidated Statements of Cash Flows for the fiscal years
ended December 28, 1997, December 29, 1996 and December
31, 1995.................................................. 28
Notes to Consolidated Financial Statements.................. 30
</TABLE>
23
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Stratosphere Corporation:
We have audited the accompanying consolidated balance sheets of
Stratosphere Corporation (a Delaware corporation) and subsidiaries ("the
Company"), debtors-in-possession, as of December 28, 1997 and December 29, 1996,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years ended December 28, 1997, 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 28, 1997 and December 29, 1996, and
the results of their operations and their cash flows for the years ended
December 28, 1997, 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 10. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
February 6, 1998
24
<PAGE> 25
STRATOSPHERE CORPORATION AND SUBSIDIARIES
(DEBTORS IN POSSESSION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 20,326,317 $ 22,558,804
Cash and cash equivalents -- restricted................... 471,273 --
Investments -- restricted................................. 3,139,469 2,678,344
Securities available for sale............................. -- 2,000,905
Accounts receivable, net.................................. 2,479,512 4,575,490
Other current assets...................................... 5,753,608 6,127,325
------------- -------------
Total Current Assets........................................ 32,170,179 37,940,868
------------- -------------
Property and Equipment, Net................................. 122,381,979 130,000,000
------------- -------------
Other Assets:
Deferred financing costs -- net........................... 624,156 12,339,097
Related party receivable -- net........................... 800,000 800,000
------------- -------------
Total Other Assets.......................................... 1,424,156 13,139,097
------------- -------------
TOTAL ASSETS................................................ $ 155,976,314 $ 181,079,965
============= =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable-trade.................................... $ 1,124,425 $ 1,250,786
Accounts payable-construction............................. -- 858,665
Current installments of long-term debt.................... 148,017 429,103
Current installments of capital lease obligations......... -- 8,684,360
Accrued interest.......................................... 263,457 18,644,462
Accrued payroll and related expenses...................... 5,778,505 5,005,047
Affiliate payable......................................... -- 1,878,717
Other accrued expenses.................................... 6,156,276 9,231,792
------------- -------------
Total Current Liabilities................................... 13,470,680 45,982,932
------------- -------------
Long-term Liabilities:
Long-term debt -- less current installments............... -- 203,000,000
Long-term note payable -- less current installments....... 296,033 --
Capital lease obligations -- less current installments.... -- 19,539,815
Note payable to affiliate................................. -- 50,000,000
------------- -------------
Total Long-Term Liabilities................................. 296,033 272,539,815
------------- -------------
Liabilities Subject to Compromise........................... 299,208,988 --
------------- -------------
TOTAL LIABILITIES........................................... 312,975,701 318,522,747
------------- -------------
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 December
28, 1997 and December 29, 1996......................... 583,931 583,931
Additional paid-in-capital................................ 218,546,069 218,787,643
Accumulated deficit....................................... (376,129,387) (356,814,356)
------------- -------------
Total Shareholders' Deficit................................. (156,999,387) (137,442,782)
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $ 155,976,314 $ 181,079,965
============= =============
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 26
STRATOSPHERE CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Casino...................................... $ 62,981,160 $ 47,901,144 $ --
Hotel....................................... 24,006,537 19,698,730 --
Food and beverage........................... 33,143,254 26,825,729 --
Tower, retail and other income.............. 30,339,898 25,541,729 59,864
------------ ------------- ------------
Gross Revenues................................ 150,470,849 119,967,332 59,864
Less: Promotional allowances................ 12,955,013 11,228,465 --
------------ ------------- ------------
NET REVENUES.................................. 137,515,836 108,738,867 59,864
------------ ------------- ------------
COSTS AND EXPENSES:
Casino...................................... 27,838,121 21,474,255 --
Hotel....................................... 8,554,553 7,082,100 --
Food and beverage........................... 25,552,348 22,416,703 --
Other operating expenses.................... 11,755,549 9,444,697 --
Depreciation and amortization............... 7,843,230 11,477,925 --
Pre-opening costs amortization.............. -- 23,909,146 --
Impairment of long-lived assets............. -- 295,946,633 --
Selling, general and administrative......... 53,166,758 48,153,596 947,008
------------ ------------- ------------
Total Costs and Expenses................. 134,710,559 439,905,055 947,008
------------ ------------- ------------
INCOME (LOSS) FROM OPERATIONS................. 2,805,277 (331,166,188) (887,144)
------------ ------------- ------------
OTHER INCOME (EXPENSE):
Interest income............................. 47,674 3,992,108 8,361,087
Interest expense (Contractual Interest for
fiscal year 1997 estimated at
$42,132,407)............................. (5,491,686) (21,761,565) (11,970,178)
Gain on sale of assets...................... 14,186 93,025 (166,815)
------------ ------------- ------------
Total Other Expense, net................. (5,429,826) (17,676,432) (3,775,906)
------------ ------------- ------------
Loss Before Reorganization Items and Income
Taxes....................................... (2,624,549) (348,842,620) (4,663,050)
------------ ------------- ------------
Reorganization Items:......................... (16,690,482) -- --
Loss Before Income Taxes...................... (19,315,031) (348,842,620) (4,663,050)
------------ ------------- ------------
Income Taxes.................................. -- -- --
------------ ------------- ------------
NET LOSS...................................... $(19,315,031) $(348,842,620) $ (4,663,050)
============ ============= ============
LOSS PER COMMON SHARE......................... $(0.33) $(6.00) $(0.12)
============ ============= ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.... 58,393,105 58,134,811 37,583,065
============ ============= ============
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
STRATOSPHERE CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON PREFERRED PAID-IN ACCUMULATED EQUITY
STOCK STOCK CAPITAL DEFICIT (DEFICIT)
------ --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
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
purchase warrants................ 816 -- 722,590 -- 723,406
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)
Net loss........................... -- -- -- (19,315,031) (19,315,031)
Vegas World acquisition (leasehold
settlement) cost................. -- -- (240,000) -- (240,000)
Unrealized holding loss on
investment....................... -- -- (1,574) -- (1,574)
-------- ---- ------------ ------------- -------------
Balances at December 28, 1997...... $583,931 $ -- $218,546,069 $(376,129,387) $(156,999,387)
======== ==== ============ ============= =============
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 28
STRATOSPHERE CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(19,315,031) $(348,842,620) $ (4,663,050)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 8,404,853 13,407,234 1,718,209
Amortization of pre-opening costs....................... -- 23,909,146 --
Reorganization Items:
Write-off of debt issuance costs...................... 11,210,108 -- --
Professional Fees..................................... 5,500,000 -- --
Management Retention Expense.......................... 820,000 -- --
Interest Earned on Accumulated Cash During Chapter 11
Proceedings......................................... (839,626) -- --
Provision for doubtful accounts......................... 272,481 3,166,829 --
Impairment of long-lived assets......................... -- 295,946,633 --
(Gain) loss on sale or disposal of assets............... (14,186) 214,495 166,815
Changes in operating assets and liabilities:
Accounts receivable................................... 1,992,195 (278,951) (4,485,681)
Other current assets.................................. 373,717 (4,070,428) (2,051,650)
Accounts payable--trade (pre-petition)................ (902,924) -- --
Accounts payable--trade (post-petition)............... 1,124,425 912,041 499,630
Other accrued expenses (pre-petition)................. (7,715,597) -- --
Other accrued expenses (post-petition)................ 8,340,789 28,931,755 3,928,575
------------ ------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES BEFORE
REORGANIZATION ITEMS...................................... 9,251,204 13,296,134 (4,887,152)
------------ ------------- ------------
Increases (decreases) to Cash Resulting from
Reorganization Items:
Professional fees paid.................................. (2,679,802) -- --
Management Retention Disbursements...................... 217,250 -- --
Interest Earned on Accumulated Cash During Chapter 11
Proceedings........................................... 839,626 -- --
------------ ------------- ------------
NET CASH PROVIDED BY (USED IN) REORGANIZATION ITEMS......... (1,622,926) -- --
------------ ------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... 7,628,278 13,296,134 (4,887,152)
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to stockholder................................... -- -- (4,411,798)
Change in cash and cash equivalents-restricted............ (472,847) 109,913,662 (115,268,775)
Change in investments-restricted.......................... (461,125) 2,678,344 --
Change in securities available for sale................... 2,000,905 3,140,045 (5,140,950)
Payments for property and equipment....................... (1,403,341) (191,301,881) (124,470,643)
Change in construction payables........................... (544,133) (32,664,947) 29,883,865
Pre-opening costs......................................... -- (18,112,284) (5,796,862)
Increase in related party receivable and other............ (168,697) (3,777,687) --
Cash proceeds from sale of property and equipment......... 1,585,827 -- 928,134
------------ ------------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... 536,589 (130,124,748) (224,277,029)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock-net................ -- 1,296,446 84,470,097
Proceeds from exercise of stock options/common stock
purchase warrants....................................... -- -- 34,304,112
Costs of secondary stock offering......................... -- (248,046) --
Debt issuance and deferred financing costs................ (6,250) (760,707) (11,221,825)
Change in prepaid offering costs.......................... -- -- 935,395
Proceeds from issuance of long-term debt.................. -- 1,170,375 216,493,456
Payments on long-term debt................................ (429,103) (741,272) (3,737,763)
Payments on capital lease obligations subject to
compromise.............................................. (10,266,760) (5,000,000) --
Increase in affiliate payable............................. 544,759 1,074,852 --
Proceeds from the issuance of debt to affiliate........... -- 50,000,000 --
Vegas World acquisition (leasehold settlement) costs...... (240,000) -- --
------------ ------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... (10,397,354) 46,791,648 321,243,472
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents........ (2,232,487) (70,036,966) 92,079,291
Cash and cash equivalents -- beginning of period............ 22,558,804 92,595,770 516,479
------------ ------------- ------------
Cash and cash equivalents -- end of period.................. $ 20,326,317 $ 22,558,804 $ 92,595,770
============ ============= ============
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 29
STRATOSPHERE CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest-net of capitalized interest................ $2,097,540 $ 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 equipment through capital lease......... $ 444,050 $33,224,175 $ --
Purchase of land, buildings, furniture and equipment
from stockholder (principally Vegas World assets)
as follows:
Purchase price................................. $ -- $ -- $ 1,000,000
Cash paid...................................... -- -- --
---------- ----------- ------------
Note payable to stockholder.................... -- -- 1,000,000
Preferential distribution to stockholder....... (240,000) -- 1,226,841
---------- ----------- ------------
Predecessor cost of assets acquired for
non-cash consideration.................... $ (240,000) $ -- $ 2,226,841
========== =========== ============
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
Issuance of preferred stock to parent in payment of
notes payable.................................... $ -- $ -- $ 33,524,860
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 30
STRATOSPHERE CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
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 39.4% 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 "Tower"). The Company
commenced operations of the resort facility on April 29, 1996.
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 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. The fiscal year 1997 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 and
continue as a going concern.
BASIS OF PRESENTATION
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
1 cases are in process, Stratosphere Corporation and SGC continue in possession
of their properties and operate and manage their business as a
debtor-in-possession pursuant to the Bankruptcy Code.
In addition, as a result of the restructuring (See Note 10), the Company
has implemented the American Institute of Certified Public Accountants ("AICPA")
Statement of Position 90-7 "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" in the preparation of the accompanying December 28,
1997 consolidated financial statements. The Company has not separately reported
financial statements of the non-debtor subsidiaries as it has determined such
disclosure is not material to the consolidated financial statements.
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.
30
<PAGE> 31
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Food and Beverage.......................................... $4,795 $3,339
Rooms...................................................... 1,220 458
Other...................................................... 358 59
------ ------
$6,373 $3,856
====== ======
</TABLE>
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 as of December
28, 1997, consist primarily of funds escrowed pursuant to the Management
Retention Agreements.
INVESTMENTS RESTRICTED
Investments restricted in fiscal years 1997 and 1996 consist primarily of
funds pledged for workers' compensation benefits.
SECURITIES AVAILABLE FOR SALE
The Company invested 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. There
were no such investments as of December 28, 1997.
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
and depreciated over their useful lives. 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.
31
<PAGE> 32
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization of property and equipment is computed using
the straight-line method over the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................................. 39 years
Furniture, fixtures and equipment........................... 3-15 years
Land improvements........................................... 15 years
</TABLE>
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
and $13,223,121 during the fiscal years 1996 and 1995 respectively. There was no
capitalized interest during fiscal year 1997.
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, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121)". 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 (See Note 4). 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 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. Prior to the Petition Date such
amount was amortized using the straight line method over the term of the First
Mortgage 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 fiscal year ended
December 31, 1994. On the Petition Date the Company expensed unamortized
deferred debt issuance costs. The total write-off classified as "Reorganization
Items" on the consolidated statement of operations was $11.2 million or $0.19
per common share.
PRE-OPENING COSTS
Pre-opening costs incurred prior to the opening were 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 year ended December 28, 1997 or any
fiscal years ending prior to 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 11 to the asset and liability method of
32
<PAGE> 33
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
EARNINGS PER SHARE ("EPS")
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128") in 1997. However, there is no effect on the EPS calculation as all
Common Stock equivalents are anti-dilutive. Under the Restated Second Amended
Plan, all existing equity interests (including Common Stock, options, and
warrants) would be canceled.
RECLASSIFICATIONS
Certain reclassifications, having no effect on net losses, have been made
to the prior years consolidated financial statements to conform with the current
fiscal 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 28, 1997 and
December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Hotel and related........................................... $ 664 $3,691
Gaming...................................................... 947 554
Other....................................................... 1,162 519
------ ------
Total....................................................... 2,773 4,764
Less allowance for doubtful accounts........................ (293) (189)
------ ------
$2,480 $4,575
====== ======
</TABLE>
33
<PAGE> 34
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) OTHER CURRENT ASSETS
Other current assets consists of the following as of December 28, 1997 and
December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Inventory................................................... $2,781 $3,270
Prepaid expenses............................................ 2,973 2,408
Other....................................................... -- 449
------ ------
$5,754 $6,127
====== ======
</TABLE>
(4) PROPERTY AND EQUIPMENT -- NET
Property and equipment consist of the following as of December 28, 1997 and
December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and improvement, including land held for
development............................................ $ 21,427 $ 21,128
Building and improvements................................ 66,717 66,673
Furniture, fixtures and equipment........................ 36,732 37,717
Construction in progress................................. 16,263 15,919
-------- --------
141,139 141,437
Less accumulated depreciation............................ (18,757) (11,437)
-------- --------
$122,382 $130,000
======== ========
</TABLE>
Included in property and equipment at December 28, 1997 and December 29,
1996, are assets recorded under capital leases of $31.4 million and $33.5,
respectively. Accumulated depreciation and amortization at December 28, 1997 and
December 29, 1996, includes amounts recorded for capital leases of $6,547,165
and $3,073,185, respectively.
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 on December 29, 1996. The impairment loss was measured as the
amount by which the carrying value of the long-lived assets exceeded their
estimated fair market value. Management made an assessment of the fair market
value of each long-lived asset category to reflect the impairment loss. As a
result of the reduced carrying amount of the impaired assets, depreciation and
amortization expense has been reduced for future periods. Based on management's
assessment of the estimated fair market value of each long-lived asset category,
as of December 28, 1997, there was no impairment losses realized during fiscal
year 1997 pursuant to SFAS 121.
Future adjustment of asset carry amounts is likely with the anticipated
adoption of "Fresh-Start Reporting" upon the effective date of a plan of
reorganization confirmed by the Bankruptcy Court.
34
<PAGE> 35
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) OTHER ACCRUED EXPENSES
Other accrued expenses, exclusive of pre-petition liabilities subject to
compromise for fiscal year 1997, consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accrued liabilities......................................... $4,278 $5,147
Deposits.................................................... 506 444
Accrued taxes............................................... 710 1,437
Other....................................................... 662 2,204
------ ------
$6,156 $9,232
====== ======
</TABLE>
(6) LONG TERM DEBT
A summary of debt outstanding, exclusive of amounts classified to
"Liabilities subject to compromise" for fiscal year 1997, is as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
14 1/4% First Mortgage Notes due April 1, 2002 (see
description following).................................... $ -- $203,000
Other....................................................... 444 429
----- --------
444 203,429
Less current portion........................................ (148) (429)
----- --------
Long-term debt-less current portion......................... $ 296 $203,000
===== ========
</TABLE>
The prime rate of interest was 8.5% and 8.25% at December 28, 1997 and
December 29, 1996, respectively.
14 1/4% 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 semi-annual periods (as defined
in the Indenture) ending March 31, once operational. The fair market value of
the First Mortgage Notes at December 29, 1996, was $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. As of
December 28, 1997 and December 29, 1996, the Company was in default of the
Indenture covenants. The First Mortgage Notes are collateralized by
substantially all of the Company's real property. 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 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 principal balance and accrued interest was $203,000,000 and $20,661,467,
respectively. Since the Petition Date, both principal and interest have been
reclassified to "Liabilities subject to compromise" on the consolidated balance
sheet (See Note 9). As of December 28, 1997, the Company accrued interest of
$20,661,467 and the fair market value of the First Mortgage Notes was
approximately $113,680,000.
35
<PAGE> 36
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The future aggregate annual maturities of non-affiliate long-term debt at
December 28, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $148
1999........................................................ 148
2000........................................................ 148
2001........................................................ --
2002........................................................ --
Thereafter.................................................. --
----
Total.................................................. $444
====
</TABLE>
(7) 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 terms of 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. 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 and the net proceeds were applied to future
principal payments on a pro rata basis pursuant to the terms of the lease
agreement.
Since the Petition Date, the capital lease obligation has been classified
to "Liabilities subject to compromise." The Company anticipates the continuation
of payments on its capital lease obligations pursuant to the pre-petition
Standstill Agreement and an order entered by the Bankruptcy Court on March 4,
1997 approving a stipulation for adequate protection (See Note 9).
Future minimum lease payments, excluding contingent rentals, due under
non-cancelable operating and capital leases for the five years subsequent to
December 28, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------- ---------
<S> <C> <C>
1998....................................................... $ 9,922 $1,818
1999....................................................... 9,616 826
2000....................................................... -- 164
2001....................................................... -- 55
2002....................................................... -- --
Thereafter................................................. -- --
-------
Total minimum lease payments............................... 19,538
Less: amounts representing interest @ 8.38%................ (1,580)
Present value of minimum capital lease payments............ 17,958
Less: current installment.................................. (8,684)
-------
Obligations under capital leases $ 9,274
=======
</TABLE>
Rent expense from the operating leases was $2,131,440, $1,298,569, and $0
in fiscal years 1997, 1996 and 1995, respectively.
36
<PAGE> 37
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) MINIMUM LEASE INCOME
The Company has entered into a number of operating leases in relation to
food and beverage and retail outlets. The future minimum lease income receivable
under these leases for the five years subsequent to December 28, 1997, consisted
of the following (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 1,023
1999........................................................ 1,000
2000........................................................ 1,000
2001........................................................ 1,000
2002........................................................ 1,000
Thereafter.................................................. 13,333
-------
$18,356
=======
</TABLE>
(9) LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise under reorganization proceedings consist
of the following as of December 28, 1997 (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Accounts payable trade...................................... $ 348
Accrued payroll and related expenses........................ 58
Affiliate payable........................................... 2,423
Other accrued expenses...................................... 4,761
Capital lease obligations................................... 17,958
14 1/4% First Mortgage Notes -- including accrued interest
through 1/27/97........................................... 223,661
Notes payable to affiliate.................................. 50,000
--------
$299,209
========
</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
to "Liabilities 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. The December 28, 1997,
consolidated balance sheet does not reflect as liabilities the total amount of
the claims as filed against the Debtors in the bankruptcy proceedings since a
reasonable estimate of additional bankruptcy claims and pre-petition liabilities
and the settlement value of certain contingent and/or disputed bankruptcy claims
could not be made at December 28, 1997. No liabilities were classified as
subject to compromise as of December 29, 1996.
(10) RESTRUCTURING
On January 27, 1997, Stratosphere Corporation and its wholly-owned
subsidiary Stratosphere Gaming Corp. 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 to operate their business subject to Bankruptcy Court supervision.
The Debtors and Grand Casinos, Inc. ("Grand") filed a Joint Plan of
Reorganization (the "Plan") on January 27, 1997.
The Plan and the various underlying agreements upon which it was
predicated, included several conditions for it to become effective, some of
which the Debtors could not ultimately satisfy. Because certain
37
<PAGE> 38
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
closing conditions could not be satisfied, the Debtors and Grand commenced
discussions in early May 1997 regarding possible alternatives to the Plan. Grand
and the Debtors ultimately agreed upon the terms of an alternative restructuring
plan. On June 20, 1997, the Debtors filed their First Amended Plan of
Reorganization ("First Amended Plan") to implement the terms of this agreement.
The First Amended Plan reserved the right for the Company's Board of
Directors to entertain and accept competing proposals which would be
economically more advantageous to the creditors of the Debtors' estates. On or
about July 15, 1997, the Debtors received a competing restructuring proposal
from High River Limited Partnership and American Real Estate Partners, L.P.
(collectively "High River"), holders of a substantial portion of the Company's
First Mortgage Notes. High River is controlled by New York financier, Carl
Icahn. After analyzing the High River proposal and negotiating certain
modifications thereto, the independent members of the Company's Board of
Directors preliminarily concluded that the High River proposal was preferable to
the First Amended Plan and thereafter determined not to proceed with the First
Amended Plan. On November 7, 1997, the Debtors filed their Second Amended Plan
of Reorganization ("Second Amended Plan"). The filing of the Second Amended Plan
followed substantial negotiation among the Debtors, High River and Grace
Brothers, Ltd. (the remaining representative of the official committee of First
Mortgage Note Holders). High River and Grace Brothers, Ltd. could not reach
agreement amongst themselves on the terms of a plan of reorganization which they
would find to be mutually acceptable. Rather than wait for the outcome of
protracted negotiations between High River and Grace Brothers, Ltd., with no
guarantee that such negotiations would result in a proposal acceptable to such
parties and to the Debtors, the Debtors filed the Second Amended Plan. On
February 13, 1998, the Debtors filed their Restated Second Amended Plan of
Reorganization ("Restated Second Amended Plan") which included the results of
subsequent negotiations between High River and Grace Brothers, Ltd. Among other
things, under the Restated Second Amended Plan, the secured portion of the
Company's First Mortgage Notes (estimated at $120.0 million) would be converted
into one hundred percent (100%) of the equity of reorganized Stratosphere
Corporation, and all currently outstanding Common Stock of the Company and all
other existing equity interests (including stock options and warrants) of the
Company would be canceled. The remaining portion of the First Mortgage Notes
claim (approximately $104.0 million) would be treated as a general unsecured
claim. In addition to the deficiency claim arising from the First Mortgage
Notes, the general unsecured class of claims would include the balance of the
Grand note (approximately at $52.4 million) and other general unsecured claims.
The Restated Second Amended Plan assumes that the general unsecured class of
claims would participate in a pro rata share of approximately $6.0 million in
full settlement of their related claims. In addition, the Restated Second
Amended Plan assumes that the reorganized Stratosphere Corporation will continue
to make payments pursuant to its capital lease and operating lease agreements. A
copy of the Restated Second Amended Plan and disclosure statement is included
herein as an exhibit. The disclosure statement accompanying the Restated Second
Amended Plan was approved, with certain modifications, by the Bankruptcy Court
on February 26, 1998, and a confirmation hearing has been scheduled on May 15,
1998. There can be no assurance that the Restated Second Amended 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.
The Company has implemented the guidance provided by AICPA Statement of
Position 90-7 "Financial Reporting By Entities In Reorganization Under The
Bankruptcy Code" and, accordingly, expenses reorganization items as incurred
(See Note 11). These items include professional fees, management retention
compensation, interest income earned and any other costs and expenses deemed to
have resulted from reorganization efforts since the Petition Date. All
professional fees require approval by the Bankruptcy Court prior to the Company
making payment in respect thereof.
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
38
<PAGE> 39
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 balance sheets, represent
the Company's estimate of the Debtors' pre-petition liabilities which are
subject to compromise (See Note 9).
(11) REORGANIZATION ITEMS
Reorganization items consisted of the following for the twelve month period
ended December 28, 1997 (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Write-off of debt issuance costs............................ $11,210
Professional fees........................................... 5,500
Interest earned on accumulated cash during Chapter 11
proceedings............................................... (840)
Management retention compensation........................... 820
-------
$16,690
=======
</TABLE>
Costs and expenses related to the reorganization of the Company have been
classified as Reorganization items in the consolidated statement of operations
since the Petition Date. Prior to the Petition Date, such costs and expenses
were classified as selling, general and administrative in the consolidated
statement of operations. Such expenses totaled approximately $1.0 million during
fiscal year 1996.
(12) SHAREHOLDERS' 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 commission 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 Bob Stupak
Enterprises ("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 13).
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
39
<PAGE> 40
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operated on a stand alone basis during the periods presented. 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 13).
- 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 13), 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 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, former Chief Executive Officer and a former 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 former director of the Company and a former 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 is used to facilitate a 500-car
parking lot. The Company issued 1,050,000 shares of Common
40
<PAGE> 41
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
There were no additional issuances of Common Stock or other equity during
1997. As of December 28, 1997, the Company had 58,393,105 shares of Common Stock
issued and outstanding. Under the terms and conditions of the Restated Second
Amended Plan, all currently outstanding Common Stock and all other existing
equity interests of the Company would be canceled.
STOCK OPTION PLANS
The Company has reserved for issuance of 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"). The Company does not plan
to issue additional stock options under either plan since all outstanding stock
is anticipated to be canceled upon Bankruptcy Court confirmation of a plan of
reorganization.
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,
non-qualified 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 28, 1997, 1,083,000 shares were available for granting further
options and options for 1,542,167 shares were outstanding at $4.00 to $8.00 per
share, of which options for 1,040,167 were exercisable. During 1997 10,000
shares became void upon employee separations. There was no exercises of stock
options during fiscal year 1997. During fiscal year 1996, 134,833 shares were
exercised at $4.25 per share and options for 527,500 shares became void upon
employee separations. There were no exercises of stock options during fiscal
years 1995 and 1994. The Company anticipates that all options will be canceled
upon Bankruptcy Court confirmation of a plan of reorganization. The Company does
not expect any issuance or exercise of additional stock options.
41
<PAGE> 42
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
Director's Plan may not be exercised more than ten years after the date of
adoption of the Director' 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 28, 1997, 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 180,000 were exercisable. No options were exercised
during 1997. Options for 10,000 shares were exercised during fiscal year 1996
and no options were exercised during fiscal years 1995 and 1994. The Company
anticipates that all options will be canceled upon 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 stock options
pursuant to the restructuring described in Note 10, no Financial Accounting
Standards Board No. 123 "Accounting for Stock-Based Compensation" pro forma
disclosures have been made.
(13) 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 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
amounted to $19,222,963, 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
42
<PAGE> 43
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consisting of goods and services (cash, casino action, hotel room nights,
beverages at casino bars, show tickets, admissions to the 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 Tower project so long
as the escrow remains in good standing. The arrangement anticipated the Company
invoicing and being reimbursed by the escrow fund for "one visit" vacation
packages 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 charged the actual cost of providing goods and services for "multiple
visit" vacation packages. Certain goods and services (agreed upon numbers of
hotel room nights, admissions to the Tower and beverages at casino bars) were
provided by Stratosphere without reimbursement. In conjunction with Stupak
providing all other benefits relating to these vacation packages. 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, as a result of
insufficient assets to the escrow. 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 Stupak being able to make adequate arrangements
that would be subject to Bankruptcy Court approval.
(14) 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. From the
opening on April 29, 1996, upon the Company's request, Grand continued to
provide consulting services until such services were terminated as of the
Petition Date.
(15) INCOME TAXES
The income tax benefit attributable to losses from operations for the years
ended December 28, 1997, December 29, 1996 and December 31, 1995 differed from
the amounts computed by applying the federal income tax rate of 35% as a result
of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current.......................................... $ -- $ -- $ --
Deferred benefit................................. (6,104) (122,095) (1,632)
Increase in deferred tax asset valuation
allowance...................................... 6,104 122,095 1,632
------- --------- -------
$ -- $ -- $ --
======= ========= =======
</TABLE>
43
<PAGE> 44
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of significant temporary differences representing deferred
tax assets and liabilities for the Company is as follows at December 28, 1997
and December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets (liabilities):
Current:
Allowance for doubtful accounts..................... $ 103 $ 66
Progressive jackpots................................ 108 258
Accrued vacation, workers' compensation............. (511) 1,753
Outstanding chip and token liability................ 80 189
Other............................................... (897) --
--------- ---------
(1,117) 2,266
--------- ---------
Long-term:
Depreciation........................................ (11,017) (1,060)
Pre-opening costs................................... 5,579 7,252
Allowance for doubtful accounts..................... 1,101 1,042
Excess of tax over book basis of assets acquired in
connection with Vegas World Asset Purchase....... 6,850 6,850
Excess of tax over book basis of assets due to write
down of assets................................... 98,338 103,581
Net operating loss carryforward..................... 35,932 9,631
--------- ---------
136,783 127,296
--------- ---------
Total deferred taxes................................ 135,666 129,562
Valuation allowance................................. (135,666) (129,562)
--------- ---------
$ -- $ --
========= =========
</TABLE>
The Company recorded a valuation allowance at December 28, 1997, December
29, 1996 and December 31, 1995, relating to recorded tax benefits because of the
significant uncertainty as to whether such benefits will ever be realized.
The provision (benefit) for income taxes differs from the amount computed
at the federal statutory rate as a result of the following at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate.................................. (35)% (35)% (35)%
Permanent differences...................................
Increase in deferred tax asset valuation allowance...... 35% 35% 35%
--- --- ---
--% --% --%
=== === ===
</TABLE>
As of December 28, 1997, the Company has a net operating loss carryforward
of approximately $102.7 million. 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.
(16) 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 accrued interest at the rate of 14 1/4% up to the
Petition Date.
44
<PAGE> 45
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This liability is classified under the caption liabilities subject to compromise
in the consolidated balance sheet at December 28, 1997.
Further, pursuant to the Memorandum of Agreement, 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 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, 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 would retain the
right to obtain the equity funds which would otherwise be provided by the
Standby Equity Commitment through other means deemed appropriate.
On February 19, 1998, the Bankruptcy Court determined that the Standby
Equity Commitment was an executory contract that the Company could not assume
due to its inability to perform and therefore, it was determined that the
Company could not compel Grand to perform under its obligation pursuant to the
agreement.
In connection with the Management and Development Agreement previously
discussed in Note 14, 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 during fiscal year 1997.
In connection with the construction of the Company's facility and its
normal operations, approximately $187,041, $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 28, 1997,
December 29, 1996 and December 31, 1995, respectively.
During 1996 the Company billed Stupak $4,777,687, of which $1,000,000 was
paid for amounts related to the Company providing its facility to service
Stupak's vacation packages. Accordingly, the Company has reserved the unfunded
amount of $2,977,687 in 1996. Stupak has disputed the billing and the escrow
account set up to satisfy these obligations remains unfunded. The amount of the
net receivable is classified as a related party receivable under other assets in
the consolidated balance sheets.
(17) 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 Agreement. The "Group One" executives
consists of nine individuals who 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 or, (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.
On January 23, 1998, the Bankruptcy Court approved Retention Agreements for
"group two" executives. The group two executives (two individuals) will have an
amount equal to 100% of their annual compensation as of May 1, 1997, placed in
escrow as additional compensation payable on the earlier of (i) an involuntary
45
<PAGE> 46
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
termination or, (ii) ninety days after a sale of the Company or (iii) upon
confirmation of a plan of reorganization by the Bankruptcy Court. Consistent
with group one, the executives are not entitled to the compensation upon a
voluntary termination.
The Company began reflecting 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. The expenses recorded in connection with the Retention Agreements is
classified to "Reorganization items."
(18) CONTINGENCIES
On January 27, 1997, the Company and its wholly-owned subsidiary
Stratosphere Gaming Corporation 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 (a former officer and
director of the Company and officer and director of Grand), Robert E. Stupak (a
former officer and director of the Company), Thomas A. Lettero (an officer and
current director 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 22, 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 former director of the Company and also a former 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
and because any claims of plaintiffs against the Company will be resolved in the
bankruptcy proceedings. On February 25, 1997, Grand and certain individual
defendants filed a motion to dismiss the complaint. The court on May 21, 1997,
dismissed the complaint finding that plaintiffs complaint failed to specifically
allege facts supporting claims made by plaintiffs in connection with certain
documents issued as certain public statements made by the Company. On July 25,
1997, the court amended its May 21 order providing plaintiffs with the
opportunity to submit an amended complaint. The plaintiffs have since filed an
46
<PAGE> 47
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amended complaint and the defendants named in the amended complaint have again
filed a motion to dismiss complaint. 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 States 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 was scheduled to begin on May 5, 1997, but was canceled.
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 and Stanley Taube. 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 the IPO Units in the IPO rather than one
plaintiff class, and that this alleged conduct caused a second dealer to lose
out on other profits it allegedly deserved. The Court of Appeals affirmed 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. The parties have stipulated to dismiss this suit.
On or about June 15, 1995, the case of City of Las Vegas Downtown
Redevelopment Agency vs. Crockett et al. and on or about November 8, 1995, the
court in the case of City of Las Vegas Downtown Redevelopment Agency vs. Mouldon
et al. dismissed these complaints based upon the City's lack of legal
justification to condemn these properties. Both cases appealed to the Nevada
Supreme Court where a decision is pending. On January 23, 1998, the Supreme
Court issued an Order of Limited Remand ordering an evidentiary hearing on
whether the Company intends to reject or accept the Owner Participation
Agreement and should the Company reject, whether the City intends to purchase
the subject properties.
The Company, based in part on the advice of its counsel, believes that it
has meritorious defenses and does not believe the above described legal actions
will have a material adverse effect on the consolidated financial statements. In
addition, in the ordinary course of business, the Company is party to various
legal actions. In management's opinion, the ultimate outcome of such legal
actions will not have a material effect on the results of operations or the
financial position of the Company.
47
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
48
<PAGE> 49
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>
Andrew S. Blumen............... 45 Executive Vice President, General Counsel, Secretary and
Director
Thomas A. Lettero.............. 41 Vice President Administration and Chief Financial Officer
Robert A. Maheu................ 80 Vice Chairman of the Board of Directors
Thomas G. Bell................. 71 Director
</TABLE>
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 President. Since July 31, 1997, Mr. Blumen and Mr.
Lettero have shared the responsibilities of the President and Chief Executive
Officer as that position remains vacant. 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 Vice President Administration and Chief
Financial Officer of the Company since December 1994. Since July 31, 1997, Mr.
Blumen and Mr. Lettero have shared the responsibilities of the President and
Chief Executive Officer as that position remains vacant. 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. Stratosphere Corporation and its
wholly-owned subsidiary, Stratosphere Gaming Corp., 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 was a director of Crowne
Ventures, Inc. and has served as its Chairman of the Board from October 1995 to
June 1997. In January 1998 Mr. Maheu became a founder of Global Intelligence
Network, an international intelligence gathering organization servicing
businesses worldwide.
Thomas G. Bell has been a director of the Company since December 1993. For
more than the past six years, Mr. Bell has been engaged in the private practice
of law, principally in the State of Nevada.
49
<PAGE> 50
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
and for each executive officer of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY $ BONUS $ OPTIONS (#)
--------------------------- ---- -------- ------- -----------
<S> <C> <C> <C> <C>
Lyle Berman,...................................... 1997 -- -- --
Former Chief Executive Officer(a) 1996 -- -- --
1995 -- -- --
Richard Schuetz(b)................................ 1997 283,846 94,615 --
Former President and Chief Executive Officer 1996 173,077 57,692 --
David R. Wirshing(c).............................. 1997 -- -- --
Former President 1996 233,331 120,000 200,000(d)
1995 400,000 -- --
Andrew S. Blumen(e)............................... 1997 225,000 -- --
Executive Vice President and General Counsel 1996 225,000 55,000 --
1995 199,039 -- 200,000
Thomas A. Lettero(e).............................. 1997 200,000 -- --
Chief Financial Officer 1996 188,462 55,000 --
1995 159,615 -- --
</TABLE>
- -------------------------
(a) Mr. Berman became Chief Executive Officer in July 1994. Mr. Berman is a
director, executive officer and principal stockholder of Grand. Mr. Berman
resigned as Chairman of the Board and Chief Executive Officer in July 1997.
(b) Mr. Schuetz became President and Chief Executive Officer in October 1996 and
resigned as such in July 1997.
(c) Mr. Wirshing resigned as President and member of the Board of Directors in
July 1996.
(d) Represents severance payable pursuant to the Separation Agreement.
Approximately $167,000 of severance was paid in fiscal year 1996, and the
remaining $33,000 has been paid during fiscal year 1997.
(e) Effective July 31, 1997, Mr. Blumen and Mr. Lettero jointly assumed the
responsibilities of President and Chief Executive Officer, a position which
remains vacant.
50
<PAGE> 51
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE OF ASSUMED
-------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OF OPTION TERM(2)
OPTION EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE)(3) DATE 5%($) 10%($)
---- ----------- ------------- ------------ ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Lyle Berman..................... -- -- -- -- -- --
Richard Schuetz................. -- -- -- -- -- --
Andrew S. Blumen................ -- -- -- -- -- --
Thomas A. Lettero............... -- -- -- -- -- --
</TABLE>
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..................................... 140,000/160,000
Thomas A. Lettero.................................... 60,000/40,000
</TABLE>
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 of 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.
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.
51
<PAGE> 52
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 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 $130,000 of severance during the fiscal
year ended December 29, 1996, and $46,000 of severance compensation was paid to
Mr. Wirshing during fiscal 1997. 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). Severance
payments, pursuant to the Separation Agreement, ceased as of the Petition Date.
The Company and Mr. Blumen entered into a one year employment agreement 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.
On July 30, 1997, the Company entered into and the Bankruptcy Court
approved Retention Agreements for eleven of the Company's non official director
management executives. The executives are divided into two groups for purposes
of computing retention compensation pursuant to the Retention Agreement. The
"group one" executives consist of nine individuals who 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
or, (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.
On January 23, 1998, the Bankruptcy Court approved Retention Agreements for
"group two" executives. The group two executives (two individuals) will have an
amount equal to 100% of their annual compensation as of May 1, 1997, placed in
escrow as additional compensation payable on the earlier of (i) an involuntary
termination or, (ii) ninety days after a sale of the Company or (iii) upon
confirmation of a plan of reorganization by the Bankruptcy Court. Consistent
with group one, the executives are not entitled to the compensation upon a
voluntary termination.
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
52
<PAGE> 53
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 during fiscal year 1997 Messrs. Bell and Maheu each received $10,000
per quarter for their service on the Committee of Independent Directors. Thomas
Hantges served as a director of the Company from August 14, 1997 to January 5,
1998. Mr. Hantges received $10,000 during his tenure on the Company's Board of
Directors in addition to the $1,000 fee for each board meeting attended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until July 31, 1997, the Compensation Committee consisted of Lyle Berman
and Stanley M. Taube, former directors of the Company. Mr. Berman is Chairman of
the Board of Directors for Grand and Mr. Taube is a former director of Grand and
Neil I. Sell, a former director of the Company, is a director of Grand. Since
the resignation of these directors on July 31, 1997, the compensation committee
has consisted of Mr. Bell and Mr. Maheu.
Mr. Sell is a partner in the law firm of Maslon Edelman Borman & Brand,
LLP, which has rendered legal services to the Company.
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 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 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 fiscal years 1996 and 1997 the Company billed Mr. Stupak $4,867,930 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 $3,867,930 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, ("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 Untied 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 Debtors. 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 Casinos, Inc. ("Grand") filed a Joint Plan of
Reorganization (the "Plan") on January 27, 1997.
The Plan and the various underlying agreements upon which it was
predicated, included several conditions for it to become effective, some of
which the Debtors could not ultimately satisfy. Because certain closing
conditions could not be satisfied, the Debtors and Grand commenced discussions
in early May 1997 regarding possible alternatives to the existing plan. Grand
and the Debtors ultimately agreed upon the terms of an alternative restructuring
plan. On June 20, 1997, the Debtors filed their First Amended Plan of
Reorganization ("First Amended Plan") to implement the terms of this agreement.
53
<PAGE> 54
The First Amended Plan reserved the right for the Company's Board of
Directors to entertain and accept competing proposals which would be
economically more advantageous to the creditors of the debtor's estates. On or
about July 15, 1997, the Debtors received a competing restructuring proposal
from High River Limited Partnership and American Real Estate Partners, L.P.
(collectively, "High River"), holders of a substantial portion of the Company's
First Mortgage Notes. High River is controlled and managed by New York
financier, Carl Icahn. After analyzing the High River proposal and negotiating
certain modifications thereto, the independent members of the Company's Board of
Directors preliminarily concluded that the High River proposal was a higher and
better proposal than the First Amended Plan and thereafter determined not to
proceed with the First Amended Plan. Lyle Berman, Stanley M. Taube and Neil I.
Sell, were directors of Stratosphere Corporation through July 31, 1997, and with
the exception that Mr. Taube resigned as an officer and director of Grand on
February 22, 1998, are also directors of Grand. Lyle Berman is also Chairman of
the Board of Grand. Mr. Berman, Mr. Taube and Mr. Sell resigned as directors of
Stratosphere Corporation on July 31, 1997.
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. Grand will have no effective control over
reorganized Stratosphere Corporation and will not own any equity in the
reorganized entity.
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 year ended 1996. No fees were
paid or incurred during fiscal year 1997. In connection with the construction of
the Company's facility and its normal operations, approximately $3,842,965 of
assets were purchased from Grand Media & Electronics, a wholly owned subsidiary
of Grand Casinos, Inc. Purchases during fiscal year 1997 were $187,041.
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 certain equity securities, on non-cumulative
basis, 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 dollars 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. On February
19, 1998, the Bankruptcy Court determined that the Standby Equity Commitment was
an executory contract that the Company could not assume due to its inability to
perform and therefore, it was determined that the Company could not compel Grand
to perform under its obligation pursuant to the agreement.
54
<PAGE> 55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 13, 1998, 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>
NUMBER OF
NAME SHARES PERCENT
---- --------- -------
<S> <C> <C>
Grand Casinos, Inc.......................................... 23,014,704(a) 39.4
13705 First Avenue North
Minneapolis, MN 55441
Bob Stupak.................................................. 3,000,000(b) .5
2000 Las Vegas Blvd. South
Las Vegas, NV 89104
Robert A. Maheu............................................. 95,000(c) *
David R. Wirshing........................................... 400,000(d) *
Andrew S. Blumen............................................ 200,000(e) *
Thomas G. Bell.............................................. 47,500(f) *
Lyle A. Berman.............................................. -- *
Stanley M. Taube............................................ -- *
Neil I. Sell................................................ 37,500(g) *
Thomas A. Lettero........................................... 60,000(h) *
All directors and executive officers (as a group four
persons).................................................. 440,000(i) .8
</TABLE>
- -------------------------
* Less than 1%
(a) Based on the most recent Schedule 13D on file with the Securities and
Exchange Commission.
(b) Based on number of shares held in escrow.
(c) Includes 95,000 shares issuable upon exercise of stock options that are
exercisable within 60 days.
(d) Represents 400,000 shares issuable upon exercise of stock options that are
exercisable within 60 days.
(e) Represents 200,000 shares issuable upon exercise of stock options that are
exercisable within 60 days.
(f) Represents 47,500 shares issuable upon exercise of stock options that are
exercisable within 60 days.
(g) Includes 37,500 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.
(h) Includes 60,000 shares issuable upon exercise of stock options exercisable
within 60 days.
(i) Includes 440,000 shares issuable upon exercise of stock options that are
exercisable within 60 days.
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 by the Company, or written
representations that no Forms 5 were required, the Company believes that during
the fiscal year ended December 28, 1997, all Section 16(a) filing requirements
applicable to its officers, directors and greater than ten-percent beneficial
owners were satisfied.
55
<PAGE> 56
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 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 fiscal years 1996 and 1997, the Company billed Mr. Stupak $4,867,930 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
reserved the underfunded amount of $3,867,930 in 1996. 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. The Company, in the form of a cross-claim, has filed an action to
recover those funds left in the escrow account and for payment of the balance
due and owing to the Company by Stupak.
On January 27, 1997, Stratosphere Corporation and SGC filed voluntary
petitions for Chapter 11 Reorganization pursuant to the Untied States Bankruptcy
Code. As of that date, the Bankruptcy Court assumed jurisdiction over the assets
of these 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.
The Debtors and Grand filed a Joint Plan of Reorganization (the "Plan") on
January 27, 1997. The Plan and the various underlying agreements upon which it
was predicated, included several conditions for it to become effective, some of
which the Debtors could not ultimately satisfy. Because certain closing
conditions could not be satisfied, the Debtors and Grand commenced discussions
in early May 1997 regarding possible alternatives to the existing plan. Grand
and the Debtors ultimately agreed upon the terms of an alternative restructuring
plan. On June 20, 1997, the Debtors filed their First Amended Plan of
Reorganization ("First Amended Plan") to implement the terms of this alternative
restructuring plan.
The First Amended Plan reserved the right for the Company's Board of
Directors to entertain and accept competing proposals which would be
economically more advantageous to the creditors of the Debtors estates. On or
about July 15, 1997, the Debtors received a competing restructuring proposal
from High River Limited Partnership and American Real Estate Partners, L.P.
(collectively, "High River"), holders of a substantial portion of the Company's
First Mortgage Notes. High River is controlled and managed by New York
financier, Carl Icahn. After analyzing the High River proposal and negotiating
certain modifications thereto, the independent members of the Company's Board of
Directors preliminarily concluded that the High River proposal was a higher and
better proposal than the First Amended Plan and thereafter determined not to
proceed with the First Amended Plan. Lyle Berman, Stanley M. Taube and Neil I
Sell, were directors of Stratosphere Corporation through July 31, 1997, and with
the exception that Mr. Taube resigned as an officer and director of Grand on
February 22, 1998, are also directors of Grand. Lyle Berman is also an executive
officer of Grand. Mr. Berman, Mr. Taube and Mr. Sell resigned as directors of
Stratosphere Corporation on July 31, 1997.
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
56
<PAGE> 57
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. Grand will have no effective control over reorganized
Stratosphere Corporation and will not own any equity in the reorganized entity.
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 year ended 1996. No fees were
paid or incurred during fiscal year 1997. In connection with the construction of
the Company's facility and its normal operations, approximately $3,842,965 of
assets were purchased from Grand Media & Electronics, a wholly owned subsidiary
of Grand Casinos, Inc. Purchases during fiscal year 1997 were $187,041. Actions
have been filed in Bankruptcy Court for the review of the payments of $2,318,873
and $3,842,965 to Grand and Grand Media & Electronics as improper preference
amounts
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 certain equity securities, on non-cumulative
basis, 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 dollars 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. On February
19, 1998, the Bankruptcy Court determined that the Standby Equity Commitment was
an executory contract that the Company could not assume due to its inability to
perform and therefore, it was determined that the Company could not compel Grand
to perform under its obligation to the agreement.
Neil I. Sell, a former 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.
57
<PAGE> 58
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
Consolidated Balance Sheets as of December 28, 1997 and December 29,
1996
Consolidated Statements of Operations for the fiscal years ended
December 28, 1997, December 29, 1996 and December 31, 1995
Consolidated Statements of Shareholders' Equity for the period from
January 1, 1995 through December 28, 1997
Consolidated Statements of Cash Flows for the fiscal years ended
December 28, 1997, December 29, 1996 and December 31, 1995
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
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
2(1) 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)
2(2) Amended and Restated Investment and Reorganization Agreement
among the Company, Stratosphere Gaming Corp. and Grand
Casinos, Inc., dated as of June 20, 1997.(k)
2(3) The Company's First Amended Plan of Reorganization.(k)
2(4) Disclosure Statement to accompany the Company's Second
Amended Plan of Reorganization.(l)
2(5) The Company's Restated Second Amended Plan of
Reorganization, dated February 26, 1998.
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)
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)
</TABLE>
58
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
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 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 November 1,
1994.(d)
</TABLE>
59
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
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.(c)
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)
</TABLE>
60
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10(46) Guaranty, dated as of 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 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.(i)
10(56) Senior Executive Severance Agreement, dated as of November
19, 1996 by and between Richard Schuetz and the Company.(j)
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)
10(58) Senior Executive Retention Agreement, dated as of January 23
by and between Thomas Lettero and the Company.
10(59) Senior Executive Retention Agreement, dated as of January 23
by and between Andrew S. Blumen and the Company.
21 Subsidiaries
27 Financial Data Schedule
</TABLE>
- -------------------------
(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.
61
<PAGE> 62
(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.
(j) Incorporated herein by reference to the Company's Annual Report on Form 10-K
for the year ended December 29, 1996.
(k) Incorporated herein by reference to the Company's Current Report on Form 8-K
dated June 26, 1997.
(l) Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1997.
+ 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 28, 1997.
62
<PAGE> 1
EXHIBIT 2(5)
GORDON & SILVER, LTD.
GERALD M. GORDON, ESQ.
Nevada Bar No. 229
THOMAS H. FELL, ESQ.
Nevada Bar No. 3717
3800 Howard Hughes Parkway
14th Floor
Las Vegas, Nevada 89109
Tel: (702) 796-5555
Counsel to STRATOSPHERE CORPORATION
and STRATOSPHERE GAMING CORP.,
Debtors-In-Possession
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEVADA
In re: )
) In Proceedings Under Chapter 11
STRATOSPHERE CORPORATION, )
a Delaware corporation, ) CASE NO. 97-20554 GWZ
)
Debtor. ) (Joint Administration Only)
_________________________________)
In re: )
) CASE NO. 97-20555 GWZ
STRATOSPHERE GAMING CORP., )
a Nevada corporation, )
) Date: 5/15/98
Debtor. ) Time: 9:30 a.m.
_________________________________)
DEBTORS' RESTATED SECOND AMENDED PLAN OF REORGANIZATION
DATED FEBRUARY 26, 1998
1
<PAGE> 2
TABLE OF CONTENTS
1. DEFINITIONS, RULES OF INTERPRETATION AND COMPUTATION OF TIME.............7
1.1. DEFINITIONS.........................................................7
1.1.1. ADMINISTRATIVE CLAIM.......................................7
1.1.2. ADMINISTRATIVE CLAIM BAR DATE..............................8
1.1.3. AFFILIATE..................................................8
1.1.4. ALLOWED CLAIM..............................................8
1.1.5. ALTERNATIVE TRANSACTIONS PROPOSAL..........................8
1.1.6. AMENDED CAPITAL LEASE AGREEMENT............................8
1.1.7. AMENDED HELLER CAPITAL LEASE...............................9
1.1.8. AMENDED PARTICIPATION AGREEMENT............................9
1.1.9. AMERICAN REAL ESTATE PARTNERS, L.P.........................9
1.1.10. APPROVED NOTEHOLDERS.......................................9
1.1.11. AVOIDANCE ACTIONS..........................................9
1.1.12. BALLOT.....................................................9
1.1.13. BANKRUPTCY CODE............................................9
1.1.14. BANKRUPTCY COURT...........................................9
1.1.15. BANKRUPTCY RULES...........................................9
1.1.16. BOARD OF DIRECTORS.........................................9
1.1.17. BAR DATE...................................................9
1.1.18. BUSINESS DAY ..... .......................................10
1.1.19. CAPITAL LEASE BANK GROUP .................................10
1.1.20. CAPITAL LEASE CLAIMS .....................................10
1.1.21. CASH......................................................10
1.1.22. CHAPTER 11 CASES .........................................10
1.1.23. CLAIM.... ................................................10
1.1.24. CLASS.... ................................................10
1.1.25. CONFIRMATION .............................................10
1.1.26. CONFIRMATION DATE ........................................11
1.1.27. CONFIRMATION HEARING......................................11
1.1.28. CONFIRMATION ORDER .......................................11
1.1.29. CONTINGENT CLAIM .........................................11
1.1.30. CREDITOR. ................................................11
1.1.31. CREDITORS' COMMITTEE .....................................11
1.1.32. CURE..... ................................................11
1.1.33. DEBT INSTRUMENT ..........................................11
1.1.34. DEBTORS.. ................................................11
1.1.35. DEBTORS-OWNED STANDBY EQUITY COMMITMENT CLAIMS ...........11
1.1.36. DISBURSING AGENT .........................................12
1.1.37. DISCLOSURE STATEMENT .....................................12
1.1.38. DISPUTED CLAIM ...........................................12
1.1.39. DISTRIBUTION DATE ........................................12
1.1.40. DISTRIBUTION RECORD DATE .................................12
1.1.41. EFFECTIVE DATE ...........................................12
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1.1.42. EFFECTIVE DATE CASH.......................................13
1.1.43. EQUITY INTEREST ..........................................13
1.1.44. EQUITY INTEREST - RELATED CLAIM ..........................13
1.1.45. ESTATE....................................................13
1.1.46. FINAL ORDER ..............................................13
1.1.47. FIRST SECURITY ...........................................13
1.1.48. GAMING AUTHORITIES .......................................13
1.1.49. GAMING BOARD .............................................13
1.1.50. GAMING COMMISSION ........................................13
1.1.51. GAMING CORP ..............................................13
1.1.52. GAMING CORP. COMMON STOCK ................................13
1.1.53. GENERAL UNSECURED CLAIM ..................................14
1.1.54. GRAND.....................................................14
1.1.55. GRAND SUBORDINATED CLAIM .................................14
1.1.56. HELLER....................................................14
1.1.57. HELLER CAPITAL LEASE .....................................14
1.1.58. HELLER CAPITAL LEASE CLAIMS ..............................14
1.1.59. HIGH RIVER LIMITED PARTNERSHIP ...........................14
1.1.60. INDENTURE TRUSTEE ........................................14
1.1.61. INTERIM MANAGEMENT AGREEMENT .............................14
1.1.62. INTERIM APPROVAL PERIOD ..................................15
1.1.63. IRS.......................................................15
1.1.64. LITIGATION CLAIMS ........................................15
1.1.65. LITIGATION LLC ...........................................15
1.1.66. LITIGATION LLC BOARD OF MANAGERS .........................15
1.1.67. LITIGATION LLC MEMBERS AGREEMENT .........................15
1.1.68. LITIGATION LLC SHARES.....................................15
1.1.69. MAJORITY ORIGINAL HOLDERS ................................15
1.1.70. NEW COMMON STOCK .........................................15
1.1.71. NEW COMMON STOCK REGISTRATION RIGHTS AGREEMENT. ..........16
1.1.72. NOTEHOLDERS COMMITTEE ....................................16
1.1.73. NOTEHOLDERS' LITIGATION CLAIMS ...........................16
1.1.74. NOTICE AND A HEARING .....................................16
1.1.75. OLD COMMON STOCK .........................................16
1.1.76. ORIGINAL CAPITAL LEASE AGREEMENT .........................16
1.1.77. ORIGINAL FIRST MORTGAGE INDENTURE ........................16
1.1.78. ORIGINAL FIRST MORTGAGE NOTES ............................16
1.1.79. ORIGINAL FIRST MORTGAGE SECURITY DOCUMENTS ...............16
1.1.80. ORIGINAL PARTICIPATION AGREEMENT .........................17
1.1.81. ORIGINAL SUBORDINATION AGREEMENT .........................17
1.1.82. ORIGINAL SUBSIDIARY GUARANTEE ............................17
1.1.83. PERSON ...................................................17
1.1.84. PETITION DATE ............................................17
1.1.85. PHASE II .................................................17
1.1.86. PLAN .....................................................17
1.1.87. PLAN DISTRIBUTED CASH ....................................17
1.1.88. PLAN SUPPLEMENT ..........................................17
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1.1.89. PRESERVED ORDINARY COURSE ADMINISTRATIVE CLAIM............18
1.1.90. PRIORITY BENEFIT PLAN CONTRIBUTION CLAIM .................18
1.1.91. PRIORITY CUSTOMER DEPOSITS CLAIM .........................18
1.1.92. PRIORITY TAX CLAIM .......................................18
1.1.93. PRIORITY WAGE CLAIM ......................................18
1.1.94. PROFESSIONAL FEE BAR DATE ................................18
1.1.95. PROFESSIONAL FEES ........................................18
1.1.96. PRO RATA. ................................................18
1.1.97. RECLAMATION CLAIMS .......................................18
1.1.98. REINSTATED OR REINSTATEMENT ..............................19
1.1.99. RELIABLE STEEL ADVERSARY ACTION ..........................19
1.1.100. RELIABLE STEEL LIEN CLAIM ................................19
1.1.101. REORGANIZED GAMING CORP ..................................19
1.1.102. REORGANIZED GAMING CORP. ARTICLES ........................19
1.1.103. REORGANIZED GAMING CORP. BY-LAWS .........................19
1.1.104. REORGANIZED STRATOSPHERE .................................19
1.1.105. REORGANIZED STRATOSPHERE ARTICLES ........................20
1.1.106. REORGANIZED STRATOSPHERE BY-LAWS .........................20
1.1.107. SCHEDULES ................................................20
1.1.108. SEC ......................................................20
1.1.109. SECURED CLAIM ............................................20
1.1.110. SECURED TAX CLAIMS .......................................20
1.1.111. SECURITIES ACT ...........................................20
1.1.112. SKY HIGH. ................................................20
1.1.113. STAND-BY EQUITY COMMITMENT ...............................20
1.1.114. STATUTORY COMMITTEE ......................................20
1.1.115. STOCKHOLDERS' AGREEMENT ..................................20
1.1.116. STRATOSPHERE. ............................................20
1.1.117. STUPAK ...................................................21
1.1.118. SUBORDINATED CLAIM .......................................21
1.1.119. TAXES ....................................................21
1.1.120. VOTING RECORD DATE .......................................21
1.1.121. UNAPPROVED NOTEHOLDERS ...................................21
1.2. COMPUTATION OF TIME ...............................................21
1.3. RULES OF INTERPRETATION ...........................................21
2. TREATMENT OF UNCLASSIFIED CLAIMS .......................................22
2.1. GENERAL ...........................................................22
2.2. TREATMENT OF ADMINISTRATIVE CLAIMS ................................22
2.2.1. GENERALLY...................................................22
2.2.2. REQUESTS FOR PAYMENT .......................................22
2.3. PRESERVED ORDINARY COURSE ADMINISTRATIVE CLAIMS....................22
2.4. ALLOWED PRIORITY TAX CLAIMS .......................................23
2.5. ALLOWED RECLAMATION CLAIMS ........................................23
3. DESIGNATION OF CLASSES OF CLAIMS AND EQUITY INTERESTS...................23
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<TABLE>
<CAPTION>
<S><C>
3.1. SUMMARY OF CLASSIFICATION............................................24
3.2. SPECIFIC CLASSIFICATION .............................................24
3.2.1. CLASS 1 - PRIORITY WAGE CLAIMS..............................24
3.2.2. CLASS 2 - PRIORITY BENEFIT PLAN CONTRIBUTION CLAIMS ........25
3.2.3. CLASS 3 - PRIORITY CUSTOMER DEPOSIT CLAIMS .................25
3.2.4. CLASS 4 - SECURED TAX CLAIMS ...............................25
3.2.5. CLASS 5 - MISCELLANEOUS SECURED CLAIMS .....................25
3.2.6. CLASS 6 - ORIGINAL FIRST MORTGAGE NOTE CLAIMS ..............25
3.2.7. CLASS 7 - HELLER CAPITAL LEASE CLAIMS ......................25
3.2.8. CLASS 8 - CAPITAL LEASE CLAIMS .............................25
3.2.9. CLASS 9 - GENERAL UNSECURED CLAIMS .........................25
3.2.10. CLASS 10 - RELIABLE STEEL LIEN CLAIM .......................25
3.2.11. CLASS 11 - GAMING CORP. COMMON STOCK .......................25
3.2.12. CLASS 12 - EQUITY INTERESTS AND EQUITY INTEREST
RELATED CLAIMS............................................. 25
4. DESIGNATION OF AND PROVISIONS FOR TREATMENT OF CLASSES OF
CLAIMS NOT IMPAIRED BY THIS PLAN..............................................25
4.1. CLASS 1 - PRIORITY WAGE CLAIMS.......................................25
4.2. CLASS 2 - PRIORITY BENEFIT PLAN CONTRIBUTION CLAIMS .................26
4.3. CLASS 3 - PRIORITY CUSTOMER DEPOSIT CLAIMS ..........................26
4.4. CLASS 4 - SECURED TAX CLAIMS ........................................26
4.5. CLASS 5 - MISCELLANEOUS SECURED CLAIMS ..............................26
4.6. CLASS 11 - GAMING CORP. COMMON STOCK. ...............................27
5. DESIGNATION OF AND PROVISIONS FOR TREATMENT OF CLASSES OF
CLAIMS AND EQUITY INTERESTS IMPAIRED BY THIS PLAN.............................27
5.1. CLASS 6 - ORIGINAL FIRST MORTGAGE NOTES..............................27
5.1.1. DISTRIBUTIONS...............................................27
5.1.2. DISBURSING AGENT ...........................................28
5.1.3. SURRENDER OF SECURITIES OR DEBT INSTRUMENTS ................28
5.1.4. DISTRIBUTION RECORD DATE ...................................29
5.1.5. DELIVERY OF DISTRIBUTIONS ..................................29
5.1.6. FEES AND EXPENSES ..........................................30
5.1.7. SECTION 363 (K) RIGHT TO CREDIT BID ........................30
5.2. CLASS 7 - HELLER CAPITAL LEASE CLAIMS................................30
5.3. CLASS 8 - CAPITAL LEASE CLAIMS ......................................30
5.4. CLASS 9 - GENERAL UNSECURED CLAIMS ..................................31
5.5. CLASS 10 - RELIABLE STEEL LIEN CLAIM ................................31
5.6. CLASS 12 - EQUITY INTERESTS AND EQUITY INTERESTS RELATED
CLAIMS ...................................................31
6. MEANS FOR IMPLEMENTATION OF PLAN..............................................31
6.1. NEW COMMON STOCK.....................................................31
6.2. CANCELLATION OF OLD COMMON STOCK ....................................31
6.3. SATISFACTION OF ORIGINAL FIRST MORTGAGE NOTES AND ORIGINAL FIRST
MORTGAGE SECURITY DOCUMENTS .........................................32
6.3.1. NO FRACTIONAL SHARES..........................................32
</TABLE>
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6.4. INTERIM MANAGEMENT AGREEMENT...................................32
6.5. PHASE II ......................................................32
6.6. NEW CERTIFICATE OF INCORPORATION AND BYLAWS ...................33
6.7. NO CORPORATE ACTION REQUIRED ..................................33
6.8. DIRECTORS AND OFFICERS ........................................33
6.9. POST-EFFECTIVE DATE FINANCING .................................34
6.10. DUTIES OF INDENTURE TRUSTEE ...................................34
7. EXECUTORY CONTRACTS AND UNEXPIRED LEASES................................34
7.1. EXECUTORY CONTRACTS............................................34
7.2. UNEXPIRED LEASES ..............................................35
7.3. APPROVAL OF ASSUMPTION OR REJECTION ...........................35
7.4. CURE OF DEFAULTS ..............................................35
7.5. POST-PETITION DATE CONTRACTS AND LEASES .......................36
7.6. BAR DATE ......................................................36
7.7. INDEMNIFICATION OBLIGATIONS ...................................36
8. LITIGATION LLC..........................................................36
8.1. PRESERVATION OF LITIGATION CLAIMS..............................36
8.2. ESTABLISHMENT OF LITIGATION LLC ...............................36
8.3. DISTRIBUTION OF LITIGATION LLC FUNDS ..........................37
9. EFFECTIVE DATE TRANSACTIONS.............................................37
10. CONDITIONS PRECEDENT ...................................................37
10.1. CONDITIONS TO CONFIRMATION.....................................37
10.2. CONDITIONS TO EFFECTIVENESS ...................................38
10.3. WAIVER OF CONDITIONS ..........................................38
11. TITLE TO PROPERTY; DISCHARGE; INJUNCTION................................39
11.1. REVESTING OF ASSETS............................................39
11.2. DISCHARGE .....................................................39
11.3. INJUNCTION ....................................................39
11.4. EXCULPATION ...................................................40
12. RETENTION OF JURISDICTION...............................................40
12.1. JURISDICTION...................................................40
13. MODIFICATION AND AMENDMENT OF PLAN; ALTERNATIVE TRANSACTIONS............42
13.1. MODIFICATION AND AMENDMENT.....................................42
13.1.1. ALTERNATIVE TRANSACTIONS..............................42
14. MISCELLANEOUS...........................................................43
14.1. FILING OF OBJECTIONS TO CLAIMS.................................43
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14.2. RESOLUTION OF OBJECTIONS AFTER EFFECTIVE DATE; DISTRIBUTIONS...43
14.2.1. RESOLUTION OF OBJECTIONS..............................43
14.2.2. DISTRIBUTIONS.........................................43
14.3. EFFECTUATING DOCUMENTS; FURTHER TRANSACTIONS; TIMING...........44
14.4. EXEMPTION FROM TRANSFER TAXES .................................44
14.5. REVOCATION OR WITHDRAWAL OF THIS PLAN .........................44
14.6. BINDING EFFECT ................................................44
14.7. GOVERNING LAW .................................................44
14.8. INTERCOMPANY CLAIMS ...........................................45
14.9. MODIFICATION OF PAYMENT TERMS .................................45
14.10. PROVIDING FOR CLAIMS PAYMENTS .................................45
14.11. SET OFFS ......................................................45
14.12. NOTICES .......................................................46
14.13. STATUTORY COMMITTEE ...........................................47
14.14. SEVERABILITY ..................................................47
14.15. WITHHOLDING AND REPORTING REQUIREMENTS ........................48
14.16. POST CONFIRMATION REPORTING ...................................48
14.17. CRAMDOWN. .....................................................48
14.18. QUARTERLY FEES TO THE UNITED STATES TRUSTEE. ..................48
vi
<PAGE> 8
Stratosphere Corporation ("Stratosphere") and Stratosphere Gaming Corp.
("Gaming Corp."), the debtors and debtors-in-possession in the above-captioned
Chapter 11 reorganization cases (collectively, the "Debtors") jointly propose
this Restated Second Amended Plan of Reorganization ("Plan") for the resolution
of the Debtors' outstanding Claims, Equity Interests and Gaming Corp. Common
Stock (as these terms are defined herein). All creditors and other
parties-in-interest should refer to the Disclosure Statement (as this term is
defined herein) for a discussion of the Debtors' history, business, properties,
results of operations and financial projections for future operations and for a
summary and analysis of this Plan and certain related matters.
ALL HOLDERS OF CLAIMS AGAINST AND EQUITY INTERESTS IN THE DEBTORS ARE
ENCOURAGED TO READ THIS PLAN, THE DISCLOSURE STATEMENT AND THE RELATED
SOLICITATION MATERIALS IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR
REJECT THIS PLAN.
Subject to the restrictions on modifications set forth in Section 1127
of the Bankruptcy Code and Bankruptcy Rule 3019, and those restrictions on
modifications set forth in Article 13 to this Plan, the Debtors expressly
reserve the right to alter, amend, strike, withdraw or modify this Plan, one or
more times before its substantial consummation.
1. DEFINITIONS, RULES OF INTERPRETATION AND COMPUTATION OF TIME
1.1. DEFINITIONS. For purposes of this Plan, except as expressly
provided or unless the context otherwise requires, all
capitalized terms not otherwise defined shall have the
meanings ascribed to them in this Article 1. Any term used in
this Plan that is not defined herein, but is defined in the
Bankruptcy Code or the Bankruptcy Rules, shall have the
meaning ascribed to that term in the Bankruptcy Code or the
Bankruptcy Rules. Whenever the context requires, such terms
shall include the plural as well as the singular, the
masculine gender shall include the feminine, and the feminine
gender shall include the masculine. As used in this Plan, the
following terms shall have the meanings specified below:
1.1.1. ADMINISTRATIVE CLAIM. A Claim for any cost or expense
of administration of the Chapter 11 Cases allowed
under Sections 503(b), 507(b) or 546(c)(2) of the
Bankruptcy Code and entitled to priority under
Section 507(a)(1) of the Bankruptcy Code, including,
but not limited to: (i) fees payable pursuant to
Section 1930 of Title 28 of the United States Code;
(ii) the actual and necessary costs and expenses
incurred after the Petition Date of preserving the
Estates, including wages, salaries, or commissions
for services rendered after the commencement of the
Chapter 11 Cases; and (iii) all Professional Fees
approved by the Bankruptcy Court pursuant to interim
and final allowances. To the extent that a Claim is
allowed as an Administrative Claim pursuant to
Section 365(d)(3) of the Bankruptcy Code, such Claim
shall also be deemed an "Administrative Claim" under
this section.
7
<PAGE> 9
1.1.2. ADMINISTRATIVE CLAIM BAR DATE. The date or dates
established by the Bankruptcy Court for the filing of
Administrative Claims, excepting therefrom Claims for
Professional Fees and Preserved Ordinary Course
Administrative Claims.
1.1.3. AFFILIATE. This term will refer to and mean with
respect to any specified Person, any other Person
directly or indirectly controlling or controlled by
or under direct or indirect common control with such
Person, and, with respect to any specified natural
Person, any other Person having a relationship by
blood, marriage or adoption not more remote than
first cousins with such natural Person. For purposes
of this definition, "control" (including, with
correlative meanings, the terms "controlled by" and
"under common control with"), as used with respect to
any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the
direction of the management or policies of such
Person, whether through the ownership of voting
securities, by agreement or otherwise.
1.1.4. ALLOWED CLAIM. Any Claim, or any portion thereof,
against the Debtors: (i) proof of which, requests for
payment of which, or application for allowance of
which, was filed or deemed to be filed on or before
the Bar Date, Administrative Claim Bar Date or the
Professional Fee Bar Date, as the case may be, for
filing proofs of Claim or requests for payment for
Claims of such type against the Debtors; (ii) if no
proof of Claim is filed, which has been or hereafter
is listed by the Debtors in the Schedules as
liquidated in amount and not disputed or contingent;
or (iii) that is allowed in any contract, instrument,
indenture or other agreement entered into in
connection with this Plan and, in any case, a Claim
as to which no objection to the allowance thereof has
been interposed within the applicable period of
limitation fixed by this Plan, the Bankruptcy Code,
the Bankruptcy Rules or the Bankruptcy Court. The
term "Allowed," when used to modify a reference in
this Plan to any Claim or Class of Claims, shall mean
a Claim (or any Claim in any such Class) that is so
allowed, e.g. an "Allowed Secured Claim" is a Claim
that has been allowed to the extent of the value, as
determined by the Bankruptcy Court pursuant to
Section 506(a) of the Bankruptcy Code, of any
interest in property of the Estate of the Debtors
securing such Claim.
1.1.5. ALTERNATIVE TRANSACTION PROPOSAL. A written
restructuring proposal that is received by the
Debtors prior to the Confirmation Hearing as an
alternative to this Plan.
1.1.6. AMENDED CAPITAL LEASE AGREEMENT. The Amended and
Restated Lease Agreement to be entered into on the
Effective Date by Reorganized Gaming Corp. and First
Security, which is one of the documents pursuant to
which the Capital Lease Claims will be restructured.
The Amended Capital Lease Agreement shall be
substantially in the form filed with the Bankruptcy
Court as part of the Plan Supplement.
8
<PAGE> 10
1.1.7. AMENDED HELLER CAPITAL LEASE. The Amended and
Restated Lease Agreement Intended As Security
Agreement to be entered into on the Effective Date by
Reorganized Gaming Corp. and Heller, pursuant to
which the Heller Capital Lease Claims will be
restructured. The Amended Heller Capital Lease shall
be substantially in the form filed with the
Bankruptcy Court as part of the Plan Supplement.
1.1.8. AMENDED PARTICIPATION AGREEMENT. The Amended and
Restated Participation Agreement to be entered into
on the Effective Date by Reorganized Stratosphere,
Reorganized Gaming Corp., First Security, and the
Capital Lease Bank Group, which is one of the
documents pursuant to which the Capital Lease Bank
Claims will be restructured. The Amended
Participation Agreement shall be substantially in the
form filed with the Bankruptcy Court as part of the
Plan Supplement.
1.1.9. AMERICAN REAL ESTATE PARTNERS, L.P. American Real
Estate Partners, L.P., a Delaware limited
partnership, and its successors and assigns.
1.1.10. APPROVED NOTEHOLDERS. Majority Original Holders of
Allowed Original First Mortgage Notes Claims who have
received the requisite approval of the Gaming
Authorities to own a Pro Rata share of the New Common
Stock issued under this Plan.
1.1.11. AVOIDANCE ACTIONS. This term refers to and means all
actions preserved for the Estates set forth in
Sections 510, 542, 543, 544, 545, 547, 548, 549 and
550 of the Bankruptcy Code.
1.1.12. BALLOT. The form of ballot or ballots that will be
distributed with the Disclosure Statement to holders
of Claims entitled to vote under this Plan in
connection with solicitation of acceptances of this
Plan.
1.1.13. BANKRUPTCY CODE. The Bankruptcy Reform Act of 1978,
Title 11, United States Code, as applicable to the
Chapter 11 Cases, as now in effect or hereafter
amended, 11 U.S.C. Sections 101 et seq.
1.1.14. BANKRUPTCY COURT. The Bankruptcy Court of the United
States District Court for the District of Nevada or
such other court as may have jurisdiction over the
Chapter 11 Cases.
1.1.15. BANKRUPTCY RULES. Collectively, the Federal Rules of
Bankruptcy Procedure, the local rules of the
Bankruptcy Court and the Federal Rules of Civil
Procedure, as applicable to the Chapter 11 Cases, as
now in effect or hereinafter amended.
1.1.16. BOARD OF DIRECTORS. This term refers to and means the
duly constituted and acting directors of
Stratosphere.
1.1.17. BAR DATE. The date or dates established by the
Bankruptcy Court for
9
<PAGE> 11
the filing of proofs of Claim for all Creditors,
including the holders of Reclamation Claims, if any,
excepting therefrom, Administrative Claims, Preserved
Ordinary Course Administrative Claims, and Claims for
Professional Fees.
1.1.18. BUSINESS DAY. Any day other than a Saturday, Sunday
or other day on which commercial banks in Clark
County, Nevada are authorized or required by law to
close.
1.1.19. CAPITAL LEASE BANK GROUP. Collectively, Bank of
Scotland, Wells Fargo Bank, National Association
(successor by merger to First Interstate Bank of
Nevada), Societe Generale, Credit Lyonnais (Los
Angeles Branch), BA Leasing and Capital Corporation,
First Security, The CIT Group/Equipment Financing,
Inc., United States National Bank of Oregon, The
First National Bank of Boston, Imperial Bank, and
Trustmark National Bank and their respective
successors and assigns.
1.1.20. CAPITAL LEASE CLAIMS. Any and all indebtedness of the
Debtors to First Security and the Capital Lease Bank
Group arising out of or evidenced by: (i) the
Original Participation Agreement; (ii) the Original
Capital Lease Agreement; (iii) that certain Loan
Agreement dated as of April 29, 1996; (iv) that
certain Standstill and Amendment Agreement dated as
of October 31, 1996; and (v) any and all loan and
security documents, including, but not limited to,
Debt Instruments, evidencing, securing, or relating
in any way to such Capital Lease Claims.
1.1.21. CASH. Currency, checks, negotiable instruments and
wire transfers of immediately available funds.
1.1.22. CHAPTER 11 CASES. The cases under Chapter 11 of the
Bankruptcy Code in which Stratosphere and Gaming
Corp. are the debtors and debtors-in-possession
pending before the Bankruptcy Court, including all
adversary proceedings pending in connection
therewith.
1.1.23. CLAIM. Any right to payment from the Debtors, whether
or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured or
unsecured arising at any time before the Effective
Date or relating to any event that occurred before
the Effective Date; or any right to an equitable
remedy for breach of performance if such breach gives
rise to a right of payment from the Debtors, whether
or not such right to an equitable remedy is reduced
to judgment, fixed, contingent, matured, unmatured,
disputed, undisputed, secured or unsecured.
1.1.24. CLASS. A category of holders of Claims, Equity
Interests or Gaming Corp. Common Stock as classified
in this Plan.
1.1.25. CONFIRMATION. The entry by the Bankruptcy Court of
the Confirmation
10
<PAGE> 12
Order.
1.1.26. CONFIRMATION DATE. The date upon which the Bankruptcy
Court enters the Confirmation Order confirming this
Plan.
1.1.27. CONFIRMATION HEARING. The duly noticed hearing held
by the Bankruptcy Court on confirmation of this Plan
pursuant to Section 1128 of the Bankruptcy Code. The
Confirmation Hearing may be adjourned by the
Bankruptcy Court from time to time without further
notice other than the announcement of the adjourned
date at the Confirmation Hearing.
1.1.28. CONFIRMATION ORDER. The order entered by the
Bankruptcy Court confirming this Plan.
1.1.29. CONTINGENT CLAIM. A Claim which is either contingent,
unmatured or unliquidated on or immediately before
the Confirmation Date.
1.1.30. CREDITOR. Any holder of a Claim, whether or not such
Claim is an Allowed Claim, encompassed within the
statutory definition set forth in Section 101(a)(10)
of the Bankruptcy Code.
1.1.31. CREDITORS' COMMITTEE. Any Official Committee of
General Unsecured Creditors appointed by the United
States Trustee in the Chapter 11 Cases pursuant to
Section 1102(a)(1) of the Bankruptcy Code.
1.1.32. CURE. The distribution on the Effective Date or as
soon thereafter as practicable of Cash, or such other
property as may be agreed upon by the parties or
ordered by the Bankruptcy Court, with respect to the
assumption of an executory contract or unexpired
lease, pursuant to Section 365(b) of the Bankruptcy
Code, in an amount equal to all unpaid monetary
obligations, without interest, or such other amount
as may be agreed upon by the parties, under such
executory contract or unexpired lease, to the extent
such obligations are enforceable under the Bankruptcy
Code and applicable bankruptcy law.
1.1.33. DEBT INSTRUMENT. A debenture, bond, promissory note,
note or other transferable instrument or document
evidencing any payment obligation.
1.1.34. DEBTORS. Collectively, Stratosphere and Gaming Corp.,
as the debtors-in-possession in the Chapter 11 Cases,
pursuant to Sections 1107 and 1108 of the Bankruptcy
Code.
1.1.35. DEBTORS-OWNED STANDBY EQUITY COMMITMENT CLAIMS The
litigation (including any appeals) commenced by the
Motion of the Official Committee of Noteholders for
(1) Standing to Request Assumption on Behalf of
Debtors' Estate of Standby Equity Commitment with
Grand Casinos, Inc. and (2) an Order Authorizing Such
Assumption Pursuant to Section 365 of the Bankruptcy
Code and any other claims of the Estates
11
<PAGE> 13
against Grand with respect to the Standby Equity
Commitment.
1.1.36. DISBURSING AGENT. Reorganized Stratosphere or such
other Person as may be retained by the Reorganized
Stratosphere and approved by the Bankruptcy Court, to
hold and distribute certain consideration to the
holders of Unclassified Claims and Allowed Claims in
Classes 1, 2, 3, 4, 5, 7, 8, 9 and 10 of this Plan.
With respect to distributions of New Common Stock to
the holders of Original First Mortgage Notes as part
of Class 6, the Indenture Trustee shall be the
Disbursing Agent.
1.1.37. DISCLOSURE STATEMENT. The written disclosure
statement that relates to this Plan, as approved by
the Bankruptcy Court pursuant to Section 1125 of the
Bankruptcy Code and Bankruptcy Rule 3017, as such
disclosure statement may be amended, modified or
supplemented from time to time.
1.1.38. DISPUTED CLAIM. A Claim which is: (i) subject to
timely objection interposed by the Debtors or any
party in interest entitled to file and prosecute such
objection in the Chapter 11 Cases, if at such time
such objection remains unresolved; (ii) a Claim that
is listed by the Debtors as disputed, unliquidated or
contingent in the Schedules; or (iii) if no objection
has been timely filed, a Claim which has been
asserted in a timely filed proof of Claim in an
amount greater than or in a Class different than that
listed by the Debtors in the Schedules as liquidated
in amount and not disputed or contingent; provided,
however, that the Bankruptcy Court may estimate a
Disputed Claim for purposes of allowance pursuant to
Section 502(c) of the Bankruptcy Code. The term
"Disputed", when used to modify a reference in this
Plan to any Claim or Class of Claims, shall mean a
Claim (or any Claim in such Class) that is a Disputed
Claim as defined herein. In the event there is a
dispute as to classification or priority of a Claim,
it shall be considered a Disputed Claim in its
entirety. Until such time as a Contingent Claim
becomes fixed and absolute, such Claim shall be
treated as a Disputed Claim and not an Allowed Claim
for purposes related to allocations and distributions
under this Plan.
1.1.39. DISTRIBUTION DATE. The date, occurring as soon as
practicable after the Effective Date, upon which
distributions are made to holders of Allowed Claims
under this Plan.
1.1.40. DISTRIBUTION RECORD DATE. The date or dates
established by the Bankruptcy Court, which shall be
the Record Date or Dates for determining the holders
of the Original First Mortgage Notes entitled to
receive distributions under this Plan in Class 6 and
Class 9.
1.1.41. EFFECTIVE DATE. The last to occur of: (i) the first
Business Day that is at least eleven (11) days after
the Confirmation Date and on which no stay of the
Confirmation Order is in effect and (ii) the Business
Day on which all of the conditions set forth in
Article 12 to this Plan have been satisfied
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or waived.
1.1.42. EFFECTIVE DATE CASH. All Cash of the Debtors on the
Effective Date prior to distribution or reservation
of any amounts under this Plan.
1.1.43. EQUITY INTEREST. Any interest in Stratosphere,
including Old Common Stock, represented by any class
or series of common or preferred stock issued by
Stratosphere prior to the Effective Date and any
warrants, options, redemption rights, dividend
rights, liquidation preferences or rights to purchase
any such common or preferred stock.
1.1.44. EQUITY INTEREST - RELATED CLAIM. Any Claim arising
from the rescission of a purchase or sale of an
Equity Interest, or for damages arising from the
purchase or sale of an Equity Interest, or any Claim
by any Person that asserts equitable or contractual
rights of reimbursement, contribution or
indemnification arising from such Claim.
1.1.45. ESTATE. Collectively, the estates created for the
Debtors in the Chapter 11 Cases, pursuant to Section
541 of the Bankruptcy Code.
1.1.46. FINAL ORDER. An order or judgment which has not been
reversed, stayed, modified or amended and is no
longer subject to appeal, certiorari proceeding or
other proceeding for review or rehearing, and as to
which no appeal, certiorari proceeding, or other
proceeding for review or rehearing shall then be
pending.
1.1.47. FIRST SECURITY. First Security Trust Company of
Nevada, and its successors and assigns.
1.1.48. GAMING AUTHORITIES. Collectively, the Gaming Board,
the Gaming Commission, and any other regulatory
agency having the authority to regulate the gaming
activities of the Debtors.
1.1.49. GAMING BOARD. The State of Nevada Gaming Control
Board established pursuant to Nev. Rev. Stat
Section 463.010, et seq., as amended from time to
time.
1.1.50. GAMING COMMISSION. The State of Nevada Gaming
Commission established pursuant to Nev. Rev. Stat.
Section 463.010, et seq., as amended from time to
time.
1.1.51. GAMING CORP. Stratosphere Gaming Corp., a Nevada
corporation, one of the debtors and
debtors-in-possession in the Chapter 11 Cases pending
before the Bankruptcy Court.
1.1.52. GAMING CORP. COMMON STOCK. All of the common stock
issued by Gaming Corp. and held by Stratosphere,
including, if applicable, any warrants, options, or
rights to purchase any such common stock.
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1.1.53. GENERAL UNSECURED CLAIM. A Claim that is not secured
by a charge against or interest in property in which
the Debtors' Estate has an interest and not an
Administrative Claim, Priority Tax Claim, Reclamation
Claim, Priority Wage Claim, Priority Customer Deposit
Claim or Equity Interest- Related Claim.
1.1.54. GRAND. Grand Casinos, Inc., a Minnesota corporation,
and Affiliates (other than Debtors and their
subsidiaries).
1.1.55. GRAND SUBORDINATED CLAIM. Any and all indebtedness of
Stratosphere and Gaming Corp. to Grand, including but
not limited to, that indebtedness arising out of or
evidenced by: (i) that certain Notes Completion
Guarantee in the original amount of $50,000,000,
dated as of March 9, 1995; (ii) that certain
Completion Guarantor Subordination Agreement dated as
of March 9, 1995; (iii) any and all subordinated
notes issued to Grand by Stratosphere from time to
time; and (iv) any other loan and security documents,
including, but not limited to Debt Instruments,
evidencing, securing, or relating to such obligations
and Claims. In accordance with the Original
Subordination Agreement, the Grand Subordinated Claim
is owned by the Indenture Trustee for the benefit of
the holders of Original First Mortgage Notes.
1.1.56. HELLER. Heller Financial Group, Inc., a Delaware
corporation.
1.1.57. HELLER CAPITAL LEASE. The Lease Intended As Security
dated as of June 28, 1996 between Gaming Corp. and
Heller.
1.1.58. HELLER CAPITAL LEASE CLAIMS. Any and all indebtedness
of the Debtors to Heller arising out of or evidenced
by: (i) the Heller Capital Lease; and (ii) any and
all loan and security documents, including, but not
limited to Debt Instruments, evidencing, securing, or
relating in any way to such Heller Capital Lease.
1.1.59. HIGH RIVER LIMITED PARTNERSHIP. High River Limited
Partnership, a Delaware limited partnership, and its
successors and assigns.
1.1.60. INDENTURE TRUSTEE. IBJ Schroder Bank and Trust
Company, as Successor Trustee to American National
Bank Association, or such other successor trustee
under the Original First Mortgage Indenture.
1.1.61. INTERIM MANAGEMENT AGREEMENT. The management
agreement which (subject to requisite Gaming
Authority approvals) may be entered into prior to the
Confirmation Date by Stratosphere and Gaming Corp.
and an entity to be named by Stratosphere with each
of the Majority Original Holders' assistance and
consent pursuant to which the day-to-day operations
of Debtors shall be managed until the Effective Date.
The Interim Management Agreement shall be
substantially in the form filed with the Bankruptcy
Court as part of the Plan Supplement.
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1.1.62. INTERIM APPROVAL PERIOD. Any period of time from and
after the Effective Date when one, but not all, of
the Majority Original Holders is an Approved
Noteholder and has received its distribution of New
Common Stock under this Plan, until such date as all
Majority Original Holders become Approved Noteholders
and receive their distribution of New Common Stock
under this Plan.
1.1.63. IRS. The Internal Revenue Service.
1.1.64. LITIGATION CLAIMS. All rights, claims, torts, liens,
liabilities, obligations, actions, causes of action,
Avoidance Actions, avoiding powers, proceedings,
debts, contracts, judgments, damages and demands
whatsoever in law or in equity, whether known or
unknown, contingent or otherwise, that the Debtors or
the Estate may have against any Person, including but
not limited to, those listed on Exhibit "1" to this
Plan and the Debtors-Owned Standby Equity Commitment
Claims. Failure to list a Litigation Claim on Exhibit
1 to this Plan, shall not constitute a waiver or
release by the Debtors, Reorganized Stratosphere,
Reorganized Gaming Corp. of such Litigation Claim.
1.1.65. LITIGATION LLC. The Litigation LLC created pursuant
to this Plan and the Litigation LLC Members Agreement
for the purpose of pursuing the Noteholders'
Litigation Claims, the Litigation Claims (including
the Debtors-Owned Standby Equity Commitment Claims)
and paying all related expenses and for holding,
liquidating and distributing the assets of the
Litigation LLC pursuant to the Litigation LLC Members
Agreement with no objective to engage in the conduct
of a trade or business.
1.1.66. LITIGATION LLC BOARD OF MANAGERS. Three (3)
individuals who shall administer the Litigation LLC
pursuant to the terms of the Litigation LLC Members
Agreement.
1.1.67. LITIGATION LLC MEMBERS AGREEMENT. The Agreement
substantially in the form filed with the Bankruptcy
Court as part of the Plan Supplement evidencing the
Litigation LLC.
1.1.68. LITIGATION LLC SHARES. The Class A membership units
issued pursuant to this Plan and the Litigation LLC
Members Agreement evidencing the right to receive a
Pro Rata distribution from the Litigation LLC,
pursuant to the terms and conditions set forth in the
Litigation LLC Members Agreement which units shall be
freely transferable.
1.1.69. MAJORITY ORIGINAL HOLDERS. As of the date of the
filing of the Plan High River Limited Partnership,
American Real Estate Partners, L.P and Sky High.
1.1.70. NEW COMMON STOCK. The authorized shares of common
stock of Reorganized Stratosphere, par value of $.01
per share.
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1.1.71. NEW COMMON STOCK REGISTRATION RIGHTS AGREEMENT. The
agreement to be entered into on the Effective Date by
Reorganized Stratosphere and any holder of an Allowed
Original First Mortgage Notes Claim that will receive
more than ten percent (10%) of the New Common Stock
issued under this Plan upon receipt of requisite
approval from the Gaming Authorities. The New Common
Stock Registration Rights Agreement shall be
substantially in the form filed with the Bankruptcy
Court as part of the Plan Supplement.
1.1.72. NOTEHOLDERS COMMITTEE. The committee appointed by the
United States Trustee pursuant to Section 1102(a)(2)
of the Bankruptcy Code comprised of certain holders
of the Original First Mortgage Notes and the
Indenture Trustee.
1.1.73. NOTEHOLDERS' LITIGATION CLAIMS. All claims and causes
of action of the holders of Original First Mortgage
Notes and the Indenture Trustee that are assigned to
the Litigation LLC pursuant to Section 6.3 of this
Plan.
1.1.74. NOTICE AND A HEARING. This phrase shall have the same
meaning as provided for in Section 102(1) of the
Bankruptcy Code.
1.1.75. OLD COMMON STOCK. The shares of common stock, $.01
par value, of Stratosphere issued and outstanding
immediately prior to the Effective Date, and all
options, warrants and similar rights, whether
contractual or otherwise, to acquires such shares of
common stock, and all shares or other securities
convertible or otherwise exchangeable into such
shares of common stock.
1.1.76. ORIGINAL CAPITAL LEASE AGREEMENT. The Lease
Agreement, dated as of April 29, 1996, between Gaming
Corp., as Lessee, and First Security, as Lessor.
1.1.77. ORIGINAL FIRST MORTGAGE INDENTURE. The Indenture
dated as of March 9, 1995, among Stratosphere, Gaming
Corp., and IBJ Schroder Bank and Trust Company, as
Successor Trustee to American National Bank
Association, pursuant to which the Original First
Mortgage Notes were issued by Stratosphere.
1.1.78. ORIGINAL FIRST MORTGAGE NOTES. The 14-1/4% First
Mortgage Notes due 2002 with Contingent Interest, in
the original principal amount of $203,000,000, issued
by Stratosphere under the Original First Mortgage
Indenture.
1.1.79. ORIGINAL FIRST MORTGAGE SECURITY DOCUMENTS. The deed
of trust, security agreement, financing statements
and fixture filings dated as of March 9, 1995 and all
other documents executed by Debtors pursuant to the
Original First Mortgage Indenture to secure the
obligations evidenced
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by the Original First Mortgage Notes.
1.1.80. ORIGINAL PARTICIPATION AGREEMENT Agreement dated as
of April 29, 1996, among Stratosphere, Gaming Corp.,
First Security and the Capital Lease Bank Group.
1.1.81. ORIGINAL SUBORDINATION AGREEMENT. The Subordination
Agreement dated as of March 9, 1995 between Grand and
the Indenture Trustee.
1.1.82. ORIGINAL SUBSIDIARY GUARANTEE. The guarantee by
Gaming Corp. of the obligations of Stratosphere under
the Original First Mortgage Notes, which guarantee is
set forth in Section 11.01 of the Original First
Mortgage Notes Indenture.
1.1.83. PERSON. An individual, corporation, limited liability
company, partnership, association, joint stock
company, joint venture, estate, trust, unincorporated
organization or government, governmental unit or any
subdivision thereof or any other entity.
1.1.84. PETITION DATE. The date (i.e., January 27, 1997) on
which the Debtors filed their voluntary petitions
commencing the Chapter 11 Cases.
1.1.85. PHASE II. Stratosphere's planned construction of
additional facilities and improvements to existing
facilities, at its resort complex located in Las
Vegas, Nevada, consisting (subject to the final
determination of Reorganized Stratosphere) of: (i)
completion of construction of a new guest room tower
of approximately 1,000 bays, including the
acquisition of all necessary furniture, fixtures and
equipment; (ii) completion of recreation and swimming
pool facilities; (iii) landscape and hardscape at
areas adjacent to the new guest tower, including
facade upgrade of floors one through three; (iv)
landscape and fencing at site of proposed aquarium
building; (v) mechanical connection and piping from
the existing Phase I central plant, (vi) renovation
of existing resort facilities, including baggage
storage, gift shop and gift kiosk remodel, Sister's
Coffee Shop remodel, tower queue remodel, and porte
cochere modifications; and (vii) other modifications
as determined by Reorganized Stratosphere's board of
directors.
1.1.86. PLAN. This Second Amended Plan of Reorganization,
either in its present form or as it may be amended,
supplemented or modified from time to time, including
all exhibits and schedules annexed hereto or
referenced herein and the Plan Supplement.
1.1.87. PLAN DISTRIBUTED CASH. The Cash to be paid pursuant
to this Plan to the holders of Allowed Claims in all
Classes and Allowed unclassified Claims hereunder.
1.1.88. PLAN SUPPLEMENT. The supplement filed with the
Bankruptcy Court
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which contains additional exhibits to this Plan, as
such exhibits may be subsequently amended, modified
or supplemented. The Plan Supplement shall be a part
of this Plan as if such exhibits were set forth more
fully herein.
1.1.89. PRESERVED ORDINARY COURSE ADMINISTRATIVE CLAIM.
Administrative Claims that are based on liabilities
incurred by the Debtors in the purchase, lease or use
of goods and services in the ordinary course of their
business, including, but not limited to,
Administrative Claims due on account of services
provided to the Debtors after the Petition Date.
1.1.90. PRIORITY BENEFIT PLAN CONTRIBUTION CLAIM. Any Claim
entitled to priority in payment under Section
507(a)(4) of the Bankruptcy Code.
1.1.91. PRIORITY CUSTOMER DEPOSITS CLAIM. Any Claim entitled
to priority in payment under Section 507(a)(6) of the
Bankruptcy Code.
1.1.92. PRIORITY TAX CLAIM. Any Claim entitled to priority in
payment under Section 507(a)(8) of the Bankruptcy
Code.
1.1.93. PRIORITY WAGE CLAIM. Any Claim entitled to priority
in payment under Section 507(a)(3) of the Bankruptcy
Code.
1.1.94. PROFESSIONAL FEE BAR DATE. The date, as set by order
of the Bankruptcy Court, on or before which
applications for compensation or expense
reimbursement, including Professional Fees receivable
pursuant to Section 503(b), must be filed with the
Bankruptcy Court, and served on Reorganized
Stratosphere, Reorganized Gaming Corp. and their
counsel.
1.1.95. PROFESSIONAL FEES. The Administrative Claims for
compensation and reimbursement submitted pursuant to
Sections 330, 331 or 503(b) of the Bankruptcy Code of
Persons: (i) employed pursuant to an order of the
Bankruptcy Court under Sections 327 or 1103 of the
Bankruptcy Code; or (ii) for whom compensation and
reimbursement has been allowed by the Bankruptcy
Court pursuant to Section 503(b) of the Bankruptcy
Code, including, but not limited to, reasonable
professional fees and expenses incurred by the
Indenture Trustee and counsel to the Indenture
Trustee, that are not otherwise satisfied in
accordance with other provisions of this Plan.
1.1.96. PRO RATA. The ratio of an Allowed Claim or Allowed
Equity Interest in a particular class to the
aggregate amount of all such Allowed Claims or
Allowed Equity Interests in any such Class.
1.1.97. RECLAMATION CLAIMS. Any Claim against the Debtors by
any Person arising out of the sale of goods to the
Debtors, in the ordinary course of such Person's
business, provided that such Person has otherwise
satisfied the requirements of Section 546(c) of the
Bankruptcy Code and the
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Uniform Commercial Code, as applicable.
1.1.98. REINSTATED OR REINSTATEMENT. These terms shall mean:
(i) leaving unaltered the legal, equitable and
contractual rights of the holder of a Claim so as to
leave such Claim unimpaired in accordance with
Section 1124 of the Bankruptcy Code; or (ii)
notwithstanding any contractual provision or
applicable law that entitles the holder of such Claim
to demand or receive accelerated payment of such
Claim after the occurrence of a default: (a) Curing
any such default that occurred before or after the
Petition Date, other than a default of a kind
specified in Section 365(b)(2) of the Bankruptcy
Code; (b) reinstating the maturity of such Claim as
such maturity existed before such default; (c)
compensating the holder of such Claim for any damages
incurred as a result of any reasonable reliance by
such holder on such contractual provision or such
applicable law; and (d) not otherwise altering the
legal, equitable, or contractual rights to which such
Claim entitles the holder of such Claim; provided,
however, that any contractual right that does not
pertain to the payment when due of principal and
interest on the obligation on which such Claim is
based, including, but not limited to, financial
covenant ratios, negative pledge covenants, covenants
or restrictions on merger or consolidation, and
affirmative covenants regarding corporate existence
prohibiting certain transactions or actions
contemplated by this Plan, or conditioning such
transactions or actions on certain factors, shall not
be required in order to accomplish Reinstatement.
1.1.99. RELIABLE STEEL ADVERSARY ACTION. The adversary action
commenced by Reliable Steel, Inc. before the
Bankruptcy Court, being Case No. 97-20554-GWZ to
foreclose upon the Reliable Steel Lien Claim.
1.1.100. RELIABLE STEEL LIEN CLAIM. The Claim of Reliable
Steel, Inc. for $249,322.85 plus interest, attorneys
fees and additional damages subject to the Second
Amended Notice and Claim of Lien recorded on January
22, 1997 and the Notice of Lien recorded on August
22, 1996, both with the County Recorder of Clark
County, Nevada
1.1.101. REORGANIZED GAMING CORP. Stratosphere Gaming Corp., a
Nevada corporation, on and after the Effective Date.
1.1.102. REORGANIZED GAMING CORP. ARTICLES. The Restated
Articles of Incorporation of Reorganized Gaming
Corp., which shall be substantially in the form filed
with the Bankruptcy Court as part of the Plan
Supplement.
1.1.103. REORGANIZED GAMING CORP. BY-LAWS. The Restated
By-Laws of Reorganized Gaming Corp., which shall be
substantially in the form filed with the Bankruptcy
Court as part of the Plan Supplement.
1.1.104. REORGANIZED STRATOSPHERE. Stratosphere Corporation, a
Delaware
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corporation, on and after the Effective Date.
1.1.105. REORGANIZED STRATOSPHERE ARTICLES. The Restated
Certificate of Incorporation of Reorganized
Stratosphere, which shall be substantially in the
form filed with the Bankruptcy Court as part of the
Plan Supplement.
1.1.106. REORGANIZED STRATOSPHERE BY-LAWS. The Restated
By-Laws of Reorganized Stratosphere, which shall be
substantially in the form filed with the Bankruptcy
Court as part of the Plan Supplement.
1.1.107. SCHEDULES. The schedules of assets and liabilities
and any amendments thereto filed by the Debtors with
the Bankruptcy Court in accordance with Section
521(1) of the Bankruptcy Code.
1.1.108. SEC. The United States Securities and Exchange
Commission.
1.1.109. SECURED CLAIM. A Claim that is secured by a lien
against property of the Estate to the extent of the
value of any interest in property of the Estate
securing such Claim or to the extent of the amount of
such Claim subject to setoff in accordance with
Section 553 of the Bankruptcy Code, in either case as
determined pursuant to Section 506(a) of the
Bankruptcy Code.
1.1.110. SECURED TAX CLAIMS. The Claim of any state or local
governmental unit which is secured by a lien against
property owned by the Debtors by operation of
applicable law, including, but not limited to, every
such Claim for unpaid real and personal property
taxes together with statutory interests.
1.1.111. SECURITIES ACT. The Securities Act of 1933, as
amended, and the regulations promulgated thereunder.
1.1.112. SKY HIGH. Sky High, L.L.C. (successor in interest to
the Claims held by Grace Brothers, Ltd.) and its
successors and assigns.
1.1.113. STANDBY EQUITY COMMITMENT. The Standby Equity
Commitment dated March 9, 1995, by and between
Stratosphere and Grand.
1.1.114. STATUTORY COMMITTEE. Collectively, the Creditors
Committee, the Noteholders Committee (and any
successor committee) and any other committee
appointed pursuant to Section 1102 of the Bankruptcy
Code.
1.1.115. STOCKHOLDERS' AGREEMENT. The agreement the Majority
Original Holders have agreed amongst themselves to be
entered on the Effective Date which will determine
certain matters with respect to the management and
financing of Reorganized Stratosphere and Reorganized
Gaming Corp. The Shareholders Agreement shall be
substantially in the form filed with the Bankruptcy
Court as part of the Plan Supplement.
1.1.116. STRATOSPHERE. Stratosphere Corporation, a Delaware
corporation, one
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of the debtors and debtors-in-possession in the
Chapter 11 Cases pending before the Bankruptcy Court.
1.1.117. STUPAK. Robert Stupak, individually, and Affiliates.
1.1.118. SUBORDINATED CLAIM. Any Claim or Equity Interest
subordinated, for purposes of distribution or
otherwise, pursuant to Section 510 of the Bankruptcy
Code.
1.1.119. TAXES. All income, gaming, franchise, excise, sales,
use, employment, withholding, property, payroll or
other taxes, assessments, or governmental charges,
together with any interest, penalties, additions to
tax, fines, and similar amounts relating thereto,
imposed or collected by any federal, state, local or
foreign governmental authority.
1.1.120. TERM SHEET. The term sheet executed by the Majority
Holders with respect to management and corporate
governance of Reorganized Stratosphere and
Reorganized Gaming Corp. A copy of the Term Sheet is
filed with the Bankruptcy Court as part of the Plan
Supplement. To the extent of inconsistencies between
the Term Sheet and the Stockholders' Agreement, New
Common Stock Registration Rights' Agreement,
Litigation LLC Members Agreement, Reorganized Gaming
Corp. Articles, Reorganized Gaming Corp. Bylaws,
Reorganized Stratosphere Articles and Reorganized
Stratosphere Bylaws, the latter documents shall
prevail.
1.1.121. VOTING RECORD DATE. The date established by the
Bankruptcy Court for purposes of voting on this Plan
by holders of Allowed Claims arising out of the
Original First Mortgage Notes.
1.1.122. UNAPPROVED NOTEHOLDERS. Any A Majority Original
Holder of an Allowed Original First Mortgage Note
Claim who, as the Effective Date, has not received
the requisite approvals of the Gaming Authorities to
receive a Pro Rata share of New Common Stock under
this Plan.
1.2. COMPUTATION OF TIME. In computing any period of time
prescribed or allowed by this Plan, unless otherwise expressly
provided, the provisions of Bankruptcy Rule 9006(a) shall
apply.
1.3. RULES OF INTERPRETATION. For purposes of this Plan and the
Plan Supplement only; (i) any reference in this Plan or Plan
Supplement to a contract, instrument, release, indenture, or
other agreement or document's being in particular form or on
particular terms and conditions means that such document shall
be substantially in such form or substantially on such terms
and conditions; (ii) any reference in this Plan or Plan
Supplement to an existing document or exhibit filed or to be
filed means such document or exhibit as it may have been or
may be amended, modified, or supplemented; (iii) unless
otherwise specified, all references in this Plan or Plan
Supplement to Sections, Articles, Schedules and Exhibits are
references to Sections, Articles, Schedules and Exhibits of or
to this Plan; (iv) the words "herein," "hereof,"
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"hereto," and "hereunder" refer to this Plan in its entirety
rather than to a particular portion of this Plan; (v) captions
and headings to Articles and Sections are inserted for
convenience of reference only and are not intended to be a
part of or to affect the interpretation of this Plan; and (vi)
the rules of construction set forth in Section 102 of the
Bankruptcy Code and in the Bankruptcy Rules shall apply unless
otherwise expressly provided.
2. TREATMENT OF UNCLASSIFIED CLAIMS
2.1. GENERAL The Claims against the Debtors set forth in this
Article 2 are not designated as Classes pursuant to Section
1123(a)(1) of the Bankruptcy Code. The holders of such Claims
are not entitled to vote on this Plan. The treatment of the
Claims set forth below is consistent with the requirements of
Section 1129(a)(9)(A) of the Bankruptcy Code.
2.2. TREATMENT OF ADMINISTRATIVE CLAIMS.
2.2.1. GENERALLY. Each Allowed Administrative Claim
(including all accrued U.S. Trustee quarterly fees),
other than Preserved Ordinary Course Administrative
Claims and Reclamation Claims, shall be paid in full
in Cash (or otherwise satisfied in accordance with
its terms) upon the latest of: (i) the Effective
Date, or as soon thereafter as practicable; (ii) such
date as may be fixed by the Bankruptcy Court, or as
soon thereafter as practicable; (iii) the tenth
(10th) Business Day after such Claim is Allowed, or
as soon thereafter as practicable; and (iv) such date
as the holder of such Claim and Reorganized
Stratosphere or Reorganized Gaming Corp., as the case
may be, have agreed or shall agree.
2.2.2. REQUESTS FOR PAYMENT. All requests for payment of
Administrative Claims (except for Professional Fees
and Preserved Ordinary Course Administrative Claims)
must be filed by the Administrative Claims Bar Date
or the holders thereof shall be forever barred from
asserting such Administrative Claims against the
Debtors, Reorganized Stratosphere and Reorganized
Gaming Corp. All final applications for allowance and
disbursement of Professional Fees must be filed by
the Professional Fee Bar Date. All such applications
must be in compliance with all of the terms and
provisions of any applicable order of the Bankruptcy
Court, including the Confirmation Order, and all
other orders governing payment of Professional Fees.
Such applications may be later amended to include any
fees and costs incurred after the Confirmation Date.
2.3. PRESERVED ORDINARY COURSE ADMINISTRATIVE CLAIMS. Each Allowed
Preserved Ordinary Course Administrative Claim shall be paid,
performed or settled by Reorganized Stratosphere or
Reorganized Gaming Corp., as the case may be, pursuant to
either: (i) the terms and conditions under which such Claim
arose; or (ii) in the ordinary course of Reorganized
Stratosphere or Reorganized Gaming
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Corp.'s business. Such payments shall be made by Reorganized
Stratosphere or Reorganized Gaming Corp., as the case may be,
without further action by the holder of such Claim.
2.4. ALLOWED PRIORITY TAX CLAIMS. Each Allowed Priority Tax Claim,
if any, will be paid in full in Cash on the Effective Date;
provided, however, that Reorganized Stratosphere or
Reorganized Gaming Corp., as the case may be, may elect to pay
such Claims (except for taxes owing on account of gaming
operations to the City of Las Vegas, County of Clark and State
of Nevada) through deferred Cash payments over a period not
exceeding six (6) years after the date of assessment of such
Claim, of a value as of the Effective Date, equal to the
Allowed amount of such Claim. In that event, such payments
shall be made in equal annual installments of principal, plus
interest accruing from the Effective Date at the rate on the
unpaid portion of Allowed Priority Tax Claim set forth in
Internal Revenue Code Sections 6621 and 6622. The first such
payment shall be payable on the latest of: (i) the Effective
Date; (ii) the tenth (10th) Business Day after the date on
which an order allowing such Claim becomes a Final Order; and
(iii) such other time as is agreed upon by the holder of such
Claim and Reorganized Stratosphere or Reorganized Gaming
Corp., provided, however, that Reorganized Stratosphere or
Reorganized Gaming Corp., as the case may be, shall have the
right to prepay any such Allowed Priority Tax Claim, or any
remaining balance of such Claim, in full or in part, at any
time on or after the Effective Date, without premium or
penalty.
2.5. ALLOWED RECLAMATION CLAIMS. All requests for payment of
Reclamation Claims must be filed by the Bar Date or the
holders thereof shall be forever barred from asserting such
Reclamation Claim against the Debtors, Reorganized
Stratosphere, and Reorganized Gaming Corp. Each Allowed
Reclamation Claim shall be paid in full in Cash upon the
latest of: (i) the Effective Date, or as soon thereafter as
practicable; (ii) such date as may be fixed by the Bankruptcy
Court, or as soon thereafter as practicable; (iii) the tenth
(10th) Business Day after such Claim is Allowed during the
Chapter 11 Cases, or as soon thereafter as practicable; and
(iv) such date as the holder of such Reclamation Claim and
Reorganized Stratosphere or Reorganized Gaming Corp., as the
case may be, have agreed or shall agree.
3. DESIGNATION OF CLASSES OF CLAIMS AND EQUITY INTERESTS
Pursuant to this Plan and in accordance with Section 1123(a)(1) of the
Bankruptcy Code, all Claims of Creditors and the holders of Equity Interests and
the Gaming Corp. Common Stock (except Administrative Claims, Priority Tax
Claims, Reclamation Claims, and Preserved Ordinary Course Administrative Claims)
are placed in the Classes described below. A Claim, Equity Interest and the
Gaming Corp. Common Stock, is classified in a particular Class only to the
extent that the Claim, Gaming Corp. Common Stock or Equity Interest qualifies
within the description of that Class and is classified in other Classes only to
the extent that any remainder of the Claim, Gaming Corp. Common Stock or Equity
Interest qualifies within the description of such other Classes. A Claim is also
classified in a particular Class only to the extent that such Claim is an
Allowed Claim in that Class and has not been paid, released or otherwise
satisfied prior to the Effective Date. With respect to Classes of Claims and
Gaming Corp. Common Stock described as unimpaired under the
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Plan, except as otherwise provided under this Plan, nothing shall affect the
rights and legal and equitable defenses of the Debtors, Reorganized Stratosphere
or Reorganized Gaming Corp. in respect of such Claims and Gaming Corp. Common
Stock classified as unimpaired under this Plan, including but not limited to,
all rights in respect of legal and equitable defenses to setoff or recoupment
against such Claims and Gaming Corp. Common Stock.
3.1. SUMMARY OF CLASSIFICATION
Class 1: Priority Wage Claims Unimpaired
- no solicitation
required
Class 2: Priority Benefit Plan Unimpaired
Contribution Claims - no solicitation
required
Class 3: Priority Customer Deposit Unimpaired
Claims - no solicitation
required
Class 4: Secured Tax Claims Unimpaired
- no solicitation
required
Class 5: Miscellaneous Secured Claims Unimpaired
- no solicitation
required
Class 6: Original First Mortgage Note Impaired
Claims - entitled to vote
Class 7: Heller Lease Claims Impaired
- entitled to vote
Class 8: Capital Lease Claims Impaired
- entitled to vote
Class 9: General Unsecured Claims Impaired
- entitled to vote
Class 10: Reliable Steel Lien Claim Impaired
- entitled to vote
Class 11: Gaming Corp. Common Stock Unimpaired
- not entitled to vote
Class 12: Equity Interests and Impaired
Equity Interests - Related - deemed rejected
Claims
3.2. SPECIFIC CLASSIFICATION
3.2.1. CLASS 1 - PRIORITY WAGE CLAIMS. Class 1 consists of all
Claims that are entitled to priority under Section 507(a)(3)
of the Bankruptcy Code.
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3.2.2. CLASS 2 - PRIORITY BENEFIT PLAN CONTRIBUTION CLAIMS.
Class 2 consists of all Claims that are entitled to
priority under Section 507(a)(4) of the Bankruptcy
Code.
3.2.3. CLASS 3 - PRIORITY CUSTOMER DEPOSIT CLAIMS. Class 3
consists of all Claims that are entitled to
priority under 507(a)(6) of the Bankruptcy Code 29
3.2.4. CLASS 4 - SECURED TAX CLAIMS. Class 4 consists of all
Secured Tax Claims. Each holder of a Secured Tax
Claim shall be considered to be in its own separate
subclass within Class 4, and each such subclass
shall be deemed to be a separate Class for purposes
of this Plan.
3.2.5. CLASS 5 - MISCELLANEOUS SECURED CLAIMS. Class 5
consists of all Secured Claims, other than Secured
Claims in Class 4, Class 6, Class 7, Class 8 and
Class 10. Each holder of a Miscellaneous Secured
Claim shall be considered to be in its own separate
subclass within Class 5, and each such subclass
shall be deemed to be a separate Class for purposes
of this Plan.
3.2.6. CLASS 6 - ORIGINAL FIRST MORTGAGE NOTE CLAIMS.
Class 6 consists of the Allowed Secured Claims
under the Original First Mortgage Notes.
3.2.7. CLASS 7 - HELLER CAPITAL LEASE CLAIMS. Class 7
consists of the Heller Capital Lease Claims.
3.2.8. CLASS 8 - CAPITAL LEASE CLAIMS. Class 8 consists of
the Capital Lease Claims.
3.2.9. CLASS 9 - GENERAL UNSECURED CLAIMS. Class 9
consists of all General Unsecured Claims, including
the Grand Subordinated Claims and the unsecured
deficiency Claim of the Indenture Trustee and
holders of the Original First Mortgage Notes.
3.2.10. CLASS 10 - RELIABLE STEEL LIEN CLAIM. Class 10
consists of the Reliable Steel Lien Claim
3.2.11. CLASS 11 - GAMING CORP. COMMON STOCK. Class 11
consists of the Gaming Corp. Common Stock held by
Stratosphere.
3.2.12. CLASS 12 - EQUITY INTERESTS AND EQUITY INTEREST
RELATED CLAIMS. Class 12 consists of all Equity
Interests and all Equity Interest Related Claims.
4. DESIGNATION OF AND PROVISIONS FOR TREATMENT OF CLASSES OF
CLAIMS NOT IMPAIRED BY THIS PLAN
4.1. CLASS 1 - PRIORITY WAGE CLAIMS. Each Allowed Priority Wage
Claim shall be paid in full in Cash upon the latest of: (i)
the Effective Date, or as soon thereafter
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<PAGE> 27
as practicable; (ii) such date as may be fixed by the
Bankruptcy Court, or as soon thereafter as practicable; (iii)
the tenth (10th) Business Day after such Claim is Allowed, or
as soon thereafter as practicable; and (iv) such date as the
holder of such Claim and Reorganized Stratosphere or
Reorganized Gaming Corp., as the case may be, have agreed or
shall agree. Class 1 is unimpaired under this Plan. Holders of
Allowed Claims in Class 1 are not entitled to vote on this
Plan.
4.2. CLASS 2 - PRIORITY BENEFIT PLAN CONTRIBUTION CLAIMS. Each
Allowed Priority Benefit Plan Contribution Claim, if any,
shall be paid in full in Cash upon the latest of: (i) the
Effective Date, or as soon thereafter as practicable; (ii)
such date as may be fixed by the Bankruptcy Court, or as soon
thereafter as practicable; (iii) the tenth (10th) Business Day
after such Claim is Allowed, or as soon thereafter as
practicable; and (iv) such date as the holder of such Claim
and Reorganized Stratosphere or Reorganized Gaming Corp., as
the case may be, have agreed or shall agree. Class 2 is
unimpaired under this Plan. Holders of Allowed Claims in Class
2 are not entitled to vote on this Plan.
4.3. CLASS 3 - PRIORITY CUSTOMER DEPOSIT CLAIMS. Each Allowed
Priority Customer Deposit Claim, if any, shall be paid in full
in Cash, unless the holder of such Priority Customer Deposit
Claim and Reorganized Stratosphere or Reorganized Gaming
Corp., whichever is applicable, agree to a different
treatment, upon the latest of: (i) the Effective Date, or as
soon thereafter as practicable; (ii) such date as may be fixed
by the Bankruptcy Court, or as soon thereafter as practicable;
(iii) the tenth (10th) Business Day after such Claim is
Allowed, or as soon thereafter as practicable; (iv) such date
as the holder of such Claim and Reorganized Stratosphere or
Reorganized Gaming Corp., as the case may be, have agreed or
shall agree; and (v) a date when such Priority Customer
Deposit Claim becomes due and owing. Class 3 is unimpaired
under this Plan. Holders of Allowed Claims in Class 3 are not
entitled to vote on this Plan.
4.4. CLASS 4 - SECURED TAX CLAIMS Each Allowed Secured Tax Claim
shall be paid in full in Cash upon the latest of: (i) the
Effective Date, or as soon thereafter as practicable; (ii)
such date as may be fixed by the Bankruptcy Court, or as soon
thereafter as practicable; (iii) the tenth (10th) Business Day
after such Claim is Allowed, or as soon thereafter as
practicable; (iv) the date on which such Secured Tax Claim is
scheduled to be paid in the ordinary course of business under
applicable law or regulation; and (v) such date as the holder
of such Claims and Reorganized Stratosphere or Reorganized
Gaming Corp., as the case may be, have agreed or shall agree.
Class 4 is unimpaired under this Plan. Holders of Allowed
Claims in Class 4 are not entitled to vote on this Plan.
4.5. CLASS 5 - MISCELLANEOUS SECURED CLAIMS. On the Effective Date,
at Reorganized Stratosphere's or Reorganized Gaming Corp.'s
option, the holder of any Allowed Secured Claim in Class 5
shall receive one (1) of the following alternative treatments:
a) the holder of such Claim shall be treated in
accordance with the
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<PAGE> 28
terms and conditions of all Debt Instruments evidencing such
Claim and the legal, equitable or contractual rights to which
each holder of such Claim is entitled shall not otherwise be
altered;
b) any default, other than a default of the kind
specified in Section 365(b)(2) of the Bankruptcy Code, shall
be Cured or Reinstated;
i) the maturity of the Claims shall be Reinstated
as such maturity before any default; and
ii) the other legal, equitable or contractual
rights to which the holder of the Claim is entitled
shall not otherwise be altered, provided, however,
that as to any Allowed Class 5 Claim which is a
nonrecourse Claim and exceeds the value of the
collateral securing the Claim, the collateral may be
sold at a sale at which the holder of such Claim has
an opportunity to bid;
c) on the Effective Date, or on such other date
thereafter as may be agreed to by Reorganized Stratosphere or
Reorganized Gaming Corp., as applicable, and the holder of
such Claim, the Estate shall abandon the collateral securing
such Claim to the holder thereof in full satisfaction and
release of such Claim; or
d) on the Effective Date, the holder of such Claim
shall receive, on account of such Claim, Cash equal to its
Allowed Secured Claim, or such lesser amount to which the
holder of such Claim shall agree, in full satisfaction and
release of such Claim.
Class 5 is unimpaired under this Plan. Holders of Allowed
Claims in Class 5 are not entitled to vote on this Plan.
4.6. CLASS 11 - GAMING CORP. COMMON STOCK. On the Effective Date,
Reorganized Stratosphere shall own the Gaming Corp. Common
Stock and Reorganized Gaming Corp. shall continue as a
wholly-owned subsidiary of Reorganized Stratosphere. Class 11
is unimpaired under this Plan. The holder of the Class 11
Gaming Corp. Common Stock is not entitled to vote on this
Plan.
5. DESIGNATION OF AND PROVISIONS FOR TREATMENT OF CLASSES OF
CLAIMS AND EQUITY INTERESTS IMPAIRED BY THIS PLAN
5.1. CLASS 6 - ORIGINAL FIRST MORTGAGE NOTES The holders of Allowed
Secured Claims arising out of Original First Mortgage Notes
are impaired and shall receive the following treatment under
this Plan.
5.1.1. DISTRIBUTIONS. From and after the Effective Date,
each holder of Original First Mortgage Notes as of
the Distribution Record Date shall receive (1) its
Pro Rata distribution of two million thirty
thousand (2,030,000) shares of New Common Stock
upon receipt of requisite
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<PAGE> 29
Gaming Authority approvals as provided for in
Section 5.1.2. below in consideration for the
Secured Claim portion of their Allowed Original
First Mortgage Note Claim; and (2) from the
Litigation LLC its Pro Rata distribution of
Litigation LLC Shares.
5.1.2. DISBURSING AGENT. With respect to each holder of
an Allowed Original First Mortgage Note Secured
Claim that is not a Majority Original Holder,
Reorganized Stratosphere shall distribute such
holder's Pro Rata share of New Common Stock to the
Indenture Trustee, as Disbursing Agent, on the
Distribution Date. As soon as practicable after
the Indenture Trustee receives a notice of
compliance with the provisions of Section 5.1.3
below from the Litigation LLC, the Indenture
Trustee shall distribute such New Common Stock to
the holders of such claims in accordance with the
terms of this Plan and the Original First Mortgage
Indenture. With respect to Majority Original
Holders of Allowed Original First Mortgage Note
Secured Claims, upon approval of such holder by
the Gaming authorities (which shall be evidenced
by a written notice from the Gaming Authorities to
the Reorganized Debtor), whereupon such holder
shall become an Approved Noteholder, Reorganized
Stratosphere shall immediately distribute such
Approved Noteholder's Pro Rata Share of New Common
Stock, including dividends, rights, or other
distributions, if any, that shall have theretofore
been paid in respect of the New Common Stock, to
the Indenture Trustee. As soon as practicable
after the Indenture Trustee receives a notice of
compliance with the provisions of Section 5.1.3
below from the Litigation LLC, the Indenture
Trustee shall deliver the Pro Rata share of New
Common Stock to such Approved Noteholder in
accordance with the terms of the Plan and the
Original First Mortgage Indenture. Reorganized
Stratosphere shall hold in escrow all shares of
New Common Stock on account of Unapproved
Noteholders until such time as the Majority
Original Holder becomes an Approved Noteholder and
the new Common Stock is distributed to the
Indenture Trustee as set forth above; provided,
however, that if the Gaming Authorities notify a
Majority Original Holder that it will not be found
suitable, such holder may either, at its election
and to the extent allowed by gaming regulations,
(a) request the immediate distribution to it of
its Pro Rata share of New Common Stock, for
ultimate disposal in accordance with Gaming
authority regulations and laws, or (b) attempt to
sell, assign or otherwise dispose of sufficient
Original First Mortgage Notes to eliminate the
necessity of having to be found suitable by the
Gaming Authorities.
5.1.3. SURRENDER OF SECURITIES OR DEBT INSTRUMENTS. On
or before the Distribution Date, or as soon as
practicable thereafter, each holder of an Debt
Instrument evidencing an Allowed Secured Claim
on account of Original First Mortgage Notes shall
surrender such Debt Instrument to the Litigation
LLC. No distribution of property hereunder shall
be made
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<PAGE> 30
to or on behalf of any such holder unless and
until such instrument is received by the
Litigation LLC, or the unavailability of such Debt
Instrument is reasonably established to the
satisfaction of the Litigation LLC Board of
Managers, and, with regard to New Common Stock,
Reorganized Stratosphere. In the event any holder
of an Allowed Original First Mortgage Note seeks
to establish the unavailability of the Debt
Instrument evidencing such Claim, the Litigation
LLC Board of Managers, shall, within the first
Business Day thirty (30) days after receipt of the
holders evidence of unavailability and statement
of indemnity of the Litigation LLC Board of
Managers, Reorganized Stratosphere and the
Indenture Trustee (i) provide the holder, in
writing, with a detailed description regarding the
unacceptableness of such evidence and statement of
indemnity; or (ii) deliver to the Indenture
Trustee and Reorganized Stratosphere a notice of
compliance and distribute to such holder its
Pro-Rata Share of Litigation LLC Shares. Any such
holder who fails to surrender or cause to be
surrendered such Debt Instrument or fails to
execute and deliver an affidavit of loss and
indemnity reasonably satisfactory to the
Litigation LLC Board of Managers and Reorganized
Stratosphere prior to the second anniversary of
the Effective Date, shall be deemed to have
forfeited all rights and Claims in respect of such
Debt Instrument and shall not participate in any
distribution hereunder, and all property in
respect of such forfeited distribution, including
interest accrued thereon, shall revert to
Reorganized Stratosphere notwithstanding any
federal or state escheat laws to the contrary.
5.1.4. DISTRIBUTION RECORD DATE At the close of business
on the Distribution Record Date, the transfer
ledgers of the Indenture Trustee shall be closed,
and there shall be no further changes in the
record holders of the Original First Mortgage
Notes. Reorganized Stratosphere, the Litigation
LLC Board of Managers and the Indenture Trustee
shall have no obligation to recognize any transfer
of such Original First Mortgage Notes occurring
after the Distribution Record Date. Reorganized
Stratosphere, the Indenture Trustee and Litigation
LLC Board of Managers shall be entitled instead to
recognize and deal for all purposes hereunder with
only those record holders stated on the transfer
ledgers as of the close of business on the
Distribution Record Date.
5.1.5. DELIVERY OF DISTRIBUTIONS. Distributions of New
Common Stock will be made by Reorganized
Stratosphere to the Indenture Trustee and
distribution of Litigation LLC Shares shall be
made by the Litigation LLC to holders of Original
First Mortgage Notes in accordance with Sections
5.1.1, 5.1.2, 5.1.3 and 5.1.4 above at the
addresses contained in the official records of
the Indenture Trustee. If any holder's
distribution is returned as undeliverable, no
further distributions to such holder shall be
made unless and until the Indenture Trustee and
Litigation LLC are notified of such holder's then
current address, at which time all missed
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distributions shall be made to such holder without
interest. Undeliverable distributions shall be
returned to Reorganized Stratosphere, until such
distributions are claimed. All claims for
undeliverable distributions shall be made on or
before the second anniversary of the Effective
Date. After such date, all unclaimed property
shall revert to Reorganized Stratosphere and the
Claim of any holder or successor to such holder
with respect to such property shall be discharged
and forever barred notwithstanding any federal or
state escheat laws to the contrary.
5.1.6. FEES AND EXPENSES. All unpaid reasonable fees,
costs, charges, and any other expenses incurred
under the Original First Mortgage Indenture,
including any reasonable fees and expenses of
professionals retained by the Indenture Trustee as
of the Effective Date shall be paid by the Debtors
or Reorganized Stratosphere, as the case may be,
to the Indenture Trustee upon approval of the
Bankruptcy Court. After the Effective Date, all
reasonable fees, costs, charges and expenses
payable to the Indenture Trustee under the
Original First Mortgage Indenture including any
such items incurred by the Indenture Trustee in
its capacity as Disbursing Agent under this Plan,
shall be paid by Reorganized Stratosphere and
Reorganized Gaming Corporation in accordance with
the Original First Mortgage Indenture without
further Bankruptcy Court approval.
5.1.7. SECTION 363(k) RIGHT TO CREDIT BID. In the event
that an Alternative Transaction Proposal is
presented by Debtors and is considered by the
Bankruptcy Court at the Confirmation Hearing,
the Indenture Trustee shall have the right (if
appropriate under the circumstances) pursuant to
Section 363(k) of the Bankruptcy Code to credit
bid all or a portion of the Allowed Claim of the
holders of Original First Mortgage Notes.
5.2. CLASS 7 - HELLER CAPITAL LEASE CLAIMS. On the Effective Date
Reorganized Stratosphere and Reorganized Gaming Corp. shall
execute and deliver to Heller the Amended Heller Capital
Lease. The Amended Heller Capital Lease shall provide for the
same payment schedule as the Heller Capital Lease but shall
not include the financial covenants as set forth in Section
13.16 of the Heller Capital Lease. In addition, Reorganized
Stratosphere and Reorganized Gaming Corp. shall execute and
deliver to Heller and any such other and further documentation
necessary to implement the terms and conditions of the Amended
Heller Capital Lease. In addition, any other terms,
conditions, warranty or covenant of the Heller Capital Lease
which would be deemed breached or violated by the transaction
proposed in this Plan shall be deemed cured on the Effective
Date. In all other respects, the legal, equitable and
contractual rights of Heller shall not otherwise be altered or
impaired.
5.3. CLASS 8 - CAPITAL LEASE CLAIMS. On the Effective Date
Reorganized Stratosphere and Reorganized Gaming Corp., as
applicable, shall execute and deliver to First Security and
the Capital Lease Bank Group the Amended Capital Lease
Agreement
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<PAGE> 32
and the Amended Participation Agreement. The Amended
Participation Agreement shall provide for the same payment
schedule as the Original Participation Agreement but shall not
include Section 5.16 of the Original Participation Agreement.
In addition, any other terms, conditions, warranty or covenant
of the Original Participation Agreement or Original Capital
Lease Agreement which would be deemed breached or violated by
the transaction proposed by this Plan shall be deemed cured on
the Effective Date. In all other respects, the legal,
equitable and contractual rights of Capital Lease Bank Group
shall not otherwise be altered or impaired.
5.4. CLASS 9 - GENERAL UNSECURED CLAIMS. Each holder of an Allowed
Class 9 General Unsecured Claim shall receive in full
satisfaction and settlement of its Allowed General Unsecured
Claim the lesser of such holder's Allowed General Unsecured
Claim or such holder's Pro Rata share of $6,000,000 Cash, upon
the latest of: (i) the Effective Date, or as soon thereafter
as practicable; (ii) the tenth (10th) Business Day after such
Claim is Allowed, or as soon thereafter as practicable; and
(iii) such date as the holder of such Claim and Reorganized
Stratosphere or Reorganized Gaming Corp., as the case may be,
have agreed or shall agree.
5.5. CLASS 10 - RELIABLE STEEL LIEN CLAIM The holder of the Allowed
Reliable Steel Lien Claim shall receive $125,000 Cash on the
Effective Date in full satisfaction and settlement of its
Reliable Steel Claim and the Reliable Steel Adversary Action
5.6. CLASS 12 - EQUITY INTERESTS AND EQUITY INTERESTS RELATED
CLAIMS Each holder of an Interest and each holder of an Equity
Interest Related Claim shall receive nothing, and the Equity
Interest shall be canceled and terminated without further act
or action under any applicable agreement, law, regulation,
order or rule.
6. MEANS FOR IMPLEMENTATION OF PLAN
6.1. NEW COMMON STOCK. On the Effective Date, Reorganized
Stratosphere shall have Ten Million (10,000,000) shares of New
Common Stock authorized of which two million thirty thousand
(2,030,000) shares shall be issued and outstanding, all of
which shares of New Common Stock shall, in accordance with
this Plan, be issued to holders of Allowed Secured Original
First Mortgage Notes Claims in accordance with this Plan. Any
Person who receives ten percent (10%) or more of New Common
Stock under this Plan shall be deemed to have entered into the
New Common Stock Registration Rights Agreement with respect to
the New Common Stock.
6.2. CANCELLATION OF OLD COMMON STOCK. On the Effective Date, the
Old Common Stock (whether issued our outstanding or held in
the treasury of Stratosphere) shall be canceled and
extinguished, and holders of the Old Common Stock shall not
receive any equity or other interests in Reorganized
Stratosphere or any other consideration in exchange for the
cancellation and extinguishment of the Old Common Stock.
6.3. SATISFACTION OF ORIGINAL FIRST MORTGAGE NOTES AND ORIGINAL
FIRST MORTGAGE
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SECURITY DOCUMENTS. As set forth in Section 5.1.3 above,
commencing on the Effective Date, the Original First Mortgage
Notes shall be delivered to the Litigation LLC and the
Original First Mortgage Security Documents and Original
Subsidiary Guarantee released and reconveyed by the Indenture
Trustee and extinguished in part in exchange for the shares of
New Common Stock to be delivered to the holders of Original
First Mortgage Notes in accordance with this Plan. The
Original First Mortgage Notes and the instruments evidencing
Claims arising from Original First Mortgage Notes shall remain
in full force and effect, provided however, that by accepting
the distributions provided in Section 5.1 above (a) holders
thereof shall be deemed, on the Effective Date and without
further action by any party, to have transferred any and all
claims and causes of action they have, whether or not any
action has been commenced with respect thereto, relating to
Original First Mortgage Notes or the facts and circumstances
involved in their issuance and sale (including, without
limitation, the Standby Equity Commitment) to the Litigation
LLC and (b) holders thereof and the Litigation LLC and all
successors and assigns shall be deemed, on the Effective Date,
and without further action by any party, to have agreed to
forebear from exercising any rights against Reorganized
Stratosphere and Reorganized Gaming Corp. or their affiliates
whatsoever with respect to the Original First Mortgage Notes
and related documentation, except the right to receive
distributions from the Litigation LLC. Upon the dissolution of
the Litigation LLC, the Original First Mortgage Notes shall be
delivered to Reorganized Stratosphere. Other than (i) the
right to receive the two million thirty thousand (2,030,000)
shares of New Common Stock on the Distribution Date; (ii) the
right to participate in Class 9 distributions; and (iii) the
right to receive the Litigation LLC Shares, the holders of the
Original First Mortgage Notes shall not receive any equity or
other interest in Reorganized Stratosphere or any other
consideration in exchange for the Original First Mortgage
Notes, Original First Mortgage Security Documents and Original
Subsidiary Guarantee.
6.4. NO FRACTIONAL SHARES. No fractional shares of New Common Stock
shall be issued. The number of shares of New Common Stock
issuable to any holder of Original First Mortgage Notes will
be rounded to the nearest whole number with .50 shares being
rounded up.
6.5. INTERIM MANAGEMENT AGREEMENT On or before the Effective Date
subject to requisite Gaming Authority approvals, Stratosphere
may enter into the Interim Management Agreement pursuant to
which the designated manager shall manage the day-to-day
operations of Stratosphere until the Effective Date. In the
event that the Interim Management Agreement is not
effectuated, Debtors' management shall remain in place until
the Effective Date.
6.6. PHASE II. Subsequent to the Effective Date, the decision as to
construction and/or completion of Phase II, the scope and
design of Phase II and the means and method to finance Phase
II will rest with Reorganized Stratosphere. Nothing contained
in this Plan or the Confirmation Order is intended to or will
dictate or restrict Reorganized Stratosphere in this regard.
Approval of the Bankruptcy Court after
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<PAGE> 34
the Effective Date concerning Phase II will not be required
nor necessary.
6.7. NEW CERTIFICATE OF INCORPORATION AND BYLAWS. As of the
Effective Date, the certificates of incorporation and bylaws
of the Debtors shall be amended and restated substantially in
the forms of the Reorganized Stratosphere Articles,
Reorganized Stratosphere By-Laws, Reorganized Gaming Corp.
By-Laws, and Reorganized Gaming Corp. Articles, which provide
for, among other things, the authorization of any and all acts
necessary to effectuate this Plan including, without
limitation, the issuance of the New Common Stock. Such
restated certificates of incorporation and by-laws shall also
provide to the extent required by Section 1123(a) and (b) of
the Bankruptcy Code, for a provision prohibiting the issuance
of non-voting equity securities. The initial members of the
board of directors of Reorganized Stratosphere and Reorganized
Gaming Corp., as the case may be, shall serve until such
directors, or their successors are elected at a properly
noticed and constituted stockholders' meetings of Reorganized
Stratosphere and Reorganized Gaming Corp. After the Effective
Date, Reorganized Stratosphere and Reorganized Gaming Corp.
may amend and restate the Reorganized Stratosphere Articles,
Reorganized Stratosphere By-Laws, Reorganized Gaming Corp.
By-Laws and Reorganized Gaming Corp. Articles as permitted by
applicable law.
6.8. NO CORPORATE ACTION REQUIRED. As of the Effective Date: (i)
the adoption of the Reorganized Stratosphere Articles,
Reorganized Stratosphere By-Laws, Reorganized Gaming Corp.
Articles, Reorganized Gaming Corp. By-Laws or similar
constituent documents for Reorganized Stratosphere and
Reorganized Gaming Corp.; (ii) the initial selection of
directors and officers for Reorganized Stratosphere and
Reorganized Gaming Corp.; (iii) the adoption, execution,
delivery and implementation of all contracts, leases,
instruments, releases and other agreements related to or
contemplated by this Plan; and (iv) the other matters provided
for under or in furtherance of this Plan involving corporate
action to be taken by or required of the Debtors, Reorganized
Stratosphere or Reorganized Gaming Corp. shall be deemed to
have occurred and be effective as provided herein, and shall
be authorized and approved in all respects without further
order of the Bankruptcy Court or any requirement of further
action by the stockholders or directors of the Debtors,
Reorganized Stratosphere and Reorganized Gaming Corp. As of
the Effective Date, the term of each of the officers and
directors of the Debtors not continuing in office, if any,
shall terminate pursuant to the Confirmation Order without any
further action by the stockholders or directors of the
Debtors, Reorganized Stratosphere or Reorganized Gaming Corp.
6.9. DIRECTORS AND OFFICERS. On the Effective Date, the operation
of Reorganized Stratosphere and Reorganized Gaming Corp. shall
become the general responsibility of their respective boards
of directors, who shall thereafter have responsibility for the
management, control and operation or Reorganized Stratosphere
and Reorganized Gaming Corp, in accordance with this Plan,
applicable law, the Reorganized Stratosphere Articles,
Reorganized Stratosphere By-Laws, Reorganized Gaming Corp.
Articles, Reorganized Gaming Corp. By-Laws and the
Stockholders' Agreement. The names of the initial seven
members of the board of
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directors and the chief executive officer of Reorganized
Stratosphere and the initial three members of the board of
directors of Reorganized Gaming Corp. shall be disclosed by
the Majority Original Holders by April 27, 1998, and if not so
nominated within two days thereafter, Stratosphere will
nominate the seven directors of Reorganized Stratosphere and
the three directors of Reorganized Gaming Corp. All such
directors and executive officers of Reorganized Stratosphere
and Reorganized Gaming Corp. shall be deemed to have been
elected or appointed, as the case may be, pursuant to the
Confirmation Order, but shall not take office until the
Effective Date. Those directors and officers not continuing in
office after the Effective Date, if any, shall be deemed
removed therefrom without cause as of the Effective Date
pursuant to the Confirmation Order and shall be indemnified by
Reorganized Stratosphere for all actions taken by such
directors and officers while acting as directors and officers
for the Debtors in accordance with the respective charters,
by-laws or contracts of Stratosphere or Gaming Corp. or
applicable state law on account of services provided by such
officers and directors to the Debtors, from the Petition Date
through and including the Effective Date. The existing
directors of Stratosphere and Gaming Corp., should they choose
to do so, will continue to serve as directors of Stratosphere
and Gaming Corp. from and after the Confirmation Date until
the Effective Date. During the period from the Confirmation
Date until the Effective Date, but not beyond the Effective
Date, all the existing directors of Stratosphere will be
compensated at $10,000 per quarter and $1,000 per meeting of
the Board of Directors for so long as they continue to serve
as directors of Stratosphere.
6.10. POST-EFFECTIVE DATE FINANCING. From and after the Effective
Date, Reorganized Stratosphere and Reorganized Gaming Corp.
shall have sole and complete discretion to raise capital for
any purpose authorized by the Reorganized Stratosphere
Articles in any manner provided, however, that during any
Interim Approval Period such efforts shall be in accordance
with the Shareholders Agreement.
6.11. DUTIES OF INDENTURE TRUSTEE. Following the Effective Date, the
Original First Mortgage Indenture shall remain in effect to
the extent required under this Plan and the Litigation LLC.
Except as set forth in this Plan with respect to its function
as Disbursing Agent, the Indenture Trustee shall take only
those actions as from time-to-time requested by the Litigation
LLC Board of Managers on behalf of the Litigation LLC, in
accordance with the Original First Mortgage Indenture. On the
Effective Date, the indemnity obligations to the Indenture
Trustee under the Original First Mortgage Indenture shall
become the obligations of Reorganized Stratosphere and
Reorganized Gaming Corporation, except that the Litigation LLC
shall in turn indemnify and hold harmless Reorganized
Stratosphere and Reorganized Gaming Corporation for all
actions taken by the Indenture Trustee at the request of the
Litigation LLC Board of Managers.
7. EXECUTORY CONTRACTS AND UNEXPIRED LEASES
7.1. EXECUTORY CONTRACTS. All executory contracts set forth on the
schedule of rejected
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executory contracts attached to this Plan as Exhibit "2," that
exist between the Debtors and any Person shall be deemed
rejected by Reorganized Stratosphere or Reorganized Gaming
Corp., as the case may be, as of the Effective Date, except
for any executory contract: (i) that has been rejected
pursuant to an order of the Bankruptcy Court entered prior to
the Confirmation Date; or (ii) as to which a motion for
approval of the rejection of such executory contract, if
applicable, has been filed with the Bankruptcy Court prior to
the Confirmation Date. Listing an Executory Contract on
Exhibit "2" shall not constitute an admission by the Debtors,
Reorganized Stratosphere or Reorganized Gaming Corp. that such
contract is an executory contract or that the Debtors,
Reorganized Stratosphere or Reorganized Gaming Corp. have any
liability thereunder. Listed on Exhibit "2" are those persons
who purchased vacation packages who have timely filed Proofs
of Claim in the Chapter 11 cases. While the Debtors do not
acknowledge that these vacation package holders are Creditors
of the Debtors or have executory contracts, to the extent that
the Bankruptcy Court determines that these persons have
executory contracts, such executory contracts shall be deemed
rejected.
7.2. UNEXPIRED LEASES. All unexpired leases set forth on the
schedule of rejected leases attached to this Plan as Exhibit
"3," that exist between the Debtors and any Person shall be
deemed rejected by Reorganized Stratosphere or Reorganized
Gaming Corp., as the case may be, as of the Effective Date,
except for any unexpired lease: (i) that has been rejected
pursuant to an order of the Bankruptcy Court entered prior to
the Confirmation Date; or (ii) as to which a motion for
approval of the rejection of such unexpired lease, if
applicable, has been filed with the Bankruptcy Court prior to
the Confirmation Date. Listing an Unexpired Lease on Exhibit
"3" shall not constitute an admission by the Debtors,
Reorganized Stratosphere or Reorganized Gaming Corp. that such
contract is an executory contract or that the Debtors,
Reorganized Stratosphere or Reorganized Gaming Corp. have any
liability thereunder.
7.3. APPROVAL OF ASSUMPTION OR REJECTION. Entry of the
Confirmation Order as of the Effective Date shall constitute:
(i) the approval, pursuant to Section 365(a) of the Bankruptcy
Code, of the assumption of the executory contracts and
unexpired leases not listed on Exhibits "2" and "3" or
otherwise rejected during the Chapter 11 Cases; and (ii) the
approval, pursuant to Section 365(a) of the Bankruptcy Code,
of the rejection of the executory contracts and unexpired
leases rejected pursuant to this Plan or otherwise during the
Chapter 11 Cases. Notwithstanding anything contained herein to
the contrary, up to the Confirmation Date the Debtors shall
have the right to add to or delete from Exhibits "2" and "3"
any executory contract or unexpired lease.
7.4. CURE OF DEFAULTS. Reorganized Stratosphere or Reorganized
Gaming Corp., as the case may be, shall Cure any defaults
respecting each executory contract or unexpired lease assumed
pursuant to Section 7.3 of this Plan upon the latest of (i)
the Effective Date or as soon thereafter as practicable; (ii)
such dates as may be fixed by the Bankruptcy Court or agreed
upon by the parties, or as soon thereafter as practicable; or
(iii) the tenth (10th) Business Day after the entry of a Final
Order
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resolving any dispute regarding (a) a Cure amount; (b) the
ability of Reorganized Stratosphere or Reorganized Gaming
Corp. to provide "adequate assurance of future performance;"
under the executory contract or unexpired lease assumed
pursuant to this Plan in accordance with Section 365(b)(1) of
the Bankruptcy Code; or (c) any matter pertaining to
assumption or the Cure of a particular executory contract or
an unexpired lease.
7.5. POST-PETITION DATE CONTRACTS AND LEASES. Executory contracts
and unexpired leases entered into and other obligations
incurred after the Petition Date by the Debtors shall be
performed by the Debtors, Reorganized Stratosphere, or
Reorganized Gaming Corp., as applicable, in the ordinary
course of their business.
7.6. BAR DATE. All proofs of Claims with respect to Claims arising
from the rejection of any executory contract or unexpired
lease shall be filed with the Bankruptcy Court no later than
thirty (30) days after the entry of the Confirmation Order.
Any Claim not filed within such time shall be forever barred.
7.7. INDEMNIFICATION OBLIGATIONS. Any obligations of the Debtors to
indemnify any officer, director or employee serving as a
fiduciary of any employee benefit plan or program of the
Debtors, pursuant to charter, by-laws, contract or applicable
state law shall be deemed to be, and shall be treated as, an
executory contract and assumed by Reorganized Stratosphere and
Reorganized Gaming Corp., as the case may be, on the Effective
Date. Any obligation of the Debtors to indemnify, reimburse,
or limit the liability of any officer, director, employee,
agent, professional, financial advisor, or underwriter of any
securities issued by the Debtors prior to the Petition Date
shall: (i) be rejected, canceled, and discharged pursuant to
this Plan as of the Effective Date; and (ii) be subordinated
pursuant to Section 510 of the Bankruptcy Code, provided
however, that the board of directors of Reorganized
Stratosphere is authorized to assume such obligation on or
after the Effective Date.
8. LITIGATION LLC
8.1. PRESERVATION OF LITIGATION CLAIMS In accordance with Section
1123(b)(3) of the Bankruptcy Code, and except as otherwise
expressly provided herein, all Litigation Claims shall be
retained and reserved for the benefit of Reorganized
Stratosphere and Reorganized Gaming Corp.
8.2. ESTABLISHMENT OF LITIGATION LLC. On the Effective Date,
Reorganized Stratosphere and Reorganized Gaming Corp. shall
(i) execute the Litigation LLC Members Agreement (ii) take all
other steps necessary to establish the Litigation LLC; and
(iii) cause all Debtors-Owned Standby Equity Commitment Claims
to be assigned to the Litigation LLC as successor-in-interest
to Debtors. In addition, on the Effective Date the Litigation
LLC shall be appointed as representative and agent of the
Debtors to prosecute or compromise and/or abandon the
Litigation Claims on behalf of and with the consent of
Reorganized Stratosphere and Reorganized Gaming Corp. in
accordance with the Litigation LLC Members Agreement. At the
request of the Litigation LLC Board of Managers,
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Reorganized Stratosphere, from time to time, shall advance
sums, not to exceed a cumulative total of Five Millions
Dollars ($5,000,000), to the Litigation LLC for payment of
reasonable expenses of the Litigation LLC as and when
incurred, provided, however, that the compliance of
Reorganized Stratosphere with the request of the Litigation
LLC for payments shall be subject to the approval of the board
of directors of Reorganized Stratosphere taking in
consideration cash requirements under this Plan and of
Reorganized Stratosphere and Reorganized Gaming Corp.
8.3. DISTRIBUTION OF LITIGATION LLC FUNDS. All funds received by
the Litigation LLC shall be applied and distributed in
accordance with the Litigation LLC Members Agreement.
9. EFFECTIVE DATE TRANSACTIONS
Effective Date transactions, in addition to other matters as set forth
in this Plan, include the following: (a) a notice of effectiveness of this Plan
to be filed with the Bankruptcy Court and served; and (b) dismissal of the
Reliable Steel Adversary Action.
10. CONDITIONS PRECEDENT
10.1. CONDITIONS TO CONFIRMATION. The following are conditions
precedent to confirmation of this Plan:
a) The Bankruptcy Court shall have entered a Final
Order approving the Disclosure Statement with respect to this
Plan; and
b) The Confirmation Order shall have been entered and
be in form and substance reasonably acceptable to the Debtors
and each of the Majority Original Holders. In the event that
Debtors and any or all of the Majority Original Holders are
unable to reach an agreement with regard to the form and
substance of the Confirmation Order, the Bankruptcy Court
shall resolve all such disputes between the parties.
i) The provisions of the Confirmation Order
are nonseverable and mutually dependent;
ii) All executory contracts or unexpired
leases assumed by Reorganized Stratosphere and
Reorganized Gaming Corp. during the Chapter 11 Cases or
under this Plan shall remain in full force and effect
for the benefit of Reorganized Stratosphere and
Reorganized Gaming Corp. notwithstanding any provision
in such contract or lease (including those described in
Sections 365(b)(2) and (f) of the Bankruptcy Code) that
prohibits such assignment or transfer or that enables,
permits or requires termination of such contract or
lease;
iii) Except as expressly provided in this
Plan, the Debtors are
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discharged effective upon the Effective Date from all
Claims and any "debt" (as that term is defined in
Section 101(12) of the Bankruptcy Code) that arose on
or before the Effective Date, and the Debtors'
liability in respect thereof is extinguished
completely, whether reduced to judgment or not,
liquidated or unliquidated, contingent or
noncontingent, asserted or unasserted, fixed or
unfixed, matured or unmatured, disputed or undisputed,
legal or equitable, or known or unknown, or that arose
from any agreement of the Debtors that has either been
assumed or rejected in the Chapter 11 Cases or pursuant
to this Plan, or obligation of the Debtors incurred
before the Effective Date, or from any conduct of the
Debtors prior to the Effective Date, or that otherwise
arose before the Effective Date, including, without
limitation, all interest, if any, on any such debts,
whether such interest accrued before or after the
Petition Date; and
iv) This Plan does not provide for the
liquidation of all or substantially all of the property
of the Debtors and its confirmation is not likely to be
followed by the liquidation of Reorganized Stratosphere
or Stratosphere Gaming Corp. or the need for further
financial reorganization;
10.2. CONDITIONS TO EFFECTIVENESS. The following are conditions
precedent to the occurrence of the Effective Date:
a) The Confirmation Date shall have occurred;
b) The Confirmation Order shall be a Final Order,
except that Debtors reserve the right to cause the Effective
Date to occur notwithstanding the pendency of an appeal of the
Confirmation Order, under circumstances that would moot such
appeal;
c) No request for revocation of the Confirmation Order
under Section 1144 of the Bankruptcy Code shall have been
made, or, if made, shall remain pending;
d) The Bankruptcy Court in the Confirmation Order shall
have approved the retention of jurisdiction provisions in
Article 12 of this Plan;
e) All documents necessary to implement the
transactions contemplated by this Plan shall be in form and
substance reasonably acceptable to the Debtors and each of the
Majority Original Holders;
f) Sufficient Effective Date Cash exists to make
required distributions to holders of Allowed Claims required
on the Distribution Date; and
g) The Debtors shall have received any and all required
approvals by the Gaming Authorities to consummate this Plan.
10.3. WAIVER OF CONDITIONS The conditions to Confirmation and the
Effective Date, other than the conditions set forth above in
Section 10.2(g) may be waived in whole
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or in part by the unanimous consent of each of the Debtors and
each of the Majority Original Holders at any time (which
consent shall not be unreasonably withheld), without notice,
an order of the Bankruptcy Court or any further action other
than proceeding to Confirmation and consummation of the Plan.
In the event that Debtors and any or all of the Majority
Original Holders are unable to reach an agreement with regard
to Sections 10.1(b), 10.2(d), 10.2(e), or 10.2(f) above, the
Bankruptcy Court shall resolve all such disputes between the
parties.
11. TITLE TO PROPERTY; DISCHARGE; INJUNCTION
11.1. REVESTING OF ASSETS. Subject to the provisions of this Plan,
the property of the Estate shall revest in Reorganized
Stratosphere and Reorganized Gaming Corp. on the Effective
Date. As of the Effective Date, all such property of the
Debtors shall be free and clear of all Liens, Claims and
Equity Interests of holders thereof, except as otherwise
provided herein. From and after the Effective Date,
Reorganized Stratosphere and Reorganized Gaming Corp. may
operate their business, and may use, acquire and dispose of
their property free of any restrictions of the Bankruptcy
Code, including the employment of and payment to
professionals, except as otherwise provided in this Plan or
the Confirmation Order.
11.2. DISCHARGE. Except as provided in this Plan or the Confirmation
Order, the rights afforded under this Plan and the treatment
of Claims and Equity Interests under this Plan shall be in
exchange for and in complete satisfaction, discharge and
release of all Claims and termination of all Equity Interests,
including any interest accrued on Claims from the Petition
Date. Except as provided in this Plan or the Confirmation
Order, upon the Effective Date, Confirmation shall: (a)
discharge the Debtors, Reorganized Stratosphere, and
Reorganized Gaming Corp. from all Claims or other debts that
arose before the Confirmation Date including all claims
arising under and related to the Original First Mortgage Notes
and all debts of the kind specified in Sections 502(g), 502(h)
or 502(i) of the Bankruptcy Code, whether or not: (i) a proof
of Claim based on such debt is filed or deemed filed pursuant
to Section 501 of the Bankruptcy Code; (ii) a Claim based on
such debt is allowed pursuant to Section 502 of the Bankruptcy
Code; or (iii) the holder of a Claim based on such debt has
accepted this Plan; and (b) terminate all Equity Interests and
other rights of holders of Equity Interests in the Debtors.
11.3. INJUNCTION. Except as provided in this Plan or the
Confirmation Order, as of the Confirmation Date, all entities
that have held, currently hold or may hold a Claim or other
debt or liability that is discharged or an Equity Interest or
other right of an Equity Interest holder that is terminated
pursuant to the terms of this Plan are permanently enjoined
from taking any of the following actions on account of any
such discharged Claims, debts or liabilities or terminated
Equity Interests or rights: (i) commencing or continuing in
any manner any action or other proceeding against the Debtors,
Reorganized Stratosphere, Reorganized Gaming Corp. or their
respective property; (ii) enforcing, attaching, collecting or
recovering in any manner any judgment, award, decree or order
against the Debtors, Reorganized Stratosphere Reorganized
Gaming Corp. or their respective property; (iii) creating,
perfecting or
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enforcing any lien or encumbrance against the Debtors,
Reorganized Stratosphere, Reorganized Gaming Corp. or their
respective property; (iv) asserting a setoff, right of
subrogation or recoupment of any kind against any debt,
liability or obligation due to the Debtors, Reorganized
Stratosphere, Reorganized Gaming Corp. or their respective
property; and (v) commencing or continuing any action, in any
manner or any place, that does not comply with or is
inconsistent with the provisions of this Plan or the
Bankruptcy Code. By accepting distributions pursuant to this
Plan, each holder of an Allowed Claim receiving distributions
pursuant to this Plan will be deemed to have specifically
consented to the injunction set forth in this section.
11.4. EXCULPATION. Neither Debtors, Reorganized Stratosphere,
Reorganized Gaming Corp., Majority Original Holders nor any
Statutory Committee, nor any of their respective present or
former members, directors, officers, employees, advisors,
attorneys or agents, shall have or incur any liability to any
holder of a Claim or Equity Interest, or any other party in
interest, or any of their respective agents, employees,
representatives, financial advisors, attorneys or Affiliates,
or any of their successors or assigns, for any act or omission
in connection with, relating to, or arising out of, the
Chapter 11 Cases, the pursuit of confirmation of this Plan,
the consummation of this Plan, except for their willful
misconduct, and in all respects shall be entitled to
reasonably rely upon the advice of counsel with respect to
their duties and responsibilities under this Plan or in the
context of the Chapter 11 Cases. No holder of a Claim or
Equity Interest, or any other party in interest, including
their respective agents, employees, representatives, financial
advisors, attorneys or Affiliates, shall have any right of
action against Debtors, Reorganized Stratosphere, Reorganized
Gaming Corp., Majority Original Holders, Statutory Committee
or any of their respective present or former members,
officers, directors, employees, advisors, attorneys or agents,
for any act or omission in connection with, relating to, or
arising out of, the Chapter 11 Cases, the pursuit of
confirmation of this Plan, the consummation of this Plan or
the administration of this Plan, except for their willful
misconduct.
12. RETENTION OF JURISDICTION
12.1. JURISDICTION. Notwithstanding the entry of the Confirmation
Order and the occurrence of the Effective Date, the Bankruptcy
Court shall retain such jurisdiction over the Chapter 11 Cases
after the Effective Date as is legally permissible, including
jurisdiction to:
a) Allow, disallow, determine, liquidate, classify,
estimate or establish the priority or secured or unsecured
status of any Claim, including the resolution of any request
for payment of any Administrative Claim and the resolution of
any and all objections to the allowance or priority of Claims
and all issues regarding United States Trustee quarterly fees;
b) Grant or deny any applications for allowance of
compensation or reimbursement of expenses authorized pursuant
to the Bankruptcy Code or this Plan for periods ending on or
before the Effective Date;
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c) Resolve any matters related to the assumption,
assignment or rejection of any executory contract or unexpired
lease to which the Debtors are a party and to hear, determine
and, if necessary, liquidate, any Claims arising therefrom or
cure amounts related thereto;
d) Ensure that distributions to holders of Allowed
Claims are accomplished pursuant to the provisions of this
Plan;
e) Decide or resolve any motions, adversary
proceedings, Litigation Claims, contested or litigated matters
and any other matters and grant or deny any applications or
motions involving the Debtors that may be pending on the
Effective Date;
f) Enter such orders as may be necessary or appropriate
to implement or consummate the provisions of this Plan and all
contracts, instruments, releases and other agreements or
documents created in connection with this Plan or the
Disclosure Statement or the Confirmation Order, except as
otherwise provided herein;
g) Resolve any cases, controversies, suits or disputes
that may arise in connection with the consummation,
interpretation or enforcement of this Plan or the Confirmation
Order or any Person's obligations incurred in connection with
this Plan or the Confirmation Order;
h) Modify this Plan before or after the Effective Date
pursuant to Section 1127 of the Bankruptcy Code or modify the
Disclosure Statement or any contract, instrument, release or
other agreement or document created in connection with this
Plan or the Disclosure Statement or the Confirmation Order; or
remedy any defect or omission or reconcile any inconsistency
in any Bankruptcy Court order, this Plan, the Disclosure
Statement or the Confirmation Order or any contract,
instrument, release or other agreement or document created in
connection with this Plan or the Disclosure Statement of the
Confirmation Order, in such manner as may be necessary or
appropriate to consummate this Plan, to the extent authorized
by the Bankruptcy Code;
i) Issue injunctions, enter and implement other orders
or take such other actions as may be necessary or appropriate
to restrain interference by any person with consummation,
implementation or enforcement of this Plan or Confirmation
Order, except as otherwise provided herein;
j) Enter and implement such orders as are necessary or
appropriate if the Confirmation Order is for any reason
modified, stayed, reversed, revoked or vacated;
k) Determine any other matters that may arise in
connection with or relate to this Plan, the Disclosure
Statement, the Confirmation Order or any contract, instrument,
release or other agreement or document created in connection
with this Plan or the Disclosure Statement or Confirmation
Order, except as
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otherwise provided herein;
l) Enter an order closing the Chapter 11 Cases; and
m) Initiate and prosecute Avoidance Actions and
Litigation Claims and continue to prosecute pending Avoidance
Actions, Litigation Claims and any other claim or cause of
action of Debtors, including, but not limited to, those
against Stupak and any of his Affiliates and Grand and any of
its Affiliates.
13. MODIFICATION AND AMENDMENT OF PLAN; ALTERNATIVE TRANSACTIONS
13.1. MODIFICATION AND AMENDMENT. Prior to Confirmation,
Stratosphere and Gaming Corp. may alter, amend, or modify this
Plan or any Exhibits thereto under Section 1127(a) of the
Bankruptcy Code at any time. After the Confirmation Date and
prior to substantial consummation of this Plan as defined in
Section 1101(2) of the Bankruptcy Code, Stratosphere and
Gaming Corp. may, under Section 1127(b), (c) and (d) of the
Bankruptcy Code, alter, amend or modify this Plan or institute
proceedings in the Bankruptcy Court to remedy any defect or
omission or reconcile any inconsistencies in this Plan, the
Disclosure Statement or the Confirmation Order, to make
appropriate adjustments and modifications to this Plan, the
Confirmation Order or the Plan Supplement exhibits as a result
of comments or actions of the SEC or Gaming Authorities, and
such matters as may be necessary to carry out the purposes and
effects of this Plan so long as such proceedings do not
materially adversely affect the treatment of holders of Claims
under this Plan.
13.2. ALTERNATIVE TRANSACTIONS. During the period commencing upon
the filing of this Plan with the Bankruptcy Court and up until
the commencement of the Confirmation Hearing, Stratosphere and
Gaming Corp., will, upon the execution of appropriate
confidentiality agreements, respond to inquiries from, engage
in discussions with and provide information to any Person
interested in the final restructuring of the Debtors in lieu
of the transaction contained in this Plan. At the Confirmation
Hearing, Debtors shall disclose to the Bankruptcy Court
information concerning all Alternative Transactions Proposals
received. In the event that prior to the Confirmation Hearing
an Alternative Transaction Proposal is received, Stratosphere
shall notify the Majority Original Holders of such Alternative
Transaction Proposal, whether written or oral, which notice
shall identify the parties to such Alternative Transaction
Proposal and set forth in reasonable detail the terms and
conditions of such Alternative Transaction Proposal and
Debtors reserve the right to submit such Alternative
Transaction Proposal to the Bankruptcy Court for determination
as to such Alternative Transaction Proposal containing
economic terms and conditions more favorable to the Debtors
and Creditors than the transaction proposed by this Plan.
Debtors reserve the right to alter, amend or modify this Plan
as provided for above in Section 13.1 prior to Confirmation or
during the Confirmation Hearing to reflect such Alternative
Transaction Proposal, it being understood and agreed that in
such event, each holder of a Claim who has accepted or
rejected this Plan shall have an opportunity within a time
period to be
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fixed by the Bankruptcy Court, to change such holder's
previous acceptance or rejection.
14. MISCELLANEOUS
14.1. FILING OF OBJECTIONS TO CLAIMS. After the Effective Date,
objections to Claims shall be made and objections to Claims
made previous thereto shall be pursued by Reorganized
Stratosphere or Reorganized Gaming Corp., as the case may be,
or any other party properly entitled to do so after notice to
Reorganized Stratosphere , Reorganized Gaming Corp. and
approval by the Bankruptcy Court. Any objections made after
the Effective Date shall be filed and served not later than
ninety (90) days after the Effective Date; provided, however,
that such period may be extended by order of the Bankruptcy
Court for good cause shown.
14.2. RESOLUTION OF OBJECTIONS AFTER EFFECTIVE DATE; DISTRIBUTIONS
14.2.1 RESOLUTION OF OBJECTIONS. From and after the Effective
Date, Reorganized Stratosphere or Reorganized Gaming Corp., as
the case may be, may litigate to judgment, propose settlements
of, or withdraw objections to, all pending or filed Disputed
Claims, and Reorganized Stratosphere or Reorganized Gaming
Corp., as applicable, may settle or compromise any Disputed
Claim without Notice and a Hearing and without approval of the
Bankruptcy Court.
14.2.2 DISTRIBUTIONS. In order to facilitate distribution of
Pro Rata shares to holders of Allowed Claims, and if and to
the extent there are Disputed Claims in any Class, the
Disbursing Agent shall set aside in a separate designated
reserve account the payments or distributions applicable to
such Disputed Claims as if such Disputed Claims were Allowed
Claims, pending the allowance or disallowance of such Disputed
Claims. All amounts applicable to Disputed Claim in Class 9
shall be segregated in a separate interest bearing account
from which shall be deducted the reasonable costs, expenses,
and fees incurred by the a) Disbursing Agent in administering
distributions and b) Reorganized Stratosphere and Reorganized
Gaming Corp. in objecting to, litigating and settling on
Disputed Claims in Class 9. In the event that either
Reorganized Stratosphere or Reorganized Gaming Corp. wish to
deposit or hold a lesser amount than required herein and is
unable to reach an agreement with the holder of the Disputed
Claim or the Disbursing Agent, as the case may be, on the
amount to be deposited or held, the Bankruptcy Court shall fix
the amount after notice and hearing. Upon Final Order with
respect to a Disputed Claim, the holder of such Disputed
Claim, to the extent it has been determined to be an Allowed
Claim, shall receive from the Disbursing Agent that payment or
distribution to which it would have been entitled if the
portion of the Claim so allowed had been allowed as of the
Effective Date. Such payment or distribution shall be made as
soon as practical after the order allowing the Claim has
become a Final Order. The balance of the amount held by the
Disbursing Agent after such payment applicable to a previously
Disputed Claim that has been disallowed in whole and in part,
shall be returned to Reorganized Debtors, except with regard
to a previously Disputed Claim in Class 9, in which event, the
balance shall be
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distributed Pro Rata amongst the holders of Allowed Claims in
Class 9 or continue to be held by Disbursing Agent with regard
to Disputed Claims not yet resolved.
14.3. EFFECTUATING DOCUMENTS; FURTHER TRANSACTIONS; TIMING. Each of
the officers of the Debtors, Reorganized Stratosphere, and
Reorganized Gaming Corp. is authorized to execute, deliver,
file or record such contracts, instruments, releases and other
agreements or documents and to take such actions as may be
necessary or appropriate to effectuate and further evidence
the terms and conditions of this Plan and any securities
issued pursuant to this Plan. All transactions that are
required to occur on the Effective Date under the terms of
this Plan shall be deemed to have occurred simultaneously. The
Debtors, Reorganized Stratosphere and Reorganized Gaming Corp.
are authorized and directed to do such acts and execute such
documents as are necessary to implement this Plan.
14.4. EXEMPTION FROM TRANSFER TAXES. Pursuant to Section 1146(c) of
the Bankruptcy Code, (i) the issuance, distribution, transfer
or exchange of the New Common Stock or other Estate property;
(ii) the creation, modification, consolidation or recording of
any deed of trust or other security interest, the securing of
additional indebtedness by such means or by other means in
furtherance of, or connection with this Plan or the
Confirmation Order; (iii) the making, assignment, modification
or recording of any lease or sublease;. or (iv) the making,
delivery or recording of a deed or other instrument of
transfer under, in furtherance of, or in connection with, this
Plan, Confirmation Order or any transaction contemplated
above, or any transactions arising out of, contemplated by or
in any way related to the foregoing shall not be subject to
any document recording tax, stamp tax, conveyance fee,
intangibles or similar tax, mortgage tax, stamp act or real
estate transfer tax, mortgage recording tax or other similar
tax or governmental assessment and the appropriate state of
local government officials or agents shall be, and hereby are,
directed to forego the collection of any such tax or
assessment and to accept for filing or recordation any of the
foregoing instruments or other documents without the payment
of any such tax or assessment.
14.5. REVOCATION OR WITHDRAWAL OF THIS PLAN. The Debtors reserve the
right to revoke or withdraw this Plan as to one of both
Debtors at any time prior to the Confirmation Date. If this
Plan is withdrawn or revoked, then this Plan shall be deemed
null and void and nothing contained herein shall be deemed to
constitute a waiver or release of any Claims by or against the
Debtors or any other Person nor shall the withdrawal or
revocation of this Plan prejudice in any manner the rights of
the Debtors or any Person in any further proceedings involving
the Debtors. In the event this Plan is withdrawn or revoked,
nothing set forth herein shall be deemed an admission of any
sort and this Plan and any transaction contemplated thereby
shall not be admitted into evidence in any proceeding.
14.6. BINDING EFFECT. This Plan shall be binding upon, and shall
inure to the benefit of, the Debtors, and the holders of all
Claims and Equity Interests and their respective successors
and assigns.
14.7. GOVERNING LAW. Except to the extent that the Bankruptcy Code
or other federal
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law is applicable or as provided in any document contained in
the Plan Supplement, any contract, instrument, release or
other agreement entered into in connection with this Plan or
in any document which remains unaltered by this Plan, the
rights, duties and obligations of the Debtors and any other
Person arising under this Plan shall be governed by, and
construed and enforced in accordance with, the internal laws
of the State of Nevada without giving effect to Nevada's
choice of law provisions.
14.8. INTERCOMPANY CLAIMS. Except with respect to the Original
Subsidiary Guarantee, any intercompany Claims between or
against Stratosphere and Gaming Corp., as the case may be,
shall remain unaltered by this Plan, and such intercompany
Claims shall be paid or otherwise satisfied in the ordinary
course of business.
14.9. MODIFICATION OF PAYMENT TERMS. Reorganized Stratosphere and
Reorganized Gaming Corp. reserve the right to modify the
treatment of any Allowed Claim or Allowed Equity Interest in
any manner adverse only to the holder of such Claim or Equity
Interest at any time after the Effective Date upon the prior
written consent of the holder whose Allowed Claim or Allowed
Equity Interest treatment is being adversely affected.
14.10. PROVIDING FOR CLAIMS PAYMENTS. Distributions to holders of
Allowed Claims in Classes 1, 2, 3 and 9 shall be made by the
Disbursing Agent: (i) at the addresses set forth on the proofs
of Claim filed by such holders (or at the last known addresses
of such holders if no proof of Claim is filed or if the Debtor
has been notified of a change of address); (ii) at the
addresses set forth in any written notices of address changes
delivered to the Disbursing Agent after the date of any
related proof of Claim; or (iii) at the addresses reflected in
the Schedules if no proof of Claim has been filed and the
Disbursing Agent has not received a written notice of a change
of address. If any holder's distribution is returned as
undeliverable, no further distributions to such holder shall
be made unless and until the Disbursing Agent is notified of
such holder's then current address, at which time all missed
distributions shall be made to such holder without interest.
Amounts in respect of undeliverable distributions made through
the Disbursing Agent shall be returned to Reorganized
Stratosphere until such distributions are claimed. All claims
for undeliverable distributions shall be made on or before the
second anniversary of the Effective Date. After such date, all
unclaimed property shall revert to Reorganized Stratosphere or
Reorganized Gaming Corp., as the case may be, and the Claim of
any holder or successor to such holder with respect to such
property shall be discharged and forever barred
notwithstanding any federal or state escheat laws to the
contrary. Nothing contained in this Plan shall require the
Debtors, Reorganized Stratosphere, Reorganized Gaming Corp. or
the Disbursing Agent to attempt to locate any holder of an
Allowed Claim.
14.11. SET OFFS. The Debtors, Reorganized Stratosphere, and
Reorganized Gaming Corp. may, but shall not be required to,
set off or recoup against any Claim or Equity Interest and the
payments or other distributions to be made pursuant to this
Plan in respect of such Claim (before any distribution is made
on account of such Claim), claims of any nature whatsoever
that the applicable Debtor, Reorganized
45
<PAGE> 47
Stratosphere and Reorganized Gaming Corp. may have against the
holder of such Claim or Equity Interest to the extent such
Claims or Equity Interest may be set off or recouped under
applicable law, but neither the failure to do so nor the
allowance of any Claim or Equity Interest hereunder shall
constitute a waiver or release by the Debtors, Reorganized
Stratosphere or Reorganized Gaming Corp., of any such claim
that it may have against such holder.
14.12. NOTICES. Any notice required or permitted to be provided under
this Plan shall be in writing and served by either: (a)
certified mail, return receipt requested, postage prepaid; (b)
hand delivery or (c) reputable overnight courier service,
freight prepaid, to be addressed as follows:
If to the Debtors: STRATOSPHERE CORPORATION
Las Vegas Boulevard South
Las Vegas, Nevada 89104
Attn: Andrew S. Blumen,
Executive Vice President and
General Counsel
Tel: (702) 383-5298
Fax: (702) 383-4733
With a copy to: GORDON & SILVER, LTD.
Howard Hughes Parkway, 14th Floor
Las Vegas, Nevada 89109
Attn: Gerald M. Gordon, Esq.
Thomas H. Fell, Esq.
Tel: (702) 796-5555
Fax: (702) 369-2666
If to Majority Original HIGH RIVER LIMITED PARTNERSHIP
Holders: AMERICAN REAL ESTATE PARTNERS, L.P.
C/O ICAHN ASSOCIATES GROUP
767 Fifth Avenue
New York, NY 10153
Attn: Carl Icahn
Tel: (212) 702-4314
Fax: (212) 750-5815
SKY HIGH L.L.C.
1560 Sherman Ave., #900
Evanston, IL 60201
Attn: Bradford T. Whitmore
Tel: (847) 733-0232
Fax: (847) 733-0339
46
<PAGE> 48
With a copy to: BERLACK, ISRAELS & LIBERMAN, LLP
120 W. 45th Street
New York, NY 10036
Attn: Robert J. Stark, Esq.
Tel: (212) 704-0100
Fax: (212) 704-0196
and
JONES, DAY, REAVIS & POGUE
77 West Wacker, 35th Floor
Chicago, ILL 60601
Attn: Timothy A. Pohl, Esq.
Tel: (312) 782-3939
Fax: (312) 782-8585
If to the Indenture Trustee: IBJ SCHRODER BANK AND TRUST
COMPANY
One State Street
New York, New York 10004
Attn: Max Volmar
Telephone: (212) 858-2428
Fax: (212) 858-2156
With a copy to: BRYAN CAVE LLP
Suite 3600
211 N. Broadway
St. Louis, Missouri 63102-2750
Attn: Gregory D. Willard, Esq.
Telephone: (314) 259-2000
Fax (314) 259-2020
14.13. STATUTORY COMMITTEE. Any Statutory Committee appointed in the
Chapter 11 Cases shall terminate on the Effective Date and
shall thereafter have no further responsibilities in respect
of the Chapter 11 Cases, except with respect to preparation of
filing of applications for compensation and reimbursement of
expenses.
14.14. SEVERABILITY. If any provision of this Plan is found by the
Bankruptcy Court to be invalid, illegal or unenforceable or
that this Plan is not confirmable pursuant to Section 1129 of
the Bankruptcy Code, the Bankruptcy Court, at the request of
the Debtors or the holders of the Original First Mortgage
Notes, shall have the power to alter and interpret such term
to make it valid or enforceable to the maximum extent
practicable, consistent with the original purpose of the term
or provision held be invalid, void or unenforceable, and such
term or provision shall then be applicable as altered or
interpreted. Notwithstanding any such holding, alteration or
interpretation , the remainder of the terms and provisions of
this Plan shall remain in
47
<PAGE> 49
full force and effect and will in no way be affected, impaired
or invalidated by such holding, alteration or interpretation.
The Confirmation Order shall constitute a judicial
determination and shall provide that each term and provision
of this Plan, as it may have been altered or interpreted in
accordance with the foregone, is valid and enforceable
pursuant to its terms.
14.15. WITHHOLDING AND REPORTING REQUIREMENTS. In connection with
this Plan and all instruments and securities issued in
connection therewith and distributions thereon, Reorganized
Stratosphere, Reorganized Gaming Corp., the Disbursing Agent
and the Indenture Trustee, as the case may be, shall comply
with all withholding and reporting requirements imposed by any
federal, state, local, or foreign taxing authority, and all
distributions hereunder shall be subject to any such
withholding and reporting requirements. Reorganized
Stratosphere, Reorganized Gaming Corp., the Disbursing Agent
or the Indenture Trustee, as the case may be, shall be
authorized to take any and all action that may be necessary to
comply with such withholding and recording requirements.
Notwithstanding any other provision of this Plan, each holder
of an Allowed Claim that has received a distribution of New
Common Stock or Cash pursuant to this Plan, shall have sole
and exclusive responsibility for the satisfaction or payment
of any tax obligation imposed by any governmental unit,
including income, withholding and other tax obligation on
account of such distribution.
14.16. POST CONFIRMATION REPORTING. Until the entry of the final
decree closing the Chapter 11 Cases, Reorganized Stratosphere
and Reorganized Gaming Corp. shall file with the clerk of the
Bankruptcy Court, not later than four (4) months after the
entry of the Confirmation Order and every six (6) months
thereafter, a report of the action taken by Reorganized
Stratosphere and Reorganized Gaming Corp. and the progress
made toward consummation of the confirmed Plan.
14.17. CRAMDOWN. In the event that any impaired Class is determined
to have rejected this Plan in accordance with Section 1126 of
the Bankruptcy Code, the Debtors will invoke the provisions of
Section 1129(b) of the Bankruptcy Code to satisfy the
requirements for confirmation of this Plan. The Debtors
reserve the right to modify this Plan to the extent, if any,
that Confirmation pursuant to Section 1129(b) of the
Bankruptcy Code requires modification.
14.18. QUARTERLY FEES TO THE UNITED STATES TRUSTEE. Reorganized
Stratosphere and Reorganized Gaming Corp. shall pay all
quarterly fees payable to the Office of the United States
Trustee for the Debtors after Confirmation, consistent with
applicable
48
<PAGE> 50
provisions of the Bankruptcy Code, Bankruptcy Rules and 28 USC
ss. 1930(a)(6).
DATED: February _____, 1998
Respectfully submitted,
STRATOSPHERE CORPORATION,
a Delaware corporation
By: ____________________________
Andrew S. Blumen
Executive Vice President
STRATOSPHERE GAMING CORP.,
a Nevada corporation
By:__________________________________
Andrew S. Blumen
Executive Vice President
GORDON & SILVER, LTD.
By: _________________________________
Gerald M. Gordon,
Attorney for the Debtors-In-
Possession
49
<PAGE> 51
EXHIBIT 1
TO
SECOND AMENDED PLAN OF REORGANIZATION
CERTAIN PRESERVED POTENTIAL CAUSES OF ACTION
All defined terms used herein shall have the meanings set
forth in the Plan. The following is a non-exhaustive list of potential parties
against whom Debtors, Reorganized Stratosphere and/or Reorganized Gaming Corp.
may hold a claim or cause of action. Debtors, Reorganized Stratosphere and
Reorganized Gaming Corp. reserve their right to modify this list to amend or add
parties or causes of action, but disclaim any obligation to do so. In addition
to the possible causes of action and claims listed below, Debtors, Reorganized
Stratosphere and Reorganized Gaming Corp. have or may have, in the ordinary
course of their business, numerous causes of action and Claims or rights against
contractors, subcontractors, suppliers and others with whom they deal in the
ordinary course of their business (the "Ordinary Course Claims"). Debtors,
Reorganized Stratosphere and Reorganized Gaming Corp. reserve their right to
enforce, sue on, settle or compromise (or decline to do any of the foregoing)
the Ordinary Course Claims, as well as the claims and causes of action listed
below and all other clams and causes of action. Debtors. Reorganized
Stratosphere and Reorganized Gaming Corp. also have, or may have, and are
retaining, various claims or causes of action arising under or pursuant to its
insurance policies, and all rights arising under, relating to, or in connection
with such policies are expressly reserved and retained.
1. Robert E. Stupak Indemnification; Derivative;
ContractuaL; Preference;
Turnover
2. Bob Stupak Enterprises, Inc. Indemnification; Derivative;
Contractual Preference
3. Las Vegas Vacation Club, Inc. Indemnification; Contractual
4. Grand Casinos, Inc. Derivative; Preference;
Contractual
5. Taylor International Corporation Negligence; Contractual
(and any and all subcontractors)
6. Any and all construction consultants, Negligence; Contractual
engineering, designers and architects
with respect to the Stratosphere Tower
Hotel and Casino in Las Vegas, Nevada
7. Any underwriters employed by Negligence; Contractual
Stratosphere prior to Petition Date
8. Perini Construction Negligence; Contractual
<PAGE> 52
EXHIBIT 2
TO
SECOND AMENDED PLAN OF REORGANIZATION
REJECTED EXECUTORY CONTRACTS
All Vacation Package Contracts of Robert E. Stupak, Bob Stupak
Enterprises, Inc. and Las Vegas Vacation Club, Inc. with individuals who have
filed Claims in these proceedings. The listing of all such contracts as rejected
executory contracts herein is not intended to be an admission that any such
contracts represent Claims in these proceedings. All such contracts are
disputed.
<PAGE> 53
EXHIBIT 3
TO
SECOND AMENDED PLAN OF REORGANIZATION
REJECTED LEASES
NONE
<PAGE> 1
EXHIBIT 10(58)
SENIOR EXECUTIVE RETENTION AGREEMENT
THIS SENIOR EXECUTIVE RETENTION AGREEMENT (this "Agreement") is made on
the 23rd day of January, 1998, by and between STRATOSPHERE GAMING CORP., a
Nevada corporation (the "Corporation") and STRATOSPHERE CORPORATION, a Delaware
corporation ("Stratosphere" and collectively with Corporation the "Debtors")
and THOMAS A. LETTERO (the "Executive") with respect to the following facts and
circumstances:
PRELIMINARY STATEMENTS
A. On January 27, 1997, the Debtors filed their Voluntary Petitions for
bankruptcy protection under Title 11, Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the District of Nevada (the
"Bankruptcy Court") and have, since that date, been operating as
debtors-in-possession under the Bankruptcy Code.
B. The Executive is currently employed by the Corporation as the Chief
Financial Officer and serves on the Board of Directors of the Corporation (the
"Board").
C. The Debtors have determined that the Executive is a key Executive of
the Corporation and it is the desire of the Debtors to assure themselves of the
availability of the services of the Executive and to provide assurances to the
Executive in the event of (1) the entry of a final and non-appealable order
confirming a plan of reorganization for the Debtors ("Confirmation Event"); or
(2) the liquidation or consummation and closing of the sale of substantially
all of the assets of the Hotel ("Sales Event"); or (3) Executive's involuntary
termination of Executive's employment without cause (hereinafter defined as
"Involuntary Termination Event" and collectively with Confirmation Event and
Sales Event, an "Event").
D. Until the occurrence of an Event, the Debtors believe it imperative
that they 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 the Debtors as to whether such proposal or transaction would be in
the best interest of the Debtors.
AGREEMENT
NOW, THEREFORE, to assure the Debtors that they 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 Debtors, and for other good and
valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, the Debtors and the Executive agree as follows:
1
<PAGE> 2
1. Retention Compensation. In addition to the base salary of the
Executive, the Executive shall be entitled to additional compensation
("Retention Compensation") equal to one hundred percent (100%) ("100% Payment")
of the Executive's annual base salary as of May 1, 1997 upon the occurrence of
the earlier of (A) an Involuntary Termination Event or (B) the occurrence of a
Sales Event or a Confirmation Event. Upon the Bankruptcy Court
entering a final and non-appealable order approving this Agreement, the
Corporation will place into escrow the 100% Payment. It is understood and
agreed that solely for income tax purposes, Retention Compensation will not be
deemed to be income of the Executive until received by the Executive.
Retention Compensation accrued but unpaid will not be paid to the Executive if
the Executive voluntarily terminates his or her employment prior to the
Executive being entitled to receive the 100% Payment from escrow.
2. Termination "for cause." For the purposes of this Agreement,
termination "for cause" shall mean: (a) the commission of fraud, embezzlement
or theft against the Debtors or against any employee, customer or business
associatesd; and (b) a conviction of or guilty plea to a felony.
3. Litigation Costs. 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 Executive shall be entitled to
recover reasonable attorneys' fees and costs incurred if the Executive is the
prevailing party.
4. Payment Obligations. All amounts payable by the Corporation hereunder
shall be paid without notice or demand. The obtaining by Executive of any
other employment shall in no event affect any reduction of the Corporation's
obligations to make the payments and arrangements required to be made under
this Agreement.
5. Health Benefits. Executive shall continue to receive healthcare
benefits (including dental and vision) for the Executive and his or her family
in accordance with the Corporation's pre-January 27, 1997 policies and
practices. In the event of a termination of Executive's employment with the
Debtors without cause, such existing healthcare benefits will be extended for
the Executive until the earlier of (1) the end of the nine month period
following such termination and (2) the qualification and eligibility of the
Executive for healthcare plan benefits under another group health plan.
6. Continuing Obligations. The Executive shall retain in confidence any
confidential information known to him concerning the Debtors and their
respective businesses so long as such information is not publicly disclosed.
7. Bankruptcy Court Approval. This Agreement is subject to the approval
of the Bankruptcy Court.
8. Successors. This Agreement shall be binding upon and inure to the
benefit of the Executive and his estate and the Debtors and any successor of
the Debtors, but
2
<PAGE> 3
neither this Agreement nor any rights arising hereunder may be
assigned or pledged by the Executive.
9. 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.
10. Prior Agreements. This Agreement supersedes any prior severance
agreement between the Executive and the Debtors, which shall be of no further
force and effect whatsoever.
11. Choice of Law. This Agreement has been entered into in the State of
Nevada and will be governed by those laws of the State of Nevada without regard
to conflict of laws principles. Any disputes which arise under this Agreement,
even after the termination of this Agreement, that cannot be resolved through
good faith discussions, will be heard only in the State or Federal courts
located in Clark County, Nevada and both parties hereby consent to such
jurisdiction.
12. Captions. The article and section captions contained in this
Agreement are inserted for convenience only and shall not affect in any way,
the meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
first above written.
DEBTORS:
Stratosphere Corporation, Stratosphere Gaming Corp.,
a Delaware corporation a Nevada corporation
By: /s/ Andrew S. Blumen By:/s/ Andrew S. Blumen
---------------------------- ----------------------------
Its: Executive Vice President Its: Executive Vice President
Grand Casinos Grand Casinos
---------------------------- ----------------------------
EXECUTIVE:
/s/ Thomas A. Lettero
- ----------------------------
THOMAS A. LETTERO
3
<PAGE> 1
EXHIBIT 10(59)
SENIOR EXECUTIVE RETENTION AGREEMENT
THIS SENIOR EXECUTIVE RETENTION AGREEMENT (this "Agreement") is made on
the 23rd day of January, 1998, by and between STRATOSPHERE GAMING CORP., a
Nevada corporation (the "Corporation") and STRATOSPHERE CORPORATION, a Delaware
corporation ("Stratosphere" and collectively with Corporation the "Debtors")
and ANDREW S. BLUMEN (the "Executive") with respect to the following facts and
circumstances:
PRELIMINARY STATEMENTS
A. On January 27, 1997, the Debtors filed their Voluntary Petitions for
bankruptcy protection under Title 11, Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the District of Nevada (the
"Bankruptcy Court") and have, since that date, been operating as
debtors-in-possession under the Bankruptcy Code.
B. The Executive is currently employed by the Corporation as the Executive
Vice President and General Counsel and serves on the Board of Directors of the
Corporation (the "Board").
C. The Debtors have determined that the Executive is a key Executive of
the Corporation and it is the desire of the Debtors to assure themselves of the
availability of the services of the Executive and to provide assurances to the
Executive in the event of (1) the entry of a final and non-appealable order
confirming a plan of reorganization for the Debtors ("Confirmation Event"); or
(2) the liquidation or consummation and closing of the sale of substantially
all of the assets of the Hotel ("Sales Event"); or (3) Executive's involuntary
termination without cause of Executive's employment (hereinafter defined as
"Involuntary Termination Event" and collectively with Confirmation Event and
Sales Event, an "Event").
D. Until the occurrence of an Event, the Debtors believe it imperative
that they 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 Debtors as to whether such proposal or transaction would be in the
best interest of the Debtors.
AGREEMENT
NOW, THEREFORE, to assure the Debtors that they 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 Debtors, and for other good and
valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, the Debtors and the Executive agree as follows:
1
<PAGE> 2
1. Retention Compensation. In addition to the base salary of the
Executive, the Executive shall be entitled to additional compensation
("Retention Compensation") equal to one hundred percent (100%) ("100% Payment")
of the Executive's annual base salary as of May 1, 1997 upon the occurrence of
the earlier of (A) an Involuntary Termination Event or (B) the occurrence of a
Sales Event or a Confirmation Event. Upon the Bankruptcy Court entering a
final and non-appealable order approving this Agreement, the Corporation will
place into escrow the 100% Payment. It is understood and agreed that solely
for income tax purposes, Retention Compensation will not be deemed to be income
of the Executive until received by the Executive. Retention Compensation
accrued but unpaid will not be paid to the Executive if the Executive
voluntarily terminates his or her employment prior to the Executive being
entitled to receive the 100% Payment from escrow.
2. Termination "for cause." For the purposes of this Agreement,
termination "for cause" shall mean: (a) the commission of fraud, embezzlement
or theft against the Debtors or against any employee, customer or business
associated; and (b) a conviction of or guilty plea to a felony.
3. Litigation Costs. 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 Executive shall be entitled to
recover reasonable attorneys' fees and costs incurred if the Executive is the
prevailing party.
4. Payment Obligations. All amounts payable by the Corporation hereunder
shall be paid without notice or demand. The obtaining by Executive of any
other employment shall in no event affect any reduction of the Corporation's
obligations to make the payments and arrangements required to be made under
this Agreement.
5. Health Benefits. Executive shall continue to receive healthcare
benefits (including dental and vision) for the Executive and his or her family
in accordance with the Corporation's pre-January 27, 1997 policies and
practices. In the event of a termination of Executive's employment with the
Debtors without cause, such existing healthcare benefits will be extended for
the Executive until the earlier of (1) the end of the nine month period
following such termination and (2) the qualification and eligibility of the
Executive for healthcare plan benefits under another group health plan.
6. Continuing Obligations. The Executive shall retain in confidence any
confidential information known to him concerning the Debtors and their
respective businesses so long as such information is not publicly disclosed.
7. Bankruptcy Court Approval. This Agreement is subject to the approval
of the Bankruptcy Court.
8. Successors. This Agreement shall be binding upon and inure to the
benefit of the Executive and his estate and the Debtors and any successor of
the Debtors, but
2
<PAGE> 3
neither this Agreement nor any rights arising hereunder may be
assigned or pledged by the Executive.
9. 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.
10. Prior Agreements. This Agreement supersedes any prior severance
agreement between the Executive and the Debtors, which shall be of no further
force and effect whatsoever.
11. Choice of Law. This Agreement has been entered into in the State of
Nevada and will be governed by those laws of the State of Nevada without regard
to conflict of laws principles. Any disputes which arise under this Agreement,
even after the termination of this Agreement, that cannot be resolved through
good faith discussions, will be heard only in the State or Federal courts
located in Clark County, Nevada and both parties hereby consent to such
jurisdiction.
12. Captions. The article and section captions contained in this
Agreement are inserted for convenience only and shall not affect in any way,
the meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
first above written.
DEBTORS:
Stratosphere Corporation, Stratosphere Gaming Corp.,
a Delaware corporation a Nevada corporation
By: /s/ Thomas A. Lettero By: /s/ Thomas A. Lettero
---------------------------- ----------------------------
Its: Chief Financial Officer Its: Chief Financial Officer
---------------------------- ----------------------------
EXECUTIVE:
/s/ Andrew S. Blumen
- -------------------------------
ANDREW S. BLUMEN
3
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
Stratosphere Gaming Corp.
Stratosphere Land Corporation
Stratosphere Advertising Agency
2000 Las Vegas Boulevard Retail Corporation
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> DEC-28-1997
<CASH> 20,326,317
<SECURITIES> 0
<RECEIVABLES> 6,718,823
<ALLOWANCES> (3,439,311)
<INVENTORY> 2,780,551
<CURRENT-ASSETS> 5,753,608
<PP&E> 141,128,059
<DEPRECIATION> 18,746,080
<TOTAL-ASSETS> 155,976,314
<CURRENT-LIABILITIES> 13,470,680
<BONDS> 0
0
0
<COMMON> 583,931
<OTHER-SE> (157,583,318)
<TOTAL-LIABILITY-AND-EQUITY> 155,976,314
<SALES> 137,515,836
<TOTAL-REVENUES> 150,470,849
<CGS> 17,930,082
<TOTAL-COSTS> 109,581,328
<OTHER-EXPENSES> 25,129,231
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,491,686
<INCOME-PRETAX> (19,315,031)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,624,549)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,624,549)
<EPS-PRIMARY> (0.33)
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</TABLE>