<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NO. 1-12030
STRATOSPHERE CORPORATION
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 88-0292318
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2000 LAS VEGAS BOULEVARD SOUTH
LAS VEGAS, NEVADA 89104
------------------------------ -----
(Address of principal executive offices) (Zip Code)
(702) 382-4446
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
Indicate the number of shares outstanding for each of the issuer's classes of
Common Stock, as of the latest practicable date: 2,030,000 as of November 10,
1998
<PAGE> 2
STRATOSPHERE CORPORATION
(DEBTOR-IN-POSSESSION)
FORM 10-Q
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 27, 1998 UNAUDITED AND
DECEMBER 28, 1997 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997 (UNAUDITED) 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997 (UNAUDITED) 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS
ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997 (UNAUDITED) 6-7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 13-17
PART II. OTHER INFORMATION 18
ITEM 1. LEGAL PROCEEDINGS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
BALANCE SHEETS (DEBTORS-IN-POSSESSION)
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 27, DECEMBER 28,
1998 1997
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $15,879,443 $20,326,317
Cash and cash equivalents-restricted 7,382,904 471,273
Investments-restricted 3,253,733 3,139,469
Accounts receivable, net 5,778,681 2,479,512
Other current assets 6,814,286 5,753,608
- ------------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 39,109,047 32,170,179
- ------------------------------------------------------------------------------------------------------------------------------------
Property and Equipment, Net 125,699,999 122,381,979
- ------------------------------------------------------------------------------------------------------------------------------------
Other Assets:
Deferred financing costs-net 299,735 624,156
Related party receivable-net - 800,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Other Assets 299,735 1,424,156
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $165,108,781 $155,976,314
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable-trade $1,534,094 $1,124,425
Current installments of long-term debt 148,017 148,017
Current installments of capital lease obligations 8,979,055 -
Accrued interest 162,830 263,457
Accrued payroll and related expenses 6,958,457 5,778,505
Other accrued expenses 17,936,664 6,156,276
- ------------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 35,719,117 13,470,680
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities:
Long-term note payable-less current installments 140,426 296,033
Capital lease obligations-less current installments 2,171,090 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 2,311,516 296,033
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities Subject to Compromise - 299,208,988
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 38,030,633 312,975,701
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity (Deficit):
Preferred stock, $.01 par value; authorized 10,000 shares;
no shares issued and outstanding
Common stock, $.01 par value; authorized 10,000,000 and
100,000,000 shares; issued and outstanding 2,030,000
and 58,393,105 at September 27, 1998 and December 28, 1997,
respectively 20,300 583,931
Additional paid-in-capital 127,057,848 218,546,069
Accumulated earnings (deficit) - (376,129,387)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity (Deficit) 127,078,148 (156,999,387)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $165,108,781 $155,976,314
====================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
STATEMENT OF OPERATIONS (DEBTORS-IN-POSSESSION)
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997 (UNAUDITED) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Casino $13,670,267 $14,900,562
Hotel 5,782,729 5,393,756
Food and beverage 7,929,662 8,004,569
Tower, retail and other income 7,964,429 8,186,223
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Revenues 35,347,087 36,485,110
Less: Promotional allowances 3,105,580 3,416,804
- ------------------------------------------------------------------------------------------------------------------------------------
NET REVENUES 32,241,507 33,068,306
- ------------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 6,427,698 6,716,606
Hotel 1,937,883 1,888,828
Food and beverage 5,764,406 6,094,671
Other operating expenses 3,321,802 3,154,912
Depreciation and amortization 1,961,288 2,106,084
Selling, general and administrative 12,881,250 12,678,539
- ------------------------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 32,294,327 32,639,640
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (52,820) 428,666
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income - -
Interest expense (Contractual Interest for the three months ended
September 27, 1998, estimated at $11,680,344) (380,088) (642,938)
Gain (Loss) on sale of assets - 15,376
- ------------------------------------------------------------------------------------------------------------------------------------
Total Other Expense, net (380,088) (627,562)
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE REORGANIZATION ITEMS AND INCOME TAXES (432,908) (198,896)
REORGANIZATION ITEMS: 4,296,160 (1,687,512)
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 3,863,252 (1,886,408)
PROVISION FOR INCOME TAXES - -
EXTRAORDINARY GAIN ON PREPETITION DEBT DISCHARGE 153,436,882 -
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $157,300,134 $(1,886,408)
====================================================================================================================================
BASIC INCOME (LOSS) PER COMMON SHARE
Before extraordinary items $ 0.07 $ (0.03)
Extraordinary items 2.62 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net $ 2.69 $ (0.03)
====================================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 58,393,105 58,393,105
====================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
STATEMENT OF OPERATIONS (DEBTORS-IN-POSSESSION)
- ------------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997 (UNAUDITED) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Casino $ 42,386,857 $ 48,148,187
Hotel 18,069,039 17,903,391
Food and beverage 25,432,561 25,050,251
Tower, retail and other income 22,898,507 23,286,929
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Revenues 108,786,964 114,388,758
Less: Promotional allowances 9,401,270 10,092,154
- ------------------------------------------------------------------------------------------------------------------------------------
NET REVENUES 99,385,694 104,296,604
- ------------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 19,319,621 21,438,920
Hotel 6,027,221 6,520,020
Food and beverage 17,335,585 19,728,461
Other operating expenses 9,035,632 8,829,450
Depreciation and amortization 5,992,656 5,901,429
Selling, general and administrative 36,091,246 41,368,780
- ------------------------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 93,801,961 103,787,060
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 5,583,733 509,544
Other income (expense):
Interest income - 47,674
Interest expense (Contractual Interest for the nine months ended
September 27, 1998, estimated at $34,176,185) (1,225,582) (4,985,782)
Gain (Loss) on sale of assets (41,571) 14,186
- ------------------------------------------------------------------------------------------------------------------------------------
Total Other Expense, net (1,267,153) (4,923,922)
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE REORGANIZATION ITEMS AND INCOME TAXES 4,316,580 (4,414,378)
REORGANIZATION ITEMS: (754,075) (15,035,580)
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 3,562,505 (19,449,958)
PROVISION (BENEFIT) FOR INCOME TAXES - -
EXTRAORDINARY GAIN ON PREPETITION DEBT DISCHARGE 153,436,882 -
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $156,999,387 $(19,449,958)
====================================================================================================================================
BASIC INCOME (LOSS) PER COMMON SHARE
Before extraordinary items $ 0.06 $ (0.33)
Extraordinary items 2.63 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net $ 2.69 $ (0.33)
====================================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 58,393,105 58,393,105
====================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (DEBTORS-IN-POSSESSION)
- ------------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997 (UNAUDITED) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $156,999,387 $(19,449,958)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,299,366 6,359,117
Reorganization Items:
Write-off of debt issuance costs - 11,210,108
Professional Fees 3,492,011 4,000,000
Management Retention Expense 233,125 421,000
Vegas World Vacation Package Settlement 3,346,793 -
Interest Earned on Accumulated Cash During
Chapter 11 Proceedings (813,941) (595,528)
Provision for doubtful accounts 139,192 408,670
(Gain) Loss on sale or disposal of assets 41,571 (14,186)
Changes in operating assets and liabilities:
Accounts receivable (2,638,361) 1,351,511
Other current assets (1,060,678) 285,636
Accounts payable - trade (prepetition) - 331,397
Accounts payable - trade (postpetition) 409,810 29,331
Other accrued expenses (prepetition) - (3,220,768)
Other accrued expenses (postpetition) 12,362,897 3,337,916
------------------------------------------
Net Cash Provided by Operating Activities
Before Reorganization Items 178,811,172 4,454,246
------------------------------------------
Increases (decreases) to Cash Resulting from Reorganization Items:
Prepetition claims payable pursuant to amended plan (7,382,904) -
Increase in allowed claims 3,708,184 -
Adjust accounts to fair value (8,597,847) -
Extraordinary gain on prepetition debt discharge (153,436,882) -
Professional fees paid (2,783,492) (1,241,498)
Management Retention Disbursements (835,875) -
Interest Earned on Accumulated Cash During
Chapter 11 Proceedings 813,941 595,528
------------------------------------------
Net Cash Provided by (Used in) Reorganization Items (168,514,874) (645,970)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,296,298 3,808,276
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in cash and cash equivalents-restricted (6,911,631) -
Change in investments-restricted (114,264) (807,716)
Change in securities available for sale - 2,000,905
Payments for property and equipment (1,062,400) (1,332,121)
Change in construction payables - (544,133)
Increase in related party receivable and other - (168,698)
Cash proceeds from sale of property and equipment 308,000 1,585,827
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (7,780,295) 734,064
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issuance and deferred financing costs - (6,250)
Proceeds from the issuance of common stock-net - -
Payments on long-term debt (155,607) (428,401)
Payments on capital lease obligations subject to compromise (6,807,270) (8,095,670)
Decrease in affiliate payable - 563,680
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (6,962,877) (7,966,641)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents (4,446,874) (3,424,301)
Cash and cash equivalents - beginning of period 20,326,317 22,558,804
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 15,879,443 $ 19,134,503
==================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (DEBTORS-IN-POSSESSION)
- ---------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997 (UNAUDITED) 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest-net of capitalized interest $ 903,928 $1,661,911
Noncash Investing and Financing Activities:
Increase in land and building from reduction
in notes receivable from stockholder $ 350,000 $ -
Cancellation of common stock from reorganization $ (583,931) $ -
Issuance of common stock to new shareholders $ 20,300 $ -
Discharge of first mortgage notes $(203,000,000) $ -
Discharge of note payable - affiliate $ (50,000,000) $ -
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS (DEBTORS-IN-POSSESSION)
================================================================================
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The accompanying condensed consolidated financial statements present the
financial position, results of operations and cash flows of Stratosphere
Corporation and its wholly-owned subsidiaries, Stratosphere Gaming Corp.,
Stratosphere Land Corporation, Stratosphere Advertising Agency and 2000 Las
Vegas Boulevard Retail Corporation (collectively the "Company"). The Company
operates an integrated casino, hotel and entertainment facility and a 1,149
foot, free-standing observation tower located in Las Vegas, Nevada.
On January 27, 1997 ("Petition Date"), Stratosphere Corporation and its
wholly-owned subsidiary Stratosphere Gaming Corp. ("SGC" and collectively with
Stratosphere Corporation, the "Debtors") filed voluntary petitions for Chapter
11 Reorganization pursuant to the United States Bankruptcy Code. As of that
date, the United States Bankruptcy Court for the District of Nevada
("Bankruptcy Court") assumed jurisdiction over the assets of Stratosphere
Corporation and SGC. Stratosphere Corporation and SGC had been acting as
debtors-in-possession on behalf of their respective bankrupt estates, and have
been authorized as such to operate their business subject to Bankruptcy Court
supervision. On June 9, 1998, the Bankruptcy Court entered an order (the
"Confirmation Order") confirming the Restated Second Amended Plan of
Reorganization filed by the Debtors (the "Restated Second Amended Plan"). On
October 14, 1998, the Restated Second Amended Plan became effective. All
material conditions precedent to the Restated Second Amended Plan becoming
binding were satisfied on or before September 27, 1998. Accordingly, the
Company has reflected the effect of the Restated Second Amended Plan as of
September 27, 1998, in the accompanying condensed consolidated financial
statements (see Note 2).
PRINCIPLES OF PRESENTATION
The condensed consolidated financial statements have been prepared in
accordance with the accounting policies described in the Company's 1997 Annual
Report on Form 10-K. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, it is suggested that
these financial statements be read in conjunction with the notes to the
consolidated financial statements which appear in that report.
In addition, as a result of the restructuring, the Company has implemented the
guidance provided by the American Institute of Certified Public Accountants
Statement of Position 90-7 "Financial Reporting By Entities In Reorganization
Under The Bankruptcy Code" ("AICPA SOP 90-7") and as such, adopted "fresh start
reporting" in the preparation of the accompanying September 27, 1998, condensed
consolidated financial statements. The Company's emergence from its Chapter 11
proceedings resulted in a new reporting entity with no retained earnings or
accumulated deficit as of September 27, 1998. Accordingly, the Company's
condensed consolidated financial statements for periods prior to September 27,
1998, are not comparable to consolidated financial statements presented on or
subsequent to September 27, 1998. A black line has been drawn on the
accompanying condensed consolidated financial statements to distinguish between
the pre-reorganization and postreorganization entity. The Company has not
separately reported financial statements of nondebtor subsidiaries as it has
determined such disclosure is not material to the condensed consolidated
financial statements (see Note 2).
In the opinion of management, the accompanying condensed consolidated financial
statements include all adjustments (consisting only of a normal recurring
nature) which are necessary for a fair presentation of the results for the
interim periods presented. Certain information and footnote disclosures
normally included in financial statements have been condensed or omitted
pursuant to such rules and regulations of the Securities and Exchange
Commission. Interim results are not necessarily indicative of results to be
expected for any future interim period or for the entire fiscal year.
Significant intercompany accounts and transactions have
8
<PAGE> 9
been eliminated.
INVENTORIES
Inventories consisting primarily of food and beverage, retail and operating
supplies are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. Inventories totaled $2.8 million as of
September 27, 1998 and December 28, 1997.
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 due to the
Restated Second Amended Plan becoming effective for accounting purposes on
September 27, 1998, the date all equity interests (including the Common Stock
shares outstanding of 58,393,105, options and warrants) were canceled.
Pursuant to the Restated Second Amended Plan, there will be 2,030,000 common
shares outstanding beginning September 27, 1998.
RECLASSIFICATIONS
Certain amounts in the 1997 condensed consolidated financial statements have
been reclassified to conform with the 1998 presentation. These
reclassifications had no effect on the Company's net loss.
(2) RESTRUCTURING
Pursuant to the Restated Second Amended Plan becoming effective on October 14,
1998, the Company has canceled all prior equity interests (including 58.3
million shares of Common Stock, options and warrants). The Company has
exchanged 2,030,000 shares of new Common Stock for the secured portion of the
14 1/4% First Mortgage Notes (estimated at $120.6 million). Approximately
89.6% of the new Common Stock has been issued to Carl C. Icahn related
entities. The remaining portion of the 14 1/4% First Mortgage Notes claim
(approximately $104 million), the balance of the note due Grand Casinos, Inc.
(approximately $52.4 million) and all other general unsecured claims will be
discharged in exchange of a cash payment of $6.0 million. Allowed priority
claims (estimated at $.9 million) will be paid in full. The discharge and
settlement of these claims has resulted in a gain of $153.4 million which has
been reflected as an extraordinary item on the September 27, 1998, condensed
consolidated statement of operations. The amount of the gain is based on the
Company's estimate of the amount of claims that will ultimately be allowable by
the Bankruptcy Court, and is not based on the total of actual claims filed (see
Note 5 regarding reserved claims). In the event additional unsecured claims
are allowed by the Bankruptcy Court, it will not increase the cash the Company
is required to distribute for full debt discharge. A portion of the $6.9
million to be distributed will be reserved for potential future settlement of
unsecured claim disputes (see Note 5).
Pursuant to the guidance of AICPA SOP 90-7, "fresh start reporting" has been
reflected as of September 27, 1998, in the accompanying condensed consolidated
financial statements, since: i) the sum of the allowed claims, plus
postpetition liabilities, exceeded the value of the preconfirmation assets; ii)
the Company experienced a change of control as defined in AICPA SOP 90-7.
AICPA SOP 90-7 requires that under these circumstances a new reporting entity
be created and the assets and liabilities be recorded at their fair values.
In support of the restructuring process, the Debtors retained an independent
valuation advisor (the "Valuation Advisor") to appraise the Stratosphere Hotel
& Casino Complex (the "Resort"). On March 24, 1997, Valuation Advisor issued
an appraisal report (hereinafter, the "Appraisal Report") to the Company's
bankruptcy counsel. The Appraisal Report estimates the "as is" market value
range of the fee simple interest in the real and personal property (of the
Resort) to be $105 million to $130 million with the final point estimate of
value being $120 million (as of March 24, 1997). The Appraisal Report assumes
a marketing exposure period of 12 to 18 months would be required in order to
realize a sales price at or about the level of the concluded value estimate.
In preparing the Appraisal Report, standard appraisal techniques were used in
conformity with the guidelines of the Uniform Standards of Appraisal Practice
as promulgated by the Appraisal Foundation. The Appraisal
9
<PAGE> 10
Report utilizes two of the typical appraisal approaches to value; the "Income
Approach" and the "Sales Comparison Approach." The "Cost Approach" was omitted
from the Appraisal Report because it was viewed that, in this instance, it did
not provide a reliable indication of value. The ultimate valuation conclusions
contained in the Appraisal Report were based primarily on the Income Approach,
with only limited weight given to the Sales Comparison Approach. The value
estimate included in the Appraisal Report was relied upon by management in
determining the reorganization value and relates solely to the assets that are
directly relevant to the operation of the Resort (exclusive of the working
capital account balances) and does not include, or relate to, "peripheral" or
"extraneous" assets owned by the Company. The primary examples of such assets
are the parcels of land (which total approximately 5 acres) located on and near
Las Vegas Boulevard South, directly across the street from the Resort
(collectively, the "Sulinda Parcels"). Accordingly, management has separately
analyzed the assets that are not covered by the Appraisal Report and have
estimated the value thereof for the purpose of determining the reorganization
value of the emerging entity ($45.1 million). Underlying management's estimate
of reorganization value are a number of assumptions (including those contained
in the Appraisal Report) that, although considered reasonable by management, are
inherently subject to significant economic and competitive uncertainties beyond
the control of management, and are based upon business decisions which could be
subject to change.
The discharge of debt and "fresh start reporting" have been reflected in the
accompanying September 27, 1998, condensed consolidated financial statements.
The Company's final condensed consolidated balance sheet as of September 27,
1998, reflects the adoption of "fresh start reporting" and will become the
opening balance sheet for "reorganized" Stratosphere Corporation. The effect
on the condensed consolidated balance sheet as of September 27, 1998, is
reflected in the following table:
<TABLE>
<CAPTION>
Adjustments to Record the Plan of Reorganization
------------------------------------------------
(In Thousands)
Prereorganization Debt Fresh Postreorganization
Balance Sheet Discharge Start Balance Sheet
======================================================================================================
Assets
<S> <C> <C> <C> <C>
Current Assets:
Cash & cash equivalents $ 26,516 $ - $ - $ 26,516
Acct Receivable, net 2,779 3,000 - 5,779
Other current assets 6,814 - - 6,814
-------- ---------- ------ --------
Total Current Assets 36,109 3,000 - 39,109
-------- ---------- ------ --------
Property & Equipment, Net 117,102 - 8,598 125,700
-------- ---------- ------ --------
Other Assets (deferred financing costs-net) 300 - - 300
-------- ---------- ------ --------
Total Assets $153,511 $ 3,000 $8,598 $165,109
======== ========== ====== ========
Liabilities & Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable-trade $ 1,534 $ - $ - $ 1,534
Current install of long-term debt 148 - - 148
Current install of capital lease - 8,979 - 8,979
Accrued interest - 163 - 163
Accrued payroll & related 6,958 - - 6,958
Other accrued expenses 10,554 7,383 - 17,937
-------- ---------- ------ --------
Total Current Liabilities 19,194 16,525 - 35,719
-------- ---------- ------ --------
Long-Term Liabilities:
Long-term note payable-less current 140 - - 140
Capital lease obligations-less current - 2,171 - 2,171
-------- ---------- ------ --------
Total Long-Term Liabilities 140 2,171 - 2,312
-------- ---------- ------ --------
Liabilities Subject to Compromise:
Accounts payable - trade 348 (348) - -
Accrued payroll & related exp 58 (58) - -
Affiliate payable 4,708 (4,708) - -
Other accrued expenses 5,688 (5,688) - -
Capital lease obligations 11,313 (11,313) - -
14 1/4% First Mortgage Notes 224,096 (224,096) - -
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
Adjustments to Record the Plan of Reorganization
------------------------------------------------
(In Thousands)
Prereorganization Debt Fresh Postreorganization
Balance Sheet Discharge Start Balance Sheet
============================================================================================================
Assets
<S> <C> <C> <C> <C>
Note payable to affiliate 50,000 (50,000) - -
--------- -------- --------- --------
Total Liabilities Subject to Compromise 296,211 (296,211) - -
--------- -------- --------- --------
Total Liabilities 315,546 (277,515) - 38,031
--------- -------- --------- --------
Shareholders Equity (Deficit):
Common Stock - old 584 (584) - -
Common Stock - new (2,030,000 shares) - 20 - 20
Treasury Stock (30) 30 - -
Add'tl Paid in Capital 218,576 127,612 (219,130) 127,058
Accumulated earnings (deficit) (381,165) 153,437 227,728 -
--------- -------- --------- --------
Total Shareholders' Equity (Deficit) (162,035) 280,515 8,598 127,078
--------- -------- --------- --------
Total Liabilities & Shareholders' Equity (Deficit) $ 153,511 $ 3,000 $ 8,598 $165,109
========= ======== ========= ========
</TABLE>
The following proforma condensed consolidated statements of operations reflect
the results of operations as if the reorganization had been effective December
29, 1997 (the beginning of the 1998 fiscal year):
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
========================================================================================================
(In Thousands)
For the Nine Months ended September 27, 1998
-------------------------------------------------
As Reported Adjustments Pro forma
========================================================================================================
<S> <C> <C> <C>
Net Revenues $99,386 $ - $99,386
Costs and Expenses:
Other operating expenses 51,718 - 51,718
Depreciation and amortization 5,993 171 (1) 6,164
Selling, general and administrative 36,091 - 36,091
- --------------------------------------------------------------------------------------------------------
Total costs and expenses 93,802 171 93,973
- --------------------------------------------------------------------------------------------------------
Income From Operations 5,584 (171) 5,413
- --------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (1,225) - (1,225)
Other income (expense) (42) - (42)
- --------------------------------------------------------------------------------------------------------
Total other expense, net (1,267) - (1,267)
- --------------------------------------------------------------------------------------------------------
Reorganization Items (754) 754 (2) -
Income (Loss) Before Income Taxes 3,563 583 4,146
- --------------------------------------------------------------------------------------------------------
Provision (Benefit) for Income Taxes - - -
Extraordinary gain on discharge of
prepetition liabilities 153,437 (153,437)(3) -
Net Income (Loss) $156,999 $(152,853) $4,146
========================================================================================================
Basic Income (Loss) per Common
Share (2,030,000 new common shares) - - $2.04
========================================================================================================
</TABLE>
(1) ESTIMATED DEPRECIATION EFFECT OF ADJUSTMENTS TO ASSET FAIR VALUES FOR THE
NINE MONTHS ENDED
(2) ELIMINATION OF EFFECT OF REORGANIZATION ITEMS
(3) ELIMINATION OF THE GAIN ON PREPETITION DEBT DISCHARGE
11
<PAGE> 12
(3) REORGANIZATION ITEMS
Reorganization Items consisted of the following for the nine month periods
ended September 27, 1998 and September 28, 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Adjust accounts to fair value $(8,598) $ -
Settlement of vacation package claims 3,347 -
Write-off of debt issuance costs - 11,210
Professional fees 2,878 4,000
Interest earned on accumulated cash during Chapter 11 proceedings (814) (595)
Increase in allowed claims 3,708 -
Management retention compensation 233 421
-------- -------
$ 754 $15,036
======== =======
</TABLE>
Cash interest earned since the Petition Date totals $1,665,711.
Costs and expenses related to the reorganization of the Company have been
separately classified as Reorganization Items in the condensed consolidated
statements of operations since the Petition Date. Prior to the Petition Date,
such costs and expenses (to the extent incurred) were classified as selling,
general and administrative in the condensed consolidated statement of
operations. Future unreserved professional fees will again be classified as
selling, general and administrative expense beginning September 29, 1998 (the
posteffective date period).
(4) INCOME TAXES
The tax effect of significant temporary differences representing deferred tax
assets and liabilities for the Company principally consist of depreciation, the
excess of tax on book basis of assets due to write down of assets and net
operating loss carryforward. The Company has recorded a valuation allowance at
September 27, 1998, related to recorded tax benefits because of the significant
uncertainty as to whether such benefits will ever be realized. To the extent
realized, benefits from preconfirmation net operating loss carryforwards will
be reported as direct additions to paid-in capital.
(5) CONTINGENCIES
The Company will reserve approximately $1.8 million of the $6.0 million being
distributed to general unsecured creditors for claims that have been filed
during the bankruptcy proceedings but disputed by the Company. Included among
the claims for which the approximately $1.8 million is being reserved are
claims filed by Strato Retail LLC of $60.0 million, McDonalds $4.1 million,
Grand Casinos, Inc. $2.3 million and Vesst Investment Partnership $2.7 million.
These contingencies have not been included as liabilities on the accompanying
September 27, 1998, condensed consolidated balance sheet as the amount of the
claims (if any) that will ultimately be allowed by the Bankruptcy Court is not
determinable. These claims will be discharged once the disputes are resolved
and regardless of the amount of claim allowed by the Bankruptcy Court, the
total cash distributed under the Restated Second Amended Plan will not change.
The Company has also reserved $.4 million related to the dispute of
miscellaneous secured claims. These contingencies have not been included as
liabilities on the accompanying September 27, 1998, condensed consolidated
balance sheet as the amount of claims (if any) that will be ultimately allowed
by the Bankruptcy Court is not determinable.
Pursuant to the Restated Second Amended Plan becoming effective on October 14,
1998, all equity interests in the Company have been canceled and all
shareholder litigation against the Company has been barred.
12
<PAGE> 13
ITEM 2. 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 the Company could differ materially from the Company's historical
results of operations and those discussed in the forward-looking statements.
OVERVIEW
The Company operates an integrated casino, hotel and entertainment facility and
a 1,149 foot, free-standing observation tower in Las Vegas, Nevada. As of
November 9, 1998, the operations included 1,873 slot machines, 34 table games,
a sports book, keno lounge, 1,444 hotel rooms and five themed restaurants.
On January 27, 1997 ("Petition Date"), Stratosphere Corporation and its
wholly-owned subsidiary Stratosphere Gaming Corp. ("SGC" and collectively with
Stratosphere Corporation, the "Debtors") filed voluntary petitions for Chapter
11 Reorganization pursuant to the United States Bankruptcy Code. As of that
date, the United States Bankruptcy Court for the District of Nevada
("Bankruptcy Court") assumed jurisdiction over the assets of Stratosphere
Corporation and SGC. Stratosphere Corporation and SGC had been acting as
debtors-in-possession on behalf of their respective bankrupt estates, and have
been authorized as such to operate their business subject to Bankruptcy Court
supervision. On June 9, 1998, the Bankruptcy Court entered an order (the
"Confirmation Order") confirming the Restated Second Amended Plan of
Reorganization filed by the Debtors (the "Restated Second Amended Plan"). On
October 14, 1998, the Restated Second Amended Plan became effective. All
material conditions precedent to the Restated Second Amended Plan becoming
binding were satisfied on or before September 27, 1998. Accordingly, the
Company has reflected the effect of the Restated Second Amended Plan as of
September 27, 1998, in the accompanying condensed consolidated financial
statements (see Note 2).
As a result of the restructuring, the Company has implemented the guidance
provided by the American Institute of Certified Public Accountants Statement of
Position 90-7 "Financial Reporting By Entities In Reorganization Under The
Bankruptcy Code" ("AICPA SOP 90-7") and as such, adopted "fresh start
reporting" in the preparation of the accompanying September 27, 1998, condensed
consolidated financial statements. The Company's emergence from its Chapter 11
proceedings resulted in a new reporting entity with no retained earnings or
accumulated deficit as of September 27, 1998. Accordingly, the Company's
condensed consolidated financial statements for periods prior to September 27,
1998, are not comparable to consolidated financial statements presented on or
subsequent to September 27, 1998. A black line has been drawn on the
accompanying September 27, 1998, condensed consolidated balance sheet to
distinguish between the prereorganization and postreorganization entity.
Pursuant to the Restated Second Amended Plan becoming effective on October 14,
1998, the Company has canceled all prior equity interests (including the
58,393,105 outstanding shares of Common Stock, options and warrants). The
Company will exchange 2,030,000 shares of new Common Stock for the secured
portion of the 14 1/4% First Mortgage Notes (estimated at $120 million).
Approximately 89.6% of the new Common Stock will be issued to Carl C. Icahn
related entities. The remaining portion of the 14 1/4% First Mortgage Notes
claim (approximately $104 million), the balance of the note due Grand Casinos,
Inc. (approximately $52.4 million) and all other general unsecured claims will
be discharged in exchange of a cash payment of $6.0 million. Certain priority
claims (estimated at $.9 million) will be paid in full. The discharge and
settlement of these claims has resulted in a gain of $153.4 million which has
been reflected as an extraordinary item on the September 27, 1998, condensed
consolidated statement of operations. The amount of the gain is based on the
Company's estimate of the amount of claims that will ultimately be allowable by
the Bankruptcy Court, and is not based on the total of actual claims filed. In
the event additional unsecured claims are allowed by the Bankruptcy Court, it
will not increase the Company's cash required for full debt discharge. A
portion (approximately $1.8 million) of the $6.0 million to be distributed will
be reserved for potential future unsecured claims dispute settlements.
13
<PAGE> 14
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 27, 1998
AND SEPTEMBER 28, 1997
NET INCOME/LOSS
For the third quarter of 1998 the Company reported net income of $157.3 million
inclusive of an extraordinary gain of $153.4 million and a gain from adjusting
accounts to fair value of $8.6 million related to "fresh start reporting". The
1997 third quarter loss was $1.9 million.
REVENUES
Casino revenues of $13.7 million for the 1998 third quarter were $1.2 million
(8%) less than the same period in 1997. Management attributes the decline to
an increased number of casinos implementing similar favorable gambling odds
promotions currently offered by the Company. Management anticipates increased
competition with the opening of several new mega resorts on the Las Vegas Strip
during the next eighteen months. Casino marketing efforts have been directed
toward the development of several promotional events and direct mail programs.
Casino revenues represented 39% and 41% of total gross revenues for the third
quarters of 1998 and 1997, respectively.
Hotel revenues of $5.8 million for the 1998 third quarter were approximately
$.4 million (7%) higher than the same period in 1997. Hotel occupancy was
91.9% during the 1998 third quarter as compared to 89.6% in 1997. The average
rate per guest room was $47.61 during the 1998 third quarter as compared to
$45.57 in 1997. Hotel revenues averaged 16% and 15% of total gross revenues
during the third quarter of 1997 and 1998, respectively. Management
anticipates increased competition for hotel room sales during the next eighteen
months with the increase of approximately 20,000 newly constructed hotel rooms
in the Las Vegas market.
Tower visitations (including the Top of The World dining) totaled 617,276
during the 1998 third quarter as compared to 698,179 for the same period in
1997. The revenue impact of the decline in visitations was partially offset by
an increase in ride admissions from 310,384 for the 1997 third quarter to
361,975 during 1998. The increase in ride revenues was due primarily to the
implementation programs to increase the number of multiple rides per visitor.
COSTS AND EXPENSES
Casino operating costs declined approximately 4% from $6.7 million for the 1997
third quarter to $6.4 million for 1998. The majority of this expense reduction
was due to reduced labor costs associated with reducing the table games offered
from 53 to 34 on April 30, 1998. Management does not anticipate further
significant labor reductions in the near future.
Food and beverage operating costs declined approximately 5% from $6.1 million
for the 1997 third quarter to $5.8 million for 1998. The majority of the
expense reduction was the result of reduced labor costs. Management does not
anticipate additional significant reductions in food and beverage labor costs
in the near future.
OTHER FACTORS IMPACTING EARNINGS
The Company recorded income from Reorganization Items totaling $4.3 million
during the 1998 third quarter principally related to the adjustments of various
accounts as a result of "fresh start reporting". The Company expensed
Reorganization Items of $1.7 million during the same period in 1997 (see Note 3
to the condensed consolidated financial statements included in this Form 10-Q).
The Company recorded a $153.4 million extraordinary gain on the discharge of
debt associated with the
14
<PAGE> 15
Company's emergence from Chapter 11 bankruptcy proceedings (see Note 2 to the
condensed consolidated financial statements included in this Form 10-Q).
The Company currently employs approximately 1,830 full time equivalents of
which approximately 900 are covered by collective bargaining agreements. 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 have commenced. Management does not anticipate any disruption of its
business during negotiations with these unions.
On October 15, 1998, management reached an agreement with Operating Engineers,
Local 501 union. Such agreement is not expected to have a material adverse
effect on future labor costs.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1998
AND SEPTEMBER 28, 1997
NET INCOME/LOSS
The Company reported net income of $157.0 million inclusive of the
extraordinary gain of $153.4 million and a gain from adjusting accounts to fair
value of $8.6 million for the period ending September 27, 1998. The Company
experienced a net loss of $19.4 million during the same period in 1997.
REVENUES
Casino revenues for the nine months ended September 27, 1998, of $42.4 million
were $5.8 million (12%) less than the same period in 1997. Management
attributes the decline to an increased number of casinos implementing similar
favorable gambling odds promotions currently offered by the Company.
Management anticipates increased competition with the opening of several new
mega resorts on the Las Vegas Strip during the next year. Casino marketing
efforts have been directed toward the development of several promotional events
and direct mail programs. Casino revenues represented 39% and 42% of total
gross revenues for the nine months ended September 27, 1998 and September 28,
1997, respectively.
Hotel occupancy was 91.9% for the nine months ended September 27, 1998, as
compared to 89% during the same period in 1997. Management anticipates
increased competition for hotel room sales during the next eighteen months with
the increase of approximately 20,000 newly constructed hotel rooms in the Las
Vegas market. Hotel revenues averaged approximately 17% and 16% of total gross
revenues during the nine months ended September 27, 1998 and September 28,
1997, respectively.
Tower visitations (including the Top of The World dinning) totaled 1.9 million
during the nine month period ended September 27, 1998, as compared to 2.1
million for the same period in 1997. The revenue impact of the decline in
visitation was substantially offset by an increase in ride admissions from
709,291 in 1997 to 949,528 in 1998. Ride revenues were enhanced through the
implementation of programs aimed at increasing the number of multiple rides per
visitor.
COSTS AND EXPENSES
Casino operating expenses declined 10% from $21.4 million for the nine months
ended September 28, 1997, to $19.3 million for the nine months ended September
27, 1998. Approximately $1.7 million of this decrease was due to a decline in
payroll and related expenses and the remainder of the savings was related to
lower gaming taxes associated with the decline in revenues.
Food and beverage operating costs declined 12% from $19.7 million for the nine
months ended September 28, 1997, to $17.3 million for the same period in 1998.
Food and beverage payroll and related costs declined $2.0 million for the nine
months ended September 27, 1998. Management does not anticipate
15
<PAGE> 16
additional significant reductions in food and beverage labor costs in the near
future.
Selling, general and administrative expenses declined approximately 13% from
$41.4 million for the nine months ended September 28, 1997, to $36.1 million
for the same period in 1998. The cost savings in 1998 were realized through a
reduction of $2.4 million in payroll and related expenses, $.6 million in
advertising expenses and approximately $.5 million reduction in bad debt
expense. In addition, the 1997 amounts included approximately $1.2 million of
nonrecurring items and $.4 million restructuring costs incurred prior to the
Petition Date. Management does not anticipate further significant reductions
in selling, general and administrative expenses in the near future.
OTHER FACTORS IMPACTING EARNINGS
Interest expense declined $3.8 million from $5.0 million for the nine months
ended September 28, 1997, to $1.2 million for the same period in 1998. The
Company ceased accruing interest on its 14 1/4% First Mortgage Notes since the
Petition Date. Interest expense in 1997 included prepetition interest related
to the 14 1/4% First Mortgage Notes of $2.3 million and $.5 million of interest
related to the Grand note. The 14 1/4% First Mortgage Notes and the Grand Note
have been discharged pursuant to the Restated Second Amended Plan. In
addition, interest related to the Company's capital lease obligations declined
$.7 million during 1998. Future interest expense will continue on the capital
lease obligations.
The Company recorded a $153.4 million extraordinary gain on the discharge of
debt associated with the Company's emergence from Chapter 11 bankruptcy
proceedings (see Note 2 to the condensed consolidated financial statements
included in this Form 10-Q).
The Company experienced expenses from Reorganization Items of $.8 million
during the nine months ended September 27, 1998. Reorganization Items expensed
during the same period of 1997 were $15.0 million (see Note 3 to the condensed
consolidated financial statements included in this Form 10-Q).
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW, WORKING CAPITAL AND CAPITAL EXPENDITURES
The Company had unrestricted cash balances of $15.9 million as of September 27,
1998. Since the Petition Date, the Company has relied on unrestricted cash
balances and its ability to generate cash flow from operations to fund its
working capital needs.
During the nine month period ended September 28, 1998, the Company generated
$10.3 million from operating activities. These funds were primarily used to
fund capital expenditures of $1.1 million and payments on capital lease
obligations of $6.8 million.
With the Restated Second Amended Plan becoming effective on October 14, 1998,
the Company will be required to provide payment of $6.0 million to general
unsecured creditors and approximately $.9 million to creditors with priority
claims. These payments will be made from restricted cash balances net of
reserves established for disputed claims during November 1998. The Company
estimates that its current level of cash and anticipated funds from operations
will be adequate to fund its cash requirements.
In addition, the Company will be required to make a final payment of
approximately $6.9 million on its capital lease obligations on April 30, 1999.
The Company estimates that future financing alternatives will be available, if
necessary, to fund this obligation.
YEAR 2000
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 complete the casino operating system
and hotel operating
16
<PAGE> 17
system upgrades by the end of the first quarter of 1999. Management continues
to assess 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. In addition, the Company's ability to
upgrade its software timely is largely dependent on the performance of its
software vendors.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Form 10-Q
and other materials filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral statements or
other written statements made or to be made by the Company) contains statements
that are forward-looking, such as statements relating to plans for future
expansion, future construction costs and other business development activities
as well as other capital spending, financing sources and the effects of
regulation (including gaming and tax regulation) and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include,
but are not limited to, those relating to development and construction
activities, dependence on existing management, leverage and debt service
(including sensitivity to fluctuations in interest rates), domestic or global
economic conditions, changes in federal or state tax laws or the administration
of such laws and changes in gaming laws or regulations (including the
legalization of gaming in certain jurisdictions).
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Pursuant to the Restated Second Amended Plan becoming effective on October 14,
1998, all equity interests in the Company have been canceled and all
shareholders litigation against the Company has been barred.
See the Company's Annual Report on Form 10-K for the fiscal year ended December
28, 1997, for information regarding other pending legal proceedings.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company defaulted on its First Mortgage Note interest payment obligation
due November 15, 1996, and has not made any subsequently scheduled interest
payments. The total principal and interest accrued as of September 27, 1998,
was approximately $224.1 million. Interest has not been accrued since the
Petition Date. Pursuant to the Restated Second Amended Plan becoming effective
on October 14, 1998, this debt was discharged (see Note 2 to the condensed
consolidated financial statements included in this Form 10-Q).
The Company was also in default on its capital lease obligations due to its
inability to meet certain financial covenants. Pursuant to the Restated Second
Amended Plan becoming effective on October 14, 1998, the Company will continue
payment on this obligation during the original term of the lease. The Company
was current on this payment obligation as of September 27, 1998. The balance
of principal and accrued interest as of September 27, 1998, was approximately
$11.3 million. Pursuant to the Restated Second Amended Plan becoming
effective, all financial covenants related to the capital lease obligations
have been eliminated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the fiscal quarter
ended September 27, 1998:
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
STRATOSPHERE CORPORATION
Date: November 12, 1998 By: /s/ Daniel A. Cassella
-------------------------------------
Name: Daniel A. Cassella
-----------------------------------
Title: Chief Executive Officer/President
----------------------------------
By: /s/ Thomas A. Lettero
-------------------------------------
Name: Thomas A. Lettero
-----------------------------------
Title: Secretary/Treasurer/CFO
----------------------------------
19
<PAGE> 20
EXHIBIT INDEX
STRATOSPHERE CORPORATION
Exhibit
No.
- -------
27 Financial Data Schedule
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> SEP-27-1998
<CASH> 15,879,443
<SECURITIES> 0
<RECEIVABLES> 6,210,799
<ALLOWANCES> (432,118)
<INVENTORY> 2,770,668
<CURRENT-ASSETS> 6,814,286
<PP&E> 150,232,730
<DEPRECIATION> 24,532,731
<TOTAL-ASSETS> 165,108,781
<CURRENT-LIABILITIES> 35,719,117
<BONDS> 0
0
0
<COMMON> 20,300
<OTHER-SE> 127,057,848
<TOTAL-LIABILITY-AND-EQUITY> 127,078,148
<SALES> 99,385,694
<TOTAL-REVENUES> 108,786,964
<CGS> 13,125,800
<TOTAL-COSTS> 74,569,955
<OTHER-EXPENSES> 19,232,006
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,225,582
<INCOME-PRETAX> 3,562,505
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,316,580
<DISCONTINUED> 0
<EXTRAORDINARY> 153,436,882
<CHANGES> 0
<NET-INCOME> 156,999,387
<EPS-PRIMARY> 2.69
<EPS-DILUTED> 2.69
</TABLE>
