<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 MARCH 29, 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: 58,393,105 as of May 11, 1998
<PAGE> 2
STRATOSPHERE CORPORATION
(DEBTOR-IN-POSSESSION)
FORM 10-Q
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AT MARCH 29, 1998 AND 3
DECEMBER 28, 1997 (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 29, 1998 AND MARCH 30, 1997 (UNAUDITED) 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED MARCH 29, 1998 AND MARCH 30, 1997 (UNAUDITED) 5-6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 10-12
PART II. OTHER INFORMATION 13
</TABLE>
2
<PAGE> 3
CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
BALANCE SHEETS (DEBTORS-IN-POSSESSION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 23,829,880 $ 20,326,317
Cash and cash equivalents-restricted 575,750 471,273
Investments-restricted 3,177,811 3,139,469
Accounts receivable, net 2,665,364 2,479,512
Other current assets 5,467,355 5,753,608
- ----------------------------------------------------------------------------------------------------------------------
Total Current Assets 35,716,160 32,170,179
- ----------------------------------------------------------------------------------------------------------------------
Property and Equipment, Net 120,840,117 122,381,979
- -----------------------------------------------------------------------------------------------------------------------
Other Assets:
Deferred financing costs-net 514,192 624,156
Related party receivable-net 800,000 800,000
- ----------------------------------------------------------------------------------------------------------------------
Total Other Assets 1,314,192 1,424,156
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $ 157,870,469 $ 155,976,314
======================================================================================================================
Liabilities and Shareholders' Deficit
Current Liabilities:
Accounts payable-trade $ 1,194,079 $ 1,124,425
Current installments of long-term debt 148,017 148,017
Accrued interest 231,476 263,457
Accrued payroll and related expenses 7,447,666 5,778,505
Other accrued expenses 7,283,615 6,156,276
- ----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 16,304,853 13,470,680
- ----------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities:
Long-term note payable-less current installments 237,580 296,033
- ----------------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 237,580 296,033
- ----------------------------------------------------------------------------------------------------------------------
Liabilities Subject to Compromise 297,022,254 299,208,988
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities 313,564,687 312,975,701
- ----------------------------------------------------------------------------------------------------------------------
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
March 29, 1998 and December 28, 1997 583,931 583,931
Additional paid-in-capital 218,546,069 218,546,069
Accumulated deficit (374,824,218) (376,129,387)
- ----------------------------------------------------------------------------------------------------------------------
Total Shareholders' Deficit (155,694,218) (156,999,387)
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Deficit $ 157,870,469 $ 155,976,314
======================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS (DEBTORS-IN-POSSESSION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months ended March 29, 1998 and March 30, 1997 (Unaudited) 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Casino $ 14,988,250 $ 17,402,986
Hotel 5,957,049 6,430,174
Food and beverage 8,948,986 8,703,293
Tower, retail and other income 7,365,379 7,303,041
- -----------------------------------------------------------------------------------------------------------------
Gross Revenues 37,259,664 39,839,494
Less: Promotional allowances 3,081,746 2,936,764
- -----------------------------------------------------------------------------------------------------------------
Net Revenues 34,177,918 36,902,730
- -----------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Casino 6,749,965 7,451,931
Hotel 2,021,269 2,378,238
Food and beverage 5,848,745 6,810,812
Other operating expenses 2,987,739 2,812,816
Depreciation and amortization 1,938,509 2,026,844
Selling, general and administrative 11,491,406 14,877,841
- -----------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 31,037,633 36,358,482
- -----------------------------------------------------------------------------------------------------------------
Income From Operations 3,140,285 544,248
- -----------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income - 47,674
Interest expense (Contractual Interest for the three months ended
March 29, 1998 estimated at $ 11,132,102) (465,289) (3,702,200)
Loss on sale of assets (4,297) (1,190)
- -----------------------------------------------------------------------------------------------------------------
Total Other Expense, net (469,586) (3,655,716)
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) Before Reorganization Items and Income Taxes 2,670,699 (3,111,468)
- -----------------------------------------------------------------------------------------------------------------
Reorganization Items: (1,365,529) (12,094,204)
Income (Loss) Before Income Taxes 1,305,170 (15,205,672)
- -----------------------------------------------------------------------------------------------------------------
Provision for Income Taxes - -
- -----------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 1,305,170 $ (15,205,672)
=================================================================================================================
Basic Income (Loss) per Common Share $ 0.02 $ (0.26)
=================================================================================================================
Weighted Average Common Shares Outstanding 58,393,105 58,393,105
=================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (DEBTORS-IN-POSSESSION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months ended March 29, 1998 and March 30, 1997 (Unaudited) 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 1,305,170 $ (15,205,672)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,041,819 2,276,454
Reorganization Items :
Write-off of debt issuance costs - 11,210,108
Professional Fees 1,500,000 1,000,000
Management Retention Expense 129,750 -
Interest Earned on Accumulated Cash During
Chapter 11 Proceedings (264,221) (115,902)
Provision for doubtful accounts 82,798 411,295
(Gain) loss on sale or disposal of assets 4,297 1,190
Changes in operating assets and liabilities:
Accounts receivable (268,650) 690,061
Other current assets 286,253 110,910
Accounts payable - trade (pre-petition) 141 (913,284)
Accounts payable - trade (post-petition) 69,654 1,149,676
Other accrued expenses (pre-petition) - 9,257,792
Other accrued expenses (post-petition) 2,221,265 (6,448,382)
-------------------------------
Net Cash Provided by Operating Activities Before Reorganization Items 7,108,276 3,424,246
-------------------------------
Increases (decreases) to Cash Resulting from Reorganization Items:
Professional fees paid (950,094) -
Management Retention Disbursements (129,750) -
Interest Earned on Accumulated Cash During
Chapter 11 Proceedings 264,221 115,902
-------------------------------
Net Cash Provided by (Used in) Reorganization Items (815,623) 115,902
- --------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 6,292,653 3,540,148
- --------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Change in cash and cash equivalents-restricted (104,477) (1,574)
Change in investments-restricted (38,342) (24,788)
Change in securities available for sale - 2,000,905
Payments for property and equipment (414,943) (967,887)
Change in construction payables - (533,250)
Increase in related party receivable and other - (168,118)
Cash proceeds from sale of property and equipment 14,000 3,427
-------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities (543,762) 308,715
- --------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Debt issuance and deferred financing costs - (6,250)
Payments on long-term debt (58,453) (253,822)
Payments on capital lease obligations subject to compromise (2,171,090) (2,171,090)
Decrease in affiliate payable (15,785) 514,720
- --------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (2,245,328) (1,916,442)
- --------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 3,503,563 1,932,421
Cash and cash equivalents - beginning of period 20,326,317 22,558,804
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ 23,829,880 $ 24,491,225
==============================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
CONDENSED CONSOLIDATED STRATOSPHERE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (DEBTORS-IN-POSSESSION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months ended March 29, 1998 and March 30, 1997 (Unaudited) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest-net of capitalized interest $ 358,094 $ 605,389
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
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 are acting as
debtors-in-possession on behalf of their respective bankrupt estates, and are
authorized as such to operate their business subject to Bankruptcy Court
supervision. The condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. These condensed
consolidated financial statements do not include any adjustments that might
result if the Company is unable to successfully emerge from bankruptcy and
continue as a going concern.
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 (see Note 2), the Company has
implemented the guidance provided by 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 March 29, 1998, condensed consolidated financial statements.
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 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 $2.7 million and $3.1 million as
of March 29, 1998 and March 30, 1997, respectively.
7
<PAGE> 8
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 Stock
Options were in excess of the average market share price. Under the restated
second amended plan of reorganization ("Restated Second Amended Plan"), which
was filed with the Bankruptcy Court on February 13, 1998, and is pending
confirmation, all existing equity interests (including Common Stock, options and
warrants) would be canceled.
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 income (loss).
(2) RESTRUCTURING
On February 13, 1998, the Debtors filed the Restated Second Amended Plan which
included the results of negotiations between High River Limited Partnership and
American Real Estate Partners, L.P. (collectively "High River"), holders of
approximately 51% of the 14 1/4% First Mortgage Notes ("First Mortgage Notes"),
and Grace Brothers, Ltd., holders of approximately 33% of the First Mortgage
Notes. Among other things, under the Restated Second Amended Plan, the secured
portion of the First Mortgage Notes (estimated at $120 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 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 note due Grand Casinos, Inc. (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 the reorganized
Stratosphere Corporation will continue to make payments pursuant to its capital
lease and operating lease agreements. 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 for 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 4).
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
conclusion of the Chapter 11 proceedings. 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 condensed consolidated balance sheets, represent the Company's
estimate of the Debtors' pre-petition liabilities which are subject to
compromise (See Note 3).
8
<PAGE> 9
(3) LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise under reorganization proceedings consist of
the following as of March 29, 1998 (in thousands):
<TABLE>
<CAPTION>
1998
<S> <C>
Accounts payable trade $ 348
Accrued payroll and related expenses 58
Affiliate payable 2,408
Other accrued expenses 4,761
Capital lease obligations 15,786
14 1/4% first mortgage notes - including accrued interest through 1/27/97 223,661
Note payable to affiliate 50,000
---------
$ 297,022
=========
</TABLE>
The Company ceased accruing interest on the 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 March 29, 1998 condensed
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 March 29, 1998.
(4) REORGANIZATION ITEMS
Reorganization items consisted of the following for the three month periods
ended March 29, 1998 and March 30, 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Write-off of debt issuance costs $ - $11,210
Professional fees 1,500 1,000
Interest earned on accumulated cash during Chapter 11 proceedings (264) (116)
Management retention compensation 130 -
------ -------
$1,366 $12,094
====== =======
</TABLE>
Cash interest earned since the Petition Date was $1,114,166.
Costs and expenses related to the reorganization of the Company have been
classified as Reorganization Items in the condensed consolidated statements of
operations since the Petition Date. Prior to the Petition Date, such costs and
expenses were classified as selling, general and administrative in the condensed
consolidated statement of operations.
(5) CONTINGENCIES
The Caesar case motion to dismiss filed by the defendant was granted in part and
denied in part by the United States District Court for the District of Nevada on
April 8, 1998.
9
<PAGE> 10
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 Stratosphere Corporation (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 March
29, 1998, the operations included 1,925 slot machines, 53 table games, a sports
book, keno lounge, 1,444 hotel rooms and five themed restaurants.
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.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 29, 1998 AND
MARCH 30, 1997
NET INCOME (LOSS)
The Company reported net income of $1.3 million or $0.02 per common share for
the 1998 first quarter as compared to the 1997 first quarter loss of $15.2
million or ($0.26) per common share.
REVENUES
Casino revenues of approximately $15.0 million for the 1998 first quarter were
$2.4 million (13.8%) less than the 1997 first quarter. Management attributes the
decline to the loss of momentum associated with the marketing campaign that
promoted the favorable gaming odds offered by the Company. Additional marketing
efforts have been directed toward the development of several promotional and
direct mail programs. Casino revenues represented 40% and 44% of total gross
revenues for the first quarters of 1998 and 1997, respectively.
Hotel revenues of approximately $6.0 million for the 1998 first quarter were
$.4 million (6%) less than the same period in 1997. Hotel occupancy was 90.5%
during the 1998 first quarter as compared to 87.0% in 1997. The average rate
per guest room declined from $56.00 during the 1997 first quarter to $49.69 for
1998. Hotel revenues averaged 16% of total gross revenues during the 1998 and
1997 first quarters.
Tower visitations (including the Top of The World Dining) totaled 636,500 during
the 1998 first quarter as compared to 685,067 for the same period in 1997. The
revenue impact of the decline in visitations was off-set by an increase in ride
admissions from 166,716 for the 1997 first quarter to 261,182 during 1998. The
increase in ride admissions was due to less down time associated with the roller
coaster during 1998.
COSTS AND EXPENSES
Casino operating costs declined approximately 9% from $7.5 million for the 1997
first quarter to $6.8 million for 1998. Approximately $.5 million of the
reduction was due to reduced labor costs.
10
<PAGE> 11
Hotel operating costs declined approximately 17% from $2.4 million for the 1997
first quarter to $2.0 million for 1998. This reduction is due to operating cost
savings resulting from the implementation of profit enhancement programs.
Food and beverage operating costs declined approximately 15% from $6.8 million
for the 1997 first quarter to $5.8 million for 1998. Food and beverage payroll
costs were approximately $.8 million less in the 1998 first quarter. In
addition, several new purchasing programs were implemented resulting in food and
beverage cost savings of approximately $.3 million in the 1998 first quarter.
Selling, general and administrative expenses declined from $14.9 million in the
1997 first quarter to $11.5 million for 1998. The cost savings in 1998 was
realized through a reduction of $1.2 million in payroll and related expenses, a
$.4 million reduction in advertising expenses and a $.2 million reduction in bad
debt expense. In addition, the 1997 amounts included approximately $.8 million
of non-recurring expenses relating to gaming and sales tax audits for the
periods prior to the Petition Date.
OTHER FACTORS IMPACTING EARNINGS
Interest expense was approximately $.5 million and $3.7 million for the 1998 and
1997 first quarters, respectively. The Company ceased accruing interest on the
First Mortgage Notes as of the Petition Date.
The Company expensed reorganization items of $1.4 million and $12.1 million
during the first quarters of 1998 and 1997, respectively. Included as a
reorganization item during the 1997 first quarter was $11.2 of unamortized debt
issuance costs that were expensed as of the Petition Date.
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 has commenced contract negotiations with this union and 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 complete the casino operating system
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 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.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
RESTRUCTURING
On February 13, 1998, the Debtors filed the Restated Second Amended Plan which
included the results of negotiations between High River Limited Partnership and
American Real Estate Partners, L.P. (collectively "High River"), holders of
approximately 51% of the First Mortgage Notes, and Grace Brothers, Ltd., holders
of approximately 33% of the First Mortgage Notes. Among other things, under the
Restated Second Amended Plan, the secured portion of the Company's First
Mortgage Notes (estimated at $120 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 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 note due Grand Casinos, Inc.
(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 the reorganized Stratosphere Corporation will continue to make
payments pursuant to its capital lease and operating lease agreements. 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 for 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.
CASH FLOW, WORKING CAPITAL AND CAPITAL EXPENDITURES
The Company had unrestricted cash balances of $23.8 million as of March 29,
1998. Since the Petition Date, the Company has relied on unrestricted current
cash balances and its ability to generate cash flow from operations to fund its
working capital needs.
During the 1998 first quarter, the Company generated $6.3 million from
operations. These funds were primarily used to fund capital expenditures of $.4
million and payments on capital lease obligations of $2.2 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-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).
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Caesar case motion to dismiss filed by the defendant was granted in part and
denied in part by the United States District Court for the District of Nevada on
April 8, 1998.
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 Company does not anticipate meeting future payment obligations
during the term of the bankruptcy proceedings. The total principal and interest
accrued as of March 29, 1998, was approximately $223.7 million. Interest has not
been accrued since the Petition Date.
The Company is also in default on its capital lease obligations due to its
inability to meet certain financial covenants. The Company anticipates it will
continue payment on this obligation during the term of the bankruptcy
proceedings. The Company was current on this payment obligation as of March 29,
1998. The balance of principal and accrued interest as of March 29, 1998, was
approximately $16.0 million.
ITEM 5. OTHER INFORMATION
On March 10, 1998, Daniel A. Cassella was elected to the Company's board of
directors. During his extensive career in the gaming industry, Mr. Cassella
served as President and Chief Executive Officer of Resorts International in
Atlantic City, New Jersey, and President and Chief Operating Officer of the
Desert Inn in Las Vegas, Nevada. In addition, Mr. Cassella served in various
senior management positions with The Mirage and Caesars Palace in Las Vegas,
Nevada, from 1980 to 1992.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the
fiscal quarter ended March 29, 1998.
13
<PAGE> 14
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: May 11, 1998 By: /s/ Thomas A. Lettero
---------------------------
Name: Thomas A. Lettero
-------------------------
Title: Chief Financial Officer
------------------------
14
<PAGE> 15
EXHIBIT INDEX
STRATOSPHERE CORPORATION
Exhibit
No.
- -------
27 Financial Data Schedule
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> MAR-29-1998
<CASH> 23,829,880
<SECURITIES> 0
<RECEIVABLES> 6,987,473
<ALLOWANCES> (3,522,109)
<INVENTORY> 2,675,430
<CURRENT-ASSETS> 5,467,355
<PP&E> 141,524,627
<DEPRECIATION> 20,684,510
<TOTAL-ASSETS> 157,870,469
<CURRENT-LIABILITIES> 16,304,853
<BONDS> 0
0
0
<COMMON> 583,931
<OTHER-SE> (156,278,149)
<TOTAL-LIABILITY-AND-EQUITY> 157,870,469
<SALES> 34,177,918
<TOTAL-REVENUES> 37,259,664
<CGS> 4,408,571
<TOTAL-COSTS> 24,641,076
<OTHER-EXPENSES> 6,396,557
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 465,289
<INCOME-PRETAX> 1,305,170
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,670,699
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,305,170
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
