<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 26, 1999
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 5,
1999
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STRATOSPHERE CORPORATION
FORM 10-Q
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 26, 1999 (unaudited) and
December 27, 1998 3
Condensed Consolidated Statements of Operations (unaudited) for the three months 4
ended September 26, 1999 (Successor Company) and September 27, 1998
(Predecessor Company)
Condensed Consolidated Statements of Operations (unaudited) for the nine months 5
ended September 26, 1999 (Successor Company) and September 27, 1998
(Predecessor Company)
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months 6-7
ended September 26, 1999 (Successor Company) and September 27, 1998
(Predecessor Company)
Notes to Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition and 11-15
Results of Operations
Part II. OTHER INFORMATION 16
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
2
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
BALANCE SHEETS STRATOSPHERE CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 26, DECEMBER 27,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
(In thousands, except share amounts) (Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 19,758 $ 12,624
Cash and cash equivalents-restricted 2,151 2,218
Marketable securities 1,471 -
Investments-restricted 1,778 3,291
Accounts receivable, net 2,348 2,619
Other current assets 5,274 5,427
- ------------------------------------------------------------------------------------------------------------------------
Total Current Assets 32,780 26,179
- ------------------------------------------------------------------------------------------------------------------------
Property and Equipment, Net 124,700 126,173
- ------------------------------------------------------------------------------------------------------------------------
Other Assets:
Deferred financing costs, net 270 194
Other receivable 3,000 3,000
- ------------------------------------------------------------------------------------------------------------------------
Total Other Assets 3,270 3,194
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $ 160,750 $ 155,546
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 1,435 $ 1,407
Current portion of long-term note payable 118 148
Current portion of capital lease obligations 2,667 8,979
Accrued payroll and related expenses 5,926 5,146
Other accrued expenses 14,701 12,878
- ------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 24,847 28,558
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities:
Long-term note payable-less current portion - 94
Capital lease obligations-less current portion 6,667 -
- ------------------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 6,667 94
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 31,514 28,652
- ------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value; authorized 3,000,000 shares;
no shares issued and outstanding - -
Common stock, $.01 par value; authorized 10,000,000 shares;
issued and outstanding 2,030,000 20 20
Additional paid-in-capital 127,058 127,058
Retained earnings (accumulated deficit) 2,158 (184)
- ------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 129,236 126,894
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 160,750 $ 155,546
========================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS STRATOSPHERE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------------------
SUCCESSOR PREDECESSOR
COMPANY COMPANY
THREE MONTHS ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) (Unaudited) (Unaudited)
<S> <C> <C>
REVENUES:
Casino $ 12,315 $ 13,670
Hotel 5,756 5,783
Food and beverage 7,914 7,930
Tower, retail and other income 7,271 7,964
- --------------------------------------------------------------------------------------------------------------------------
Gross Revenues 33,256 35,347
Less: Promotional allowances 2,544 3,106
- --------------------------------------------------------------------------------------------------------------------------
NET REVENUES 30,712 32,241
- --------------------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Casino 7,474 7,505
Hotel 3,453 3,354
Food and beverage 6,386 6,380
Other operating expenses 3,010 3,764
Depreciation and amortization 2,001 1,961
Selling, general and administrative 8,235 9,330
- --------------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 30,559 32,294
- --------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 153 (53)
- --------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 222 -
Interest expense (216) (380)
Loss on sale of assets (3) -
- --------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense), net 3 (380)
- --------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE REORGANIZATION ITEMS AND INCOME TAXES 156 (433)
- --------------------------------------------------------------------------------------------------------------------------
REORGANIZATION ITEMS: - 4,296
INCOME BEFORE INCOME TAXES 156 3,863
- --------------------------------------------------------------------------------------------------------------------------
Provision for Income Taxes 55 -
Extraordinary Gain on Prepetition Debt Discharge - 153,437
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 101 $ 157,300
==========================================================================================================================
BASIC INCOME PER COMMON SHARE $ 0.05 *
==========================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,030 *
==========================================================================================================================
</TABLE>
* Earnings per share is not presented for the three months ended September 27,
1998 because such presentation would not be meaningful. The Old Common Stock
was cancelled and the New Common Stock was issued pursuant to the Restated
Second Amended Plan.
See notes to condensed consolidated financial statements.
4
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS STRATOSPHERE CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------------
SUCCESSOR PREDECESSOR
COMPANY COMPANY
NINE MONTHS ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) (Unaudited) (Unaudited)
<S> <C> <C>
REVENUES:
Casino $ 37,280 $ 42,387
Hotel 18,445 18,069
Food and beverage 25,301 25,433
Tower, retail and other income 20,783 22,898
- -------------------------------------------------------------------------------------------------------------------------------
Gross Revenues 101,809 108,787
Less: Promotional allowances 7,411 9,401
- -------------------------------------------------------------------------------------------------------------------------------
NET REVENUES 94,398 99,386
- -------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 21,053 23,149
Hotel 10,499 9,368
Food and beverage 19,320 19,023
Other operating expenses 8,607 10,215
Depreciation and amortization 6,283 5,993
Selling, general and administrative 24,837 26,054
- -------------------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 90,599 93,802
- -------------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 3,799 5,584
- -------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 531 -
Interest expense (656) (1,226)
Loss on sale of assets (71) (42)
- -------------------------------------------------------------------------------------------------------------------------------
Total Other Expense, net (196) (1,268)
- -------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE REORGANIZATION ITEMS AND INCOME TAXES 3,603 4,316
- -------------------------------------------------------------------------------------------------------------------------------
REORGANIZATION ITEMS: - (754)
INCOME BEFORE INCOME TAXES 3,603 3,562
- -------------------------------------------------------------------------------------------------------------------------------
Provision for Income Taxes 1,261 -
Extraordinary Gain on Prepetition Debt Discharge - 153,437
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,342 $ 156,999
===============================================================================================================================
BASIC INCOME PER COMMON SHARE $ 1.15 *
===============================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,030 *
===============================================================================================================================
</TABLE>
* Earnings per share is not presented for the nine months ended September 27,
1998 because such presentation would not be meaningful. The Old Common Stock
was cancelled and the New Common Stock was issued pursuant to the Restated
Second Amended Plan.
See notes to condensed consolidated financial statements.
5
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS STRATOSPHERE CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------------
SUCCESSOR PREDECESSOR
COMPANY COMPANY
NINE MONTHS ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands) (Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,342 $ 156,999
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,482 6,299
Reorganization Items :
Professional Fees - 3,492
Management Retention Expense - 233
Vegas World Vacation Package Settlement - 3,347
Interest Earned on Accumulated Cash During
Chapter 11 Proceedings - (814)
(Recoveries) provision for doubtful accounts (113) 139
Loss on sale or disposal of assets 71 42
Changes in operating assets and liabilities:
Accounts receivable 383 (2,638)
Other current assets 153 (1,061)
Accounts payable - trade 28 410
Accrued payroll and related expenses 780 1,122
Other accrued expenses (post-petition) 1,823 11,223
-----------------------------------
Net Cash Provided by Operating Activities Before Reorganization Items 11,949 178,793
-----------------------------------
Increases (decreases) to Cash Resulting from Reorganization Items:
Prepetition claims payable pursuant to amended plan - (7,383)
Increase in allowed claims - 3,708
Adjust accounts to fair value - (8,598)
Extraordinary gain on prepetition debt discharge - (153,437)
Professional fees paid - (2,783)
Management Retention Disbursements - (836)
Interest Earned on Accumulated Cash During
Chapter 11 Proceedings - 814
-----------------------------------
Net Cash Used in Reorganization Items - (168,515)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,949 10,278
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in cash and cash equivalents-restricted 67 (6,912)
Purchase of marketable securities (2,471) -
Proceeds from the sale of marketable securities 1,000 -
Decrease (increase) in investments-restricted 1,513 (114)
Capital expenditures (5,432) (1,062)
Proceeds from sale of property and equipment 551 308
- ------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (4,772) (7,780)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term note payable (124) (156)
Final payments on capital lease obligations - original (8,979) (6,807)
Payments on capital lease obligations - new (666) -
Proceeds from capital lease obligations 10,000 -
Increase in deferred financing costs (274) 18
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (43) (6,945)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 7,134 (4,447)
Cash and cash equivalents - beginning of period 12,624 20,326
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 19,758 $ 15,879
========================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
6
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS STRATOSPHERE CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------
SUCCESSOR PREDECESSOR
COMPANY COMPANY
NINE MONTHS ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
(In thousands) (Unaudited) (Unaudited)
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest-net of capitalized interest $ 443 $ 904
Income taxes $ 300 $ -
Non-Cash Investing and Financing Activities:
Increase (decrease) in land and building from
reduction in notes receivable from stockholder $ - $ 350
Cancellation of common stock from reorganization $ - $ (584)
Issuance of common stock to new shareholders $ - $ 20
Discharge of first mortgage notes $ - $ (203,000)
Discharge of note payable - affiliate $ - $ (50,000)
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS STRATOSPHERE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(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. 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 reflected the effect of the
Restated Second Amended Plan as of September 27, 1998.
PRINCIPLES OF PRESENTATION
The condensed consolidated financial statements have been prepared in accordance
with the accounting policies described in the Company's 1998 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.
As a result of the restructuring, the Company 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" as of
September 27, 1998. 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. Column headings have been included on the accompanying
Condensed Consolidated Statements of Operations and Condensed Consolidated
Statement of Cash Flows to distinguish between the predecessor and successor
entities.
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.
RECLASSIFICATIONS
Certain amounts in the 1998 condensed consolidated financial statements have
been reclassified to conform to the 1999 presentation. These reclassifications
had no effect on the Company's net income.
8
<PAGE> 9
EARNINGS PER SHARE ("EPS")
The Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS
128") in 1997. However, there is no effect on the EPS calculation as all Common
Stock and equivalents have been canceled as of the Effective Date. Pursuant to
the Restated Second Amended Plan, 2,030,000 shares of new Common Stock were
issued on the Effective Date. There were no other Common Stock equivalents as of
September 26, 1999.
(2) RESTRUCTURING
Pursuant to the Restated Second Amended Plan becoming effective on October 14,
1998, the Company canceled all prior equity interests (including 58.4 million
shares of Common Stock, options and warrants) and 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 was
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 were discharged in exchange for cash payments which will total
$6.0 million. Allowed priority claims (estimated at $.9 million) were paid in
full. The discharge and settlement of these claims resulted in a gain of $153.4
million, which was reflected as an extraordinary item on the September 27, 1998,
consolidated statement of operations. The amount of the gain was based on the
Company's estimate of the amount of claims that will ultimately be allowable by
the Bankruptcy Court, and was 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 cash the Company is required to distribute for full debt
discharge. A portion of the $6.9 million to be distributed has been reserved for
potential future settlement of unsecured claim disputes (approximately $1.8
million).
(3) INCOME TAXES
The tax effect of significant temporary differences representing deferred tax
assets for the Company principally consist of the excess of tax over book basis
of assets due to the write down of assets. The Company has recorded a valuation
allowance at September 26, 1999, related to recorded tax benefits because of the
significant uncertainty as to whether such benefits will ever be realized. To
the extent realized, benefits remaining from tax attributes will be reported as
direct additions to contributed capital.
(4) RELATED PARTY TRANSACTIONS
Carl C. Icahn related entities own approximately 89.6% of the Company's Common
Stock as of September 26, 1999. Since January 1999, Mr. Daniel A. Cassella and
Mr. Thomas A. Lettero, Chief Executive Officer and Chief Financial Officer,
respectively, provided management services to Arizona Charlie's, Inc. (an entity
owned 100% by Mr. Icahn). The Company has recorded a $56,000 receivable that was
reimbursed on October 1, 1999, for payroll and other expenses related to the
services performed from June 27, 1999 to September 26, 1999. The $56,000
reimbursed by Arizona Charlie's, Inc. was net of certain printing expenses
(approximately $4,000) that were paid on behalf of the Company by Arizona
Charlie's, Inc.
Pursuant to a wholesale tour and travel agreement with Lowestfare.com (a company
owned by Mr. Icahn), the Company received hotel revenues of $.1 million during
the 1999 third quarter.
On October 4, 1999, American Real Estate Holdings Limited Partnership ("AREH")
repurchased 985,286 shares from entities owned or controlled by Carl C. Icahn.
AREH is the subsidiary limited partnership of American Real Estate Partners,
L.P. ("AREP") a master limited partnership whose units are traded on the New
York Stock Exchange. Mr. Icahn currently owns approximately 85% of the
outstanding depositary units of AREP. Upon completion of the transaction, Mr.
Icahn continues to control approximately 89.6% of the Company's Common Stock.
9
<PAGE> 10
(6) CONTINGENCIES
The Company's complaint for the avoidance of preferential transfers made to
McDonald's Corporation (the "Complaint") and the Company's objection to the
proof of claim filed by McDonald's Corporation came to trial June 24, 1999. On
September 20, 1999, the Bankruptcy Court entered its Notice of Entry of Findings
of Fact, Conclusions of Law and Judgment Re Debtors' Complaint for Avoidance of
Preferential Transfers Pursuant to 11 U.S.C. ss. 547 and Order Re Objection To
McDonald's Proof of Claim ("Judgment"). The Judgment ordered that payments made
in January 1997, by the Company to McDonald's in the amount of $.7 million
("Judgment Amount"), were preferential payments pursuant to Section 547(b) of
the Bankruptcy Code and were thereby recoverable by the Company. Regarding the
Company's objection to the proof of claim filed by McDonald's, the Bankruptcy
Court held that McDonald's was not entitled to an administrative claim and that
it was not entitled to any claim for damages. On September 29, 1999, McDonald's
Corporation filed its notice of appeal to the Bankruptcy Appellate Panel for the
Ninth Circuit Court of Appeals. To date the record on appeal has been designated
but a briefing schedule has not been set.
On February 26, 1998, the Company filed its Motion for Approval of Assumption of
Unexpired Lease ("Assumption Motion") seeking to assume the Development and
Lease Agreement ("Lease") with Strato-Retail. Strato-Retail opposed the
Assumption Motion claiming that the cessation of Phase II construction was an
incurable breach of the Lease by the Company. Strato-Retail also has claimed
damages due to the Company's alleged failure to timely tender the Phase II
shell. On January 28, 1999, January 29, 1999 and March 5, 1999, the Bankruptcy
Court held evidentiary hearings on the Assumption Motion. On June 18, 1999, the
Bankruptcy Court entered its Order Re Motion for Approval of Assumption of
Unexpired Lease ("Order") finding in pertinent part that the Company's failure
to complete construction and the ramifications following therefrom are incurable
"historical facts" and that the Company could not cure such breaches. On June
28, 1999, the Company filed its notice of appeal. The Company's opening brief
was filed on October 21, 1999. On July 16, 1999, Strato-Retail filed its
protective proof of claim in excess of $139.5 million. The basis for the amount
of the proof of claim is Strato-Retail's calculation of its alleged cash flow if
Phase II had been completed as contemplated by the Lease. Strato-Retail
acknowledged that it is only entitled to offset its damages against the rent
reserved under the Lease (approximately $1.3 million annually); however,
Strato-Retail claims that the prepetition failure to complete Phase II is an
ongoing breach by the Company because the incompletion of Phase II was found by
the Bankruptcy Court to be incurable. The Bankruptcy Court has not yet set a
hearing date regarding this matter.
In addition, in the ordinary course of business, the Company is party to various
legal actions. In management's opinion, the ultimate outcome of such legal
actions will not have a material effect on the results of operations or the
financial position of the Company.
10
<PAGE> 11
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 5, 1999, the operations included 1,514 slot machines, 44 table games, 6
poker tables, a race and 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 were acting as debtors-in-possession on
behalf of their respective bankrupt estates, and were 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.
As a result of the restructuring, the Company 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" as of
September 27, 1998. 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. Column headings have been included on the accompanying
Condensed Consolidated Statements of Operations and Condensed Consolidated
Statement of Cash Flows to distinguish between the predecessor and successor
entities.
Pursuant to the Restated Second Amended Plan becoming effective on October 14,
1998, the Company canceled all prior equity interests (including the 58.4
million outstanding shares of Common Stock, options and warrants) and 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 was 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) were
paid in full. The discharge and settlement of these claims resulted in a gain of
$153.4 million, which was reflected as an extraordinary item on the September
27, 1998 consolidated statements of operations. The amount of the gain was based
on the Company's estimate of the amount of claims that will ultimately be
allowable by the Bankruptcy Court, and was 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 of the $6.9 million to be distributed has been reserved for potential
future settlement of unsecured claim disputes (approximately $1.8 million).
RESULTS OF OPERATIONS
The following is a discussion of the comparison of operating results for the
third quarter of 1999 (Successor Company) and 1998 (Predecessor Company) and the
nine months ended September 26, 1999 (Successor Company) and September 27, 1998
(Predecessor Company). These comparisons are included in this Form 10-Q since
operations have remained similar during the pre and post-reorganization periods
and such
11
<PAGE> 12
comparison would not be misleading.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 26, 1999
AND SEPTEMBER 27, 1998
REVENUES
Casino revenues of $12.3 million for the 1999 third quarter were $1.4 million
(10%) less than the same period in 1998. Management attributes the decline to
increased competition with the opening of four new mega resorts on the Las Vegas
Strip. Competition is expected to continue to increase during the next twelve
months with the opening of one additional mega resort. The casino product was
enhanced with the additions of the new 5,000 square foot race and sports book,
deli and lounge on August 4, 1999. Casino marketing efforts continue to be
directed toward the development of several promotional events and direct mail
programs targeting casino guest visits during lower occupancy periods. Casino
revenues represented 37% and 39% of total gross revenues for the third quarters
of 1999 and 1998, respectively.
Hotel occupancy was 93% during the 1999 third quarter as compared to 92% in
1998. The average rate per guestroom was $47 during the 1999 third quarter as
compared to $48 in 1998. Hotel revenues averaged 17% and 16% of total gross
revenues during the third quarter of 1999 and 1998, respectively. Management
anticipates a slight increase in hotel occupancy during the fourth quarter as
compared to the prior year. However, management does not expect hotel occupancy
growth during the year 2000.
Tower, retail and other revenues of $7.3 million for the 1999 third quarter were
approximately $.7 million (9%) less than the same period in 1998. Tower
visitations (including the Top of The World dining) totaled 585,420 during the
1999 third quarter as compared to 617,276 for the same period in 1998. The
decline in Tower visitation (5%) is attributed to the increase in new
attractions on the Las Vegas Strip.
COSTS AND EXPENSES
Promotional allowances decreased from $3.1 million during the three months ended
September 27, 1998, to $2.5 million for the same period in 1999. The 18%
reduction in promotional allowances was the result of less direct mail
promotions that include room, food and beverage being offered to guests on a
complimentary basis. Management anticipates that promotional allowances will
increase in future periods with an increase in direct marketing efforts and
special events offered to casino guests.
Other operating expenses decreased 20% from $3.8 million for the 1998 third
quarter to $3.0 million for 1999. The majority of this reduction is due to
reduced entertainer fees and payroll costs associated with the showroom and
Tower operations.
Selling, general and administrative expenses decreased 12% from $9.3 million for
the 1998 third quarter to $8.2 million for 1999. The Company reduced its
advertising and promotional expenses $.9 million during the 1999 third quarter.
In addition, fixed expenses declined approximately $.3 million as a result of
the termination of the Company's operating lease obligations. Professional fees
(accounting and legal), which were unrelated to the Company's reorganization,
incurred during the 1999 third quarter were $.2 million. Professional fees
incurred during the 1998 third quarter were classified as Reorganization items.
OTHER FACTORS IMPACTING EARNINGS
Interest income was approximately $.2 million for the 1999 third quarter.
Interest income earned during the same period in 1998 of approximately $.3
million was classified as a Reorganization item.
Interest expense decreased 43% from $.4 million for the 1998 third quarter to
$.2 million for 1999. The decrease was due to a reduction in interest associated
with the Company's capital lease obligations. The Company financed a new capital
lease obligation of $10.0 million on May 28, 1999. The current rate of interest
is 8.0%.
The Company recorded income from Reorganization items totaling $4.3 million
during the 1998 third quarter. Since the Effective Date, any unaccrued income or
expense related to the reorganization will be
12
<PAGE> 13
classified as a selling, general and administrative expense. There were no such
items incurred during the 1999 third quarter.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1999 AND
SEPTEMBER 27, 1998
REVENUES
Casino revenues of $37.3 million for the nine months ended September 26, 1999,
were $5.1 million (12%) less than the same period in 1998. Management attributes
the decline in casino revenues to increased competition with the opening of four
new mega resorts on the Las Vegas Strip (Bellagio, Mandalay Bay, Venetian and
Paris). Additional competition is anticipated during the next twelve months with
the opening of one additional mega resort on the Las Vegas Strip. The casino
product was enhanced with the additions of the new 5,000 square foot race and
sports book, deli and lounge on August 4, 1999. Casino marketing efforts
continue to be directed toward the development of several promotional events and
direct mail programs targeting casino guest visits during lower occupancy
periods.
Tower, retail and other revenues of $20.8 million for the nine months ended
September 26, 1999 was $2.1 million (9%) less than the same period in 1998.
Tower visitation (including the Top of The World dining) totaled 1.7 million
during the nine months ended September 26, 1999, as compared to 1.9 million for
the same period in 1998. The decline in Tower visitation (11%) is due to the
increase in new attractions on the Las Vegas Strip.
COSTS AND EXPENSES
Promotional allowances decreased from $9.4 million during the nine months ended
September 27, 1998, to $7.4 million for the same period in 1999. The reduction
in promotional allowances was the result of less direct mail promotions that
include room, food and beverage being offered to guests on a complimentary
basis. Management anticipates that promotional allowances will increase during
future periods with an increase in direct marketing efforts and special events
offered to casino guests during low occupancy periods.
Casino operating costs declined approximately 9% from $23.1 million for the nine
months ended September 27, 1998, to $21.1 million for the same period in 1999.
The majority of the decline in casino operating expenses resulted from a $1.5
million reduction in the cost of providing complimentary room, food and beverage
to casino guests. Management anticipates future increases in these costs
resulting from the implementation of additional promotional events and direct
mail programs.
Hotel operating costs increased 12% from $9.4 million for the nine months ended
September 27, 1998, to $10.5 million for 1999. Approximately $.8 million of the
increase is due to fewer room nights being provided to casino guests on a
complimentary basis, the cost of which is charged to casino operations.
Other operating expenses decreased 16% from $10.2 million for the nine months
ended September 27, 1998, to $8.6 million for 1999. The majority of this
reduction is due to reduced entertainer fees and payroll costs associated with
the showroom and Tower operations.
OTHER FACTORS IMPACTING EARNINGS
Interest income was approximately $.5 million for the nine months ended
September 26, 1999. Interest income earned during the same period in 1998 of
approximately $.8 million was classified as a Reorganization item.
Interest expense decreased 46% from $1.2 million for the nine months ended
September 27, 1998, to $.7 million for 1999. The decrease was due to a reduction
in interest associated with the Company's capital lease obligations. The Company
financed the new capital lease obligation of $10.0 million on May 28, 1999. The
current rate of interest is 8.0%.
13
<PAGE> 14
The Company recorded expense from Reorganization items totaling $.8 million
during the nine months ended September 27, 1998. Since the Effective Date, any
unaccrued professional fees related to the reorganization will be classified as
a selling, general and administrative expense. There were no such items incurred
during the nine months ended September 26, 1999.
The Company recorded a provision for income taxes of $1.3 million for the nine
months ended September 26, 1999. In the event the Company is able to utilize any
of its deferred tax assets in future periods, any such tax benefit will be
reported as a direct addition to contributed capital.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW, WORKING CAPITAL AND CAPITAL EXPENDITURES
During the nine month period ended September 26, 1999, the Company generated
$11.9 million in cash flows from operating activities. These funds, combined
with a portion of unrestricted cash, were used to fund capital expenditures of
$3.7 million, the final payments on the former capital and operating lease
obligations of $10.0 million and $.7 million on the new capital lease
obligation. The Company had unrestricted cash balances of $19.8 million as of
September 26, 1999.
On May 28, 1999, the Company entered into the $10.0 million new capital lease
obligation ("New Capital Lease Obligation") in which certain existing gaming and
other equipment was financed over a thirty-six month period. Interest is
calculated based on the LIBO rate for each period plus 2.5%. The current rate of
interest for the period ended September 26, 1999, was 8.0%. A $2.0 million
balloon payment will be due upon conclusion of the thirty-six month term. The
New Capital Lease Obligation contains certain covenants that effectively would
create an event of default if the current controlling stockholder of the Company
were to cease to be the beneficial owner of at least 51% of the Company's Common
Stock. The covenants also restrict the Company from incurring more than $5.0
million in additional debt without the consent of the creditors of the New
Capital Lease Obligation.
As of September 26, 1999, the Company had approximately $1.8 million reserved
for disputed claims related to the Restated Second Amended Plan. The $1.8
million of disputed claims is classified as other accrued liabilities on the
accompanying September 26, 1999, Condensed Consolidated Balance Sheet. The
remaining payments will be made from restricted cash and/or investment balances.
The Company has completed various enhancement projects, including a new race and
sports book, deli and entertainment lounge with a combined estimated cost of
approximately $3.7 million of which approximately $3.3 million has been spent as
of September 26, 1999. In addition, the Company estimates that other capital
expenditures will be approximately $4.0 million during the next twelve months.
The Company anticipates funding the enhancements and other capital expenditures
from operating activities or unrestricted cash balances, if needed.
YEAR 2000 READINESS
BACKGROUND
Many of the Company's software programs were written using two digits rather
than four to define the applicable year. As a result, date-sensitive computer
software may recognize a date using "00" as the year 1900 instead of the
appropriate year 2000. If this situation were to occur, the potential exists for
computer system failures.
RISK FACTORS
The Company does not utilize computers to directly generate revenues; however,
computers do play a critical role in the reporting of operating results and
supports the Company's internal control systems. Computer systems are also used
as a tool by Company employees when servicing customers. For example, the
property management system assists hotel employees in booking reservations and
checking guests into the hotel. Although the Company is prepared to implement
manual "back-up" procedures, extended failure
14
<PAGE> 15
of the property management system would result in increased labor costs and
diminished customer service levels. The Company utilizes similar computer
systems in its food and beverage and Tower operations in which any extended
computer system failure would have a similar impact.
The Company relies on its database as a tool to generate hotel occupancy and
promote casino events. Failure of the database computer systems would create
inefficiency in performing these tasks resulting in increased labor costs. Many
of the Company's guests participate in a computerized casino players club in
which they receive points based on their play. The points can be converted to
complimentary products and services as well as cash. Failure of the players club
computer system could have a substantial negative impact on Company casino
revenues.
The Company's electrical, heating and ventilation, fire safety systems and
elevators are dependent on computer software systems. Each of these systems is
critical to the Company's ability to operate.
Many of the Company's guests utilize airline transportation and reservation
services to coordinate travel plans. Any computer system failures within these
organizations would have a negative impact on Company revenues.
The Company depends on outside vendors for all computers, software and software
upgrades. The Company is solely dependent on the ability of its vendors to
perform the upgrades timely and accurately.
STRATEGY AND COST
The Company's hardware configuration, casino operating system, hotel property
management and financial accounting system upgrades have been completed. These
upgrades, combined with other operating systems that are already Year 2000
compliant, represent completion of the Company's most critical systems. The
Company plans to be fully Year 2000 compliant with all remaining internal
systems by November 30, 1999. The Company is also prepared to implement
alternative operating procedures in all departments in the event of a computer
system failure.
Management currently estimates that the combined upgrades and purchases of new
systems may total approximately $2.6 million. Approximately $2.2 million has
been spent as of November 5, 1999. In addition, the Company's ability to
complete the remaining software upgrades timely is 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).
15
<PAGE> 16
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's complaint for the avoidance of preferential transfers made to
McDonald's Corporation (the "Complaint") and the Company's objection to the
proof of claim filed by McDonald's Corporation came to trial June 24, 1999. On
September 20, 1999, the Bankruptcy Court entered its Notice of Entry of Findings
of Fact, Conclusions of Law and Judgment Re Debtors' Complaint for Avoidance of
Preferential Transfers Pursuant to 11 U.S.C. ss. 547 and Order Re Objection To
McDonald's Proof of Claim ("Judgment"). The Judgment ordered that payments made
in January 1997, by the Company to McDonald's in the amount of $.7 million
("Judgment Amount"), were preferential payments pursuant to Section 547(b) of
the Bankruptcy Code and were thereby recoverable by the Company. Regarding the
Company's objection to the proof of claim filed by McDonald's, the Bankruptcy
Court held that McDonald's was not entitled to an administrative claim and that
it was not entitled to any claim for damages. On September 29, 1999, McDonald's
Corporation filed its notice of appeal to the Bankruptcy Appellate Panel for the
Ninth Circuit Court of Appeals. To date the record on appeal has been designated
but a briefing schedule has not been set.
On February 26, 1998, the Company filed its Motion for Approval of Assumption of
Unexpired Lease ("Assumption Motion") seeking to assume the Development and
Lease Agreement ("Lease") with Strato-Retail. Strato-Retail opposed the
Assumption Motion claiming that the cessation of Phase II construction was an
incurable breach of the Lease by the Company. Strato-Retail also has claimed
damages due to the Company's alleged failure to timely tender the Phase II
shell. On January 28, 1999, January 29, 1999 and March 5, 1999, the Bankruptcy
Court held evidentiary hearings on the Assumption Motion. On June 18, 1999, the
Bankruptcy Court entered its Order Re Motion for Approval of Assumption of
Unexpired Lease ("Order") finding in pertinent part that the Company's failure
to complete construction and the ramifications following therefrom are incurable
"historical facts" and that the Company could not cure such breaches. On June
28, 1999, the Company filed its notice of appeal. The Company's opening brief
was filed on October 21, 1999. On July 16, 1999, Strato-Retail filed its
protective proof of claim in excess of $139.5 million. The basis for the amount
of the proof of claim is Strato-Retail's calculation of its alleged cash flow if
Phase II had been completed as contemplated by the Lease. Strato-Retail
acknowledged that it is only entitled to offset its damages against the rent
reserved under the Lease (approximately $1.3 million annually); however,
Strato-Retail claims that the prepetition failure to complete Phase II is an
ongoing breach by the Company because the incompletion of Phase II was found by
the Bankruptcy Court to be incurable. The Bankruptcy Court has not yet set a
hearing date regarding this matter.
In addition, in the ordinary course of business, the Company is party to various
legal actions. In management's opinion, the ultimate outcome of such legal
actions will not have a material effect on the results of operations or the
financial position of the Company.
ITEM 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 26, 1999.
<PAGE> 17
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.
<TABLE>
<S> <C>
STRATOSPHERE CORPORATION
Date: November 9, 1999 By: /s/ Daniel A. Cassella
----------------------------------------------
Name: Daniel A. Cassella
----------------------------------------------
Title: Chief Executive Officer/President/Director
----------------------------------------------
By: /s/ Thomas A. Lettero
----------------------------------------------
Name: Thomas A. Lettero
----------------------------------------------
Title: Secretary/Treasurer/CFO
----------------------------------------------
</TABLE>
17
<PAGE> 18
EXHIBIT INDEX
STRATOSPHERE CORPORATION
Exhibit
No.
- -------
(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 26, 1999.
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-END> SEP-26-1999
<CASH> 19,758
<SECURITIES> 1,471
<RECEIVABLES> 5,692
<ALLOWANCES> (344)
<INVENTORY> 2,749
<CURRENT-ASSETS> 2,525
<PP&E> 132,874
<DEPRECIATION> (8,174)
<TOTAL-ASSETS> 160,750
<CURRENT-LIABILITIES> 24,847
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 129,216
<TOTAL-LIABILITY-AND-EQUITY> 160,750
<SALES> 94,398
<TOTAL-REVENUES> 101,809
<CGS> 10,846
<TOTAL-COSTS> 71,080
<OTHER-EXPENSES> 19,519
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 656
<INCOME-PRETAX> 3,603
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<NET-INCOME> 2,342
<EPS-BASIC> 1.15
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