<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 28, 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 MAY 10, 1999
<PAGE> 2
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 MARCH 28, 1999 (UNAUDITED) AND
DECEMBER 27, 1998 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE
MONTHS ENDED MARCH 28, 1999 (SUCCESSOR COMPANY) AND MARCH 29, 1998
(PREDECESSOR COMPANY) 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE
THREE MONTHS ENDED MARCH 28, 1999 (SUCCESSOR COMPANY) AND MARCH 29,
1998 (PREDECESSOR COMPANY) 5-6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 10-13
PART II. OTHER INFORMATION 14
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
</TABLE>
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CONDENSED CONSOLIDATED
BALANCE SHEETS STRATOSPHERE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 28, DECEMBER 27,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 15,553 $ 12,624
Cash and cash equivalents-restricted 2,158 2,218
Investments-restricted 3,317 3,291
Accounts receivable, net 3,060 2,619
Related party receivable, net 60 -
Other current assets 5,311 5,427
- ------------------------------------------------------------------------------------------------------------------------
Total Current Assets 29,459 26,179
- ------------------------------------------------------------------------------------------------------------------------
Property and Equipment, Net 124,136 126,173
- ------------------------------------------------------------------------------------------------------------------------
Other Assets:
Deferred financing costs, net 89 194
Other receivable 3,000 3,000
- ------------------------------------------------------------------------------------------------------------------------
Total Other Assets 3,089 3,194
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 156,684 $ 155,546
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 1,758 $ 1,407
Current installments of long-term debt 148 148
Current installments of capital lease obligations 6,808 8,979
Accrued payroll and related expenses 6,030 5,146
Other accrued expenses 12,883 12,878
- ------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 27,627 28,558
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities:
Long-term note payable-less current installments 43 94
- ------------------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 43 94
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 27,670 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) 1,936 (184)
- ------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 129,014 126,894
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 156,684 $ 155,546
========================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED
STATEMENTS OF INCOME STRATOSPHERE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
THREE MONTHS ENDED MARCH 28, 1999 AND MARCH 29, 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) (Unaudited) (Unaudited)
<S> <C> <C>
REVENUES:
Casino $ 13,693 $ 14,988
Hotel 6,576 5,957
Food and beverage 9,160 8,949
Tower, retail and other income 6,999 7,366
- --------------------------------------------------------------------------------------------------------------------
Gross Revenues 36,428 37,260
Less: Promotional allowances 2,513 3,082
- --------------------------------------------------------------------------------------------------------------------
NET REVENUES 33,915 34,178
- --------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 7,030 7,923
Hotel 3,472 3,042
Food and beverage 6,581 6,416
Other operating expenses 2,806 3,340
Depreciation and amortization 2,225 1,939
Selling, general and administrative 8,386 8,378
- --------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 30,500 31,038
- --------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 3,415 3,140
- --------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 141 -
Interest expense (244) (465)
Loss on sale of assets (52) (4)
- --------------------------------------------------------------------------------------------------------------------
Total Other Expense, net (155) (469)
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE REORGANIZATION ITEMS AND INCOME TAXES 3,260 2,671
- --------------------------------------------------------------------------------------------------------------------
REORGANIZATION ITEMS: - (1,366)
INCOME BEFORE INCOME TAXES 3,260 1,305
- --------------------------------------------------------------------------------------------------------------------
Provision for Income Taxes 1,141 -
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,119 $ 1,305
====================================================================================================================
BASIC INCOME PER COMMON SHARE $ 1.04 *
====================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,030 *
====================================================================================================================
</TABLE>
* Earnings per share is not presented for the three months ended March 29, 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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CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS STRATOSPHERE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
THREE MONTHS ENDED MARCH 28, 1999 AND MARCH 29, 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
(In thousands) (Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,119 $ 1,305
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,325 2,042
Reorganization Items :
Professional Fees - 1,500
Management Retention Expense - 130
Interest Earned on Accumulated Cash During
Chapter 11 Proceedings - (264)
Provision for doubtful accounts 13 83
Loss on sale or disposal of assets 52 4
Changes in operating assets and liabilities:
Accounts receivable (454) (269)
Related party receivable and other receivable (60) -
Other current assets 116 286
Accounts payable - trade 351 70
Accrued expenses 895 2,221
----------------------------------
Net Cash Provided by Operating Activities Before Reorganization Items 5,357 7,108
----------------------------------
Increases (decreases) to Cash Resulting from Reorganization Items:
Professional fees paid - (950)
Management Retention Disbursements - (130)
Interest Earned on Accumulated Cash During
Chapter 11 Proceedings - 265
----------------------------------
Net Cash Used in Reorganization Items - (815)
- ----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,357 6,293
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in cash and cash equivalents-restricted 60 (105)
Change in investments-restricted (26) (38)
Payments for property and equipment (365) (415)
Cash proceeds from sale of property and equipment 125 14
--------------------------------------------------------------------------------------------------------------
- -------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (206) (544)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (51) (58)
Payments on capital lease obligations (2,171) (2,171)
Decrease in affiliate payable - (16)
- ----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (2,222) (2,245)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,929 3,504
Cash and cash equivalents - beginning of period 12,624 20,326
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 15,553 $ 23,830
======================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS STRATOSPHERE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
SUCCESSOR PREDECESSOR
COMPANY COMPANY
THREE MONTHS ENDED MARCH 28, 1999 AND MARCH 29, 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 $ 138 $ 358
</TABLE>
See notes to condensed consolidated financial statements.
6
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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. A black line has been drawn on the accompanying Condensed
Consolidated Statement of Income 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.
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 new Common Stock shares were issued
on the Effective Date. There were no other Common Stock equivalents as of March
28, 1999.
7
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RECLASSIFICATIONS
Certain amounts in the 1998 condensed consolidated financial statements have
been reclassified to conform with the 1999 presentation. These reclassifications
had no effect on the Company's net income.
(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 March 28, 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 March 28, 1999. Since January 1999, Mr. Daniel A. Cassella and Mr.
Thomas A. Lettero (Chief Executive Officer and Chief Financial Officer of the
Company) provided "over sight" management services to Arizona Charlie's, Inc.
(an entity owned 100% by Mr. Icahn). The Company has recorded a $60,000
receivable that was reimbursed in April 1999 for payroll and other expenses
related to the services performed from January 1, 1999 to March 28, 1999.
On April 13, 1999, Mr. Cassella was appointed Executive Vice President of
Arizona Charlie's, Inc. in addition to his responsibilities at the Company.
Pursuant to a wholesale tour and travel agreement with Lowest Fare.Com (a
company owned by Mr. Icahn), the Company received hotel revenues of $.1 million
during the 1999 first quarter.
(5) CONTINGENCIES
McDonald's Corporation filed a proof of claim in the Bankruptcy Proceedings in
which it asserted both an administrative and a general unsecured claim related
to a lease of premises located within the Stratosphere. The Debtors filed an
objection to the claim. The Bankruptcy Court sustained the objection to the
general unsecured claim upon a motion for summary judgment filed by the Debtors.
The Bankruptcy Court set a hearing in June 1999 for the objection to the
administrative claim of $410,843 for guaranteed income provided for by the lease
during the administrative period of the Bankruptcy Proceedings. In the event
McDonald's is able to establish an allowed administrative claim, such claim
would be paid by the Debtors upon entry of a final order approving the claim.
Based upon the legal requirements of the Bankruptcy Code for an administrative
claim and the lease having been assigned to Strato-Retail prior to the
initiation of the Bankruptcy Proceedings, the Debtors believe they will prevail
on the objection to the McDonald's administrative claim. The administrative
claim has not been recorded as a liability on the accompanying Condensed
Consolidated Balance Sheet.
8
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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.
9
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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
March 28, 1999, the operations included 1,873 slot machines, 34 table games, a
sports book, keno lounge, 1,444 hotel rooms and five themed restaurants.
On January 27, 1997 ("Petition Date"), Stratosphere Corporation and its
wholly-owned subsidiary Stratosphere Gaming Corp. ("SGC" and collectively with
Stratosphere Corporation, the "Debtors") filed voluntary petitions for Chapter
11 Reorganization pursuant to the United States Bankruptcy Code. As of that
date, the United States Bankruptcy Court for the District of Nevada ("Bankruptcy
Court") assumed jurisdiction over the assets of Stratosphere Corporation and
SGC. Stratosphere Corporation and SGC 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. A black line has been drawn on the accompanying Condensed
Consolidated Statements of Income and Condensed Consolidated Statement of Cash
Flows to distinguish between the pre-reorganization and post-reorganization
entity.
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
first quarter of 1999 (post-reorganization) and 1998 (pre-reorganization). This
comparison is included in this Form 10-Q since operations have remained similar
during the pre and post-reorganization periods and such comparison would not be
misleading.
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COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 28, 1999 AND
MARCH 29, 1998
REVENUES
Casino revenues of $13.7 million for the 1999 first quarter were $1.3 million
(9%) less than the same period in 1998. Management attributes the decline to
increased competition with the opening of two new mega resorts on the Las Vegas
Strip. Competition is expected to continue to increase during the next twelve
months with the opening of three additional mega resorts. Casino marketing
efforts have been directed toward the development of several promotional events
and direct mail programs targeting casino guest visits during lower occupancy
periods. Casino revenues represented 38% and 40% of total gross revenues for the
first quarters of 1999 and 1998, respectively.
Hotel revenues of $6.6 million for the 1999 first quarter were approximately $.6
million (10%) higher than the same period in 1998. Hotel occupancy was 86.9%
during the 1999 first quarter as compared to 90.5% in 1998. The average rate per
guest room was $57.11 during the 1999 first quarter as compared to $49.69 in
1998. Hotel revenues averaged 18% and 16% of total gross revenues during the
first quarter of 1999 and 1998, respectively. Management anticipates increased
competition for hotel room sales during the next twelve months with the increase
of approximately 10,000 newly constructed hotel rooms on the Las Vegas Strip.
Tower visitations (including the Top of The World dining) totaled 579,823 during
the 1999 first quarter as compared to 636,499 for the same period in 1998. The
revenue impact of the decline in visitations was partially offset by an increase
in ride admissions from 261,182 for the 1998 first quarter to 327,566 during
1999. The increase in ride revenues was due primarily to the implementation of
programs to increase the number of multiple rides per visitor. Management
anticipates a decline in ride revenues during the 1999 second quarter due to the
"High Roller" being closed for approximately thirty days for annual maintenance
and inspections, which will be more extensive then in prior periods.
COSTS AND EXPENSES
Casino operating costs declined approximately 11% from $7.9 million for the 1998
first quarter to $7.0 million for 1999. The majority of this expense reduction
was due to a $.5 million reduction in the cost of providing complimentary room,
food and beverage to casino guests.
Hotel operating costs increased 14% from $3.0 million for the 1998 first quarter
to $3.5 million for 1999. The increase is due to fewer room nights being
provided to casino customers on a complimentary basis in the 1999 first quarter,
the cost of which is charged to casino operations.
Other operating expenses decreased 16% from $3.3 million for the 1998 first
quarter to $2.8 million for 1999. The majority of this reduction is due to
reduced entertainer fees and payroll costs associated with the showroom.
OTHER FACTORS IMPACTING EARNINGS
Depreciation and amortization increased 15% from $1.9 million for the 1998 first
quarter to $2.2 million in 1999. The increase in depreciation is due primarily
to the $8.6 million increase in asset values relating to the adoption of "fresh
start reporting" on the Effective Date.
Interest income was approximately $.1 million for the 1999 first quarter.
Interest income earned during the same period in 1998 of approximately $.3
million was classified as a Reorganization Item.
Interest expense decreased 48% from $.5 million for the 1998 first quarter to
$.2 million for 1999. The decrease was due to a reduction interest associated
with the Company's capital lease obligations. The Company anticipates
refinancing its capital lease obligations during the 1999 second quarter and
expects interest to continue near current levels.
The Company recorded expense from Reorganization Items totaling $1.4 million
during the 1998 first quarter. Since the Effective Date, any unreserved
professional fees related to the reorganization will be
11
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classified as a selling, general and administrative expense.
The Company recorded a provision for income taxes of $1.1 million for the 1999
first quarter. 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
The Company had unrestricted cash balances of $15.6 million as of March 28,
1999. The Company has relied on unrestricted cash balances and its ability to
generate cash flow from operations to fund its working capital and capital
expenditure requirements.
During the three month period ended March 28, 1999, the Company generated $5.4
million from operating activities. A portion of these funds were used to fund
capital expenditures of $.4 million and payments on capital lease obligations of
$2.2 million.
As of March 28, 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 accompany
March 28, 1999, Condensed Consolidated Balance Sheet. The remaining payments
will be made from restricted cash and/or investment balances.
The Company made a final payment of approximately $6.9 million on its capital
lease obligations on April 30, 1999. Although the payments were made from
current cash balances, the Company anticipates refinancing the capital lease
obligations and raising additional capital of approximately $2.0 million during
the 1999 second quarter.
The Company anticipates completing various enhancement projects during the next
twelve months. Included in these projects is a new race and sports book, deli
and entertainment lounge with a combined estimated cost of $2.6 million. In
addition, the Company estimates that other capital expenditures will be
approximately $2.0 million. The Company anticipates funding the enhancements and
other capital expenditures from operating activities or may incorporate a
portion (approximately $2.0 million) in the capital lease obligation
refinancing.
YEAR 2000
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.
Management continues to assess all other information support systems throughout
the Company, as well as those systems it relies on from its primary vendors. The
Company plans to be Year 2000 compliant with all remaining internal systems
prior to the end of the 1999 third quarter. 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 May 6, 1999. There can
be no assurance based on future assessment or other changed circumstances that
the amount estimated will represent the actual costs incurred. In addition, the
Company's ability to upgrade its software timely is largely dependent on the
performance of its software vendors.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Form 10-Q
and other materials filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contains statements that
are forward-looking, such as statements relating to plans for future expansion,
future construction costs and other business development activities as well as
other capital spending, financing sources and the effects of regulation
(including gaming and tax regulation) and competition. Such forward-looking
information
12
<PAGE> 13
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).
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
McDonald's Corporation filed a proof of claim in the Bankruptcy Proceedings in
which it asserted both an administrative and a general unsecured claim related
to a lease of premises located within the Stratosphere. The Debtors filed an
objection to the claim. The Bankruptcy Court sustained the objection to the
general unsecured claim upon a motion for summary judgment filed by the Debtors.
The Bankruptcy Court set a hearing in June 1999 for the objection to the
administrative claim of $410,843 for guaranteed income provided for by the lease
during the administrative period of the Bankruptcy Proceedings. In the event
McDonald's is able to establish an allowed administrative claim, such claim
would be paid by the Debtors upon entry of a final order approving the claim.
Based upon the legal requirements of the Bankruptcy Code for an administrative
claim and the lease having been assigned to Strato-Retail prior to the
initiation of the Bankruptcy Proceedings, the Debtors believe they will prevail
on the objection to the McDonald's administrative claim.
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
<TABLE>
<S> <C> <C>
(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 March 28, 1999.
</TABLE>
14
<PAGE> 15
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 12, 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
----------------------------
15
<PAGE> 16
EXHIBIT INDEX
STRATOSPHERE CORPORATION
Exhibit
No.
- -------
27 Financial Data Schedule
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-END> MAR-28-1999
<CASH> 15,553
<SECURITIES> 0
<RECEIVABLES> 6,590
<ALLOWANCES> (470)
<INVENTORY> 2,756
<CURRENT-ASSETS> 2,555
<PP&E> 128,432
<DEPRECIATION> (4,296)
<TOTAL-ASSETS> 156,684
<CURRENT-LIABILITIES> 27,627
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 128,994
<TOTAL-LIABILITY-AND-EQUITY> 156,684
<SALES> 33,915
<TOTAL-REVENUES> 36,428
<CGS> 3,782
<TOTAL-COSTS> 24,041
<OTHER-EXPENSES> 6,459
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244
<INCOME-PRETAX> 3,260
<INCOME-TAX> 1,141
<INCOME-CONTINUING> 2,119
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,119
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
</TABLE>
