<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 JUNE 25, 2000
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
----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
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
MARCH 13, 2000
<PAGE> 2
STRATOSPHERE CORPORATION
FORM 10-Q
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 25, 2000 (UNAUDITED) AND DECEMBER 26, 1999 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED JUNE 4
25, 2000 AND JUNE 27, 1999
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 25, 5
2000 AND JUNE 27, 1999
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED 6
JUNE 25, 2000 AND JUNE 27, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 10-14
RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15-16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K/A 17-22
</TABLE>
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
BALANCE SHEETS STRATOSPHERE CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------
JUNE 25, DECEMBER 26,
2000 1999
--------------------------------------------------------------------------------
(In thousands) (Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 15,527 $ 16,422
Cash and cash equivalents-restricted 1,926 1,926
Marketable securities 4,459 3,459
Investments-restricted 2,278 2,278
Accounts receivable, net 3,023 1,414
Other current assets 4,778 5,284
--------------------------------------------------------------------------------
Total Current Assets 31,991 30,783
--------------------------------------------------------------------------------
Property and Equipment, Net 123,061 123,461
--------------------------------------------------------------------------------
Other Assets:
Deferred financing costs, net 187 244
Other receivable 3,000 3,000
--------------------------------------------------------------------------------
Total Other Assets 3,187 3,244
--------------------------------------------------------------------------------
TOTAL ASSETS $ 158,239 $ 157,488
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 1,039 $ 1,203
Current portion of long-term debt 14 87
Current portion of capital lease obligations 2,667 2,667
Accrued payroll and related expenses 5,521 5,212
Income taxes payable 674 400
Other accrued expenses 11,760 13,027
--------------------------------------------------------------------------------
Total Current Liabilities 21,675 22,596
--------------------------------------------------------------------------------
Capital lease obligation-less current portion 4,667 5,778
--------------------------------------------------------------------------------
TOTAL LIABILITIES 26,342 28,374
--------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value; authorized
3,000,000 shares; no shares issued. - -
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 4,819 2,036
--------------------------------------------------------------------------------
Total Shareholders' Equity 131,897 129,114
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 158,239 $ 157,488
================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED) STRATOSPHERE CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 25, 2000 AND JUNE 27, 1999 2000 1999
--------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C>
REVENUES:
Casino $ 12,221 $ 11,272
Hotel 6,535 6,113
Food and beverage 9,003 8,227
Tower, retail and other income 6,827 6,513
--------------------------------------------------------------------------------
Gross Revenues 34,586 32,125
Less promotional allowances 2,498 2,354
--------------------------------------------------------------------------------
NET REVENUES 32,088 29,771
--------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 7,016 6,549
Hotel 3,642 3,574
Food and beverage 6,699 6,353
Other operating expenses 3,143 2,776
Depreciation and amortization 2,124 2,057
Selling, general and administrative 7,743 8,231
--------------------------------------------------------------------------------
Total Costs and Expenses 30,367 29,540
--------------------------------------------------------------------------------
INCOME FROM OPERATIONS 1,721 231
--------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 261 168
Interest expense (175) (196)
Loss on sale of assets (12) (16)
--------------------------------------------------------------------------------
Total Other Income (Expense), net 74 (44)
--------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,795 187
--------------------------------------------------------------------------------
Provision for Income Taxes 629 65
--------------------------------------------------------------------------------
NET INCOME $ 1,166 $ 122
================================================================================
BASIC AND DILUTED INCOME PER COMMON SHARE $ 0.57 $ 0.06
================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,030 2,030
================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED) STRATOSPHERE CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 25, 2000 AND JUNE 27, 1999 2000 1999
--------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C>
REVENUES:
Casino $ 26,382 $ 24,965
Hotel 13,154 12,689
Food and beverage 18,100 17,387
Tower, retail and other income 13,883 13,512
--------------------------------------------------------------------------------
Gross Revenues 71,519 68,553
Less promotional allowances 5,427 4,867
--------------------------------------------------------------------------------
NET REVENUES 66,092 63,686
--------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 14,766 13,584
Hotel 7,056 7,046
Food and beverage 13,473 12,934
Other operating expenses 6,321 5,530
Depreciation and amortization 4,214 4,282
Selling, general and administrative 16,083 16,664
--------------------------------------------------------------------------------
Total Costs and Expenses 61,913 60,040
--------------------------------------------------------------------------------
INCOME FROM OPERATIONS 4,179 3,646
--------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 487 309
Interest expense (381) (440)
Loss on sale of assets (3) (68)
--------------------------------------------------------------------------------
Total Other Income (Expense), net 103 (199)
--------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,282 3,447
--------------------------------------------------------------------------------
Provision for Income Taxes 1,499 1,206
--------------------------------------------------------------------------------
NET INCOME $ 2,783 $ 2,241
================================================================================
BASIC AND DILUTED INCOME PER COMMON SHARE $ 1.37 $ 1.10
================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,030 2,030
================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
5
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED) STRATOSPHERE CORPORATION AND SUBSIDIARIES
------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 25, 2000 AND JUNE 27, 1999 2000 1999
------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,783 $ 2,241
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,238 4,457
Provision for doubtful accounts 69 (115)
Loss on sale or disposal of assets 4 67
Changes in operating assets and liabilities:
Accounts receivable (1,677) 775
Other current assets 506 (395)
Accounts payable - trade (164) 404
Accrued expenses and income taxes payable (684) (235)
------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,075 7,199
------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in cash and cash equivalents-restricted - 67
Change in investments-restricted - 2,841
Purchase of marketable securities (1,000) -
Payments for property and equipment (3,918) (2,800)
Cash proceeds from sale of property and equipment 124 360
------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (4,794) 468
------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (65) (89)
Payments on capital lease obligations (1,111) (9,201)
Increase in deferred financing costs - (288)
Proceeds from capital lease obligations - 10,000
------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,176) 422
------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (895) 8,089
Cash and cash equivalents - beginning of period 16,422 12,624
------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 15,527 $ 20,713
================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest-net of capitalized interest $ 293 $ 255
Income taxes 800 200
================================================================================================
</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, Stratosphere
Development, LLC 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.
PRINCIPLES OF PRESENTATION
The condensed consolidated financial statements have been prepared in accordance
with the accounting policies described in the Company's 1999 Annual Report on
Form 10-K. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, the Company suggests these
financial statements be read in conjunction with the notes to the consolidated
financial statements which appear in that report.
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. All significant intercompany accounts and
transactions have been eliminated in consolidation.
RECLASSIFICATIONS
Certain amounts in the 1999 condensed consolidated financial statements have
been reclassified to conform to the 2000 presentation. These reclassifications
had no effect on the Company's net income.
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 Common Stock equivalents as of June
25, 2000.
(2) 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 June 25, 2000, 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.
(3) RELATED PARTY TRANSACTIONS
Carl C. Icahn related entities own approximately 89.6% of the Company's Common
Stock as of June 25, 2000. On March 24, 2000, American Real Estate Holdings
Limited Partnership ("AREH") purchased 50,000 shares of the Company's common
stock from NYBOR, an entity controlled by Mr. Icahn. Upon completion of the
purchase, AREH owns 51% of the Company's Common Stock. AREH is the subsidiary
limited partnership of American Real Estate Partners L.P. ("AREP"), a master
limited partnership whose
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units are traded on the New York Stock Exchange. Mr. Icahn currently owns
approximately 85% of the outstanding depositary units of AREP.
From January 1999, until their resignations in April 2000, 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.
and Fresca, LLC dba Arizona Charlie's East (entities owned 100% by Mr. Icahn).
Mr. Richard Brown, Executive Vice President of Marketing, Mr. Bobby Ray Harris,
Senior Vice President of Operations and Mr. William Bischoff, Chief Financial
Officer, have provided similar management services to Arizona Charlie's, Inc.
and Arizona Charlie's East subsequent to the resignation of Mr. Cassella and Mr.
Lettero in April 2000. The Company has recorded a $30,000 receivable that was
reimbursed on June 26, 2000, from Arizona Charlie's, Inc. and a $30,000
receivable that was reimbursed on August 3, 2000, from Fresca, LLC ("Arizona
Charlie's East") for payroll and other expenses related to the services
performed from March 27, 2000 to June 25, 2000.
In June 2000, the Company created Stratosphere Development, LLC ("Development"),
a wholly-owned LLC, to provide development and construction management services
for construction related projects of Stratosphere Corporation, Arizona
Charlie's, Inc. and Arizona Charlie's East. There were no intercompany
transactions between Development and Arizona Charlie's, Inc. or Arizona
Charlie's East during the quarter ended June 25, 2000. Development was formed as
a series LLC under Delaware law and therefore, only the Company's construction
project will have an effect on the Company.
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 second quarter, 2000.
(4) 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. The matter has been briefed and argument was
heard in May 2000. A decision is pending.
The Company has filed a complaint for the avoidance of preferential transfers
made to Grand Casinos, Inc. ("Grand"). Included in the complaint are
approximately $5.9 million of payments made to Grand prior to the Company
beginning bankruptcy proceedings. The Company expects counsel to file a motion
for summary judgment in the third quarter 2000, at which time the Bankruptcy
Court Judge will set a hearing date.
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. After evidentiary hearing, 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 assume the Lease. The Bankruptcy Court's ruling was affirmed
by the Bankruptcy Appellate Panel for the United States District Court of
Appeals, Ninth Circuit on March 21, 2000. Further appeal to the Ninth Circuit
Court of Appeals was filed by the Company. The case will likely be briefed,
argued and submitted for decision before December 2000. 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 damages
against the rent reserved under
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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. On February 1, 2000, Strato-Retail filed an adversary complaint
alleging prepetition damages in excess of $1 million plus a claimed right to set
off future damages against future rent. The adversary complaint has been set for
trial on January 28, 2001.
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 financial statements of the
Company taken as a whole.
(5) SUBSEQUENT EVENT
On July 21, 2000, American Real Estate Holdings Limited Partnership ("AREH") and
NYBOR Limited Partnership, entities controlled by Mr. Icahn, provided $1,138,000
and $862,000, respectively, to Stratosphere Development, LLC to fund Phase II
construction of the Company's new 1,000 room tower. Each note payable is an
unsecured, demand note paying 9.5%. Additional funding, at market rates, will be
provided as needed.
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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 June
25, 2000, the operations included 1,559 slot machines, 43 table games, 7 poker
tables, a race and sports book, keno lounge, 1,444 hotel rooms and five themed
restaurants.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 25, 2000 AND
JUNE 27, 1999
REVENUES
Casino revenues of $12.2 million for second quarter, 2000 were $.9 million (8%)
greater than the same period in 1999. Revenues from table games increased $.2
million (9%) in the second quarter, 2000 when compared with second quarter,
1999. Revenues from slots increased $.3 million (4%) in the second quarter, 2000
when compared with second quarter, 1999. Management attributes these increases
to decreased disruption caused by construction of the new Race and Sports Book
and escalator experienced during the second quarter of 1999. The Company's new
Race and Sports Book, opened August 1999, contributed $.5 million to revenues in
second quarter, 2000. Keno revenues decreased $.1 million (87%) in the second
quarter, 2000 when compared with second quarter, 1999. Management attributes the
decrease in Keno revenue to a Keno promotion aimed at increasing non-keno casino
play among all hotel guests and tower visitors. This promotion was discontinued
at the end of second quarter, 2000. Competition is expected to continue to
increase during the next twelve months with the opening of one additional mega
resort on the Las Vegas Strip. Casino marketing has begun a "Guaranteed Winners"
program targeting current casino, hotel and tower guests who are not Player's
Club members. This program's goal is to entice guests to join the Players Club
and become repeat customers while increasing the Company's player database.
Casino revenues represented 35% of total gross revenues for the second quarters
of 2000 and 1999.
Hotel revenues of $6.5 million for second quarter, 2000 were approximately $.4
million (7%) higher than the same period in 1999. Hotel occupancy was 96% during
the second quarter, 2000 as compared to 89% in 1999. The average daily rate
("ADR") was $51 during the second quarter, 2000 as compared to $52 in 1999. This
ADR decrease is attributed to an additional 10,000 rooms that became available
on the Las Vegas Strip with the opening of four new mega resorts in 1999. Hotel
revenues averaged 19% of total gross revenues during the second quarters of 2000
and 1999. With the addition of 2,500 newly constructed hotel rooms expected to
open on the Las Vegas Strip in the third quarter, 2000, management does not
expect any growth in hotel occupancy or ADR over the next twelve months.
Food and beverage revenues increased from $8.2 million for second quarter, 1999
to $9.0 million for second quarter, 2000. The 9% increase in revenues can be
attributed to the increased number of hotel guests, extended hours of operation
of Roxy's Diner and the opening of the Company's Triple Crown Deli, adjacent to
the Race and Sports Book.
Tower visitations (including the Top of The World dining) totaled 538,600 during
the second quarter, 2000 as compared to 556,234 for the same period in 1999. The
decline in Tower visitation (3%) is attributed to the increase in new
attractions on the Las Vegas Strip. Tower revenues increased $.3 million (5%)
from $6.5 million in second quarter, 1999 to $6.8 million in second quarter,
2000. Management attributes the increase to increased ride revenues generated
from increased ride admissions during second quarter, 2000. In April 1999, the
Company's "High Roller" roller coaster was closed for maintenance for
approximately 30 days. Tower, retail and other revenues represented 20% of total
gross revenues for the second quarters
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of 2000 and 1999.
COSTS AND EXPENSES
Promotional allowances increased from $2.4 million during the three months ended
June 27, 1999, to $2.5 million for the same period in 2000. The 6% increase in
promotional allowances was the result of more direct mail promotions that
include room, food and beverage being offered to guests on a complimentary
basis.
Casino operating costs increased 7% from $6.5 million for second quarter, 1999
to $7.0 million in second quarter, 2000. Operating expenses of the new Race and
Sports Book contributed $.3 million to the increase and $.2 million is
attributed to an increase in the Company's slot lease expense.
Food and beverage operating costs have increased from $6.4 million in second
quarter, 1999 to $6.7 million in second quarter, 2000. Management attributes the
5% increase to higher cost of goods sold. Management is evaluating various
alternatives including, but not limited to, raising menu prices and implementing
additional cost control measures.
Other operating expenses increased 13% from $2.8 million for the second quarter,
1999 to $3.1 million for second quarter, 2000. The majority of this increase is
due to increased entertainer fees, $.1 million, and complimentary costs, $.2
million, associated with additional direct marketing coupons aimed at increasing
showroom attendance.
Selling, general and administrative expenses have decreased $.5 million (6%)
from $8.2 million in second quarter, 1999 to $7.7 million in second quarter,
2000. Management attributes this change to decreases in marketing operating
expenses of $.5 million and reduction in operating lease expense of $.3 million.
These decreases in expenses were offset by increases in payroll of $.1 million,
professional expenses of $.1 million associated with Mr. Icahn's proposed buyout
of the Company's remaining shares and a gaming tax adjustment of $.1 million.
Management anticipates marketing expenses to increase in future periods as new
advertising promotions are launched.
OTHER FACTORS IMPACTING EARNINGS
Interest income was approximately $.3 million for the second quarter, 2000 as
compared to $.2 million for the second quarter, 1999. The increase can be
attributed to interest earned on marketable securities and increased cash
balances from funds received for refinancing certain equipment under the new
capital lease obligation.
Interest expense decreased 11% in second quarter, 2000 as compared to second
quarter, 1999. The majority of the decrease can be attributed to reduced
deferred financing amortization costs associated with the new capital lease
obligation. The Company financed a new capital lease obligation of $10.0 million
on May 28, 1999. The current rate of interest is 9.3%.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 25, 2000 AND JUNE
27, 1999
REVENUES
Casino revenues of $26.4 million for the six months ended June 25, 2000 were
$1.4 million (6%) greater than the six months ended June 27, 1999. Revenues from
slots increased $.8 million (4%) for the six months ended June 25, 2000 when
compared with 1999. Management attributes this increase to decreased disruption
caused by construction of the new Race and Sports Book and escalator experienced
during the first half of 1999. The Company's new Race and Sports Book, opened
August 1999, contributed $1.0 million to revenues in the six months ended June
25, 2000. Revenues from table games decreased $.2 million (3%) for the six
months ended June 25, 2000, when compared with 1999. Management attributes this
decline to a change in the mix of casino guests from table games players to slot
players. Casino marketing efforts have been, and will continue to be, focused on
attracting additional slot players. Management expects table games revenues to
be flat or decline for the remainder of the year 2000. Keno revenues decreased
$.2 million (120%) for the six months ended June 25, 2000 when compared with
1999.
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Management attributes the decrease in Keno revenue to a Keno promotion aimed at
increasing non-keno casino play among all hotel guests and tower visitors. This
promotion was discontinued at the end of second quarter, 2000. Competition is
expected to continue to increase during the next twelve months with the opening
of one additional mega resort on the Las Vegas Strip. Casino marketing has begun
a "Guaranteed Winners" program targeting current casino, hotel and tower guests
who are not Player's Club members. This program's goal is to entice guests to
join the Players Club and become repeat customers while increasing the Company's
player database.
Hotel revenues of $13.2 million for the six months ended June 25, 2000 were
approximately $.5 million (4%) higher than the six months ended June 27, 1999.
Hotel occupancy was 94% during the six months ended June 25, 2000 as compared to
88% in 1999. With the addition of 2,500 newly constructed hotel rooms expected
to open on the Las Vegas Strip in the third quarter, 2000 management does not
expect any growth in hotel occupancy or average daily rate ("ADR") over the next
twelve months.
Food and beverage revenues increased from $17.4 million for the six months ended
June 27, 1999 to $18.1 million for the six months ended June 25, 2000. The 4%
increase in revenues can be attributed to the increased number of hotel guests,
extended hours of operation of Roxy's Diner and the opening of the Company's
Triple Crown Deli, adjacent to the Race and Sports Book.
Tower visitations (including the Top of The World dining) totaled 1,075,359
during the six months ended June 25, 2000 as compared to 1,136,057 for the six
months ended June 27, 1999. The decline in Tower visitation (5%) is attributed
to the increase in new attractions on the Las Vegas Strip.
COSTS AND EXPENSES
Promotional allowances increased from $4.9 million during the six months ended
June 27, 1999, to $5.4 million for the six months ended June 25, 2000. The 12%
increase in promotional allowances was the result of more direct mail promotions
that include room, food and beverage being offered to guests on a complimentary
basis.
Casino operating costs increased 9% from $13.6 million for the six months ended
June 27, 1999 to $14.8 million for the six months ended June 25, 2000. Operating
expenses of the new Race and Sports Book contributed $.7 million to the
increase, $.4 million is attributed to an increase in the Company's slot lease
expense and $.2 million is attributed to an increase in complimentaries from
additional promotional events and direct mail programs.
Food and beverage operating costs have increased from $12.9 million for the six
months ended June 27, 1999 to $13.5 million for the six months ended June 25,
2000. Management attributes the 4% increase to higher cost of goods sold.
Management is evaluating various alternatives including, but not limited to,
raising menu prices and implementing additional cost control measures.
Other operating expenses increased 14% from $5.5 million for the six months
ended June 27, 1999 to $6.3 million for the six months ended June 25, 2000. The
majority of this increase is due to entertainer fees, $.2 million, and
complimentary costs, $.5 million, associated with additional direct marketing
coupons aimed at increasing showroom attendance.
Selling, general and administrative expenses have decreased $.6 million (3%)
from $16.7 million for the six months ended June 27, 1999 to $16.1 million for
the six months ended June 25, 2000. Management attributes this change to
decreases in marketing operating expenses of $.7 million, reduced operating
lease expense of $.6 million and reduced facilities maintenance expenses of $.2
million. These decreases in expenses were offset by increases in payroll of $.3
million, professional expenses of $.1 million associated with Mr. Icahn's
proposed buyout of the Company's remaining shares and a gaming tax adjustment of
$.5 million. Management anticipates marketing expenses to increase in future
periods as new advertising promotions are launched.
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OTHER FACTORS IMPACTING EARNINGS
Interest income was approximately $.5 million for the six months ended June 25,
2000 as compared to $.3 million for the six months ended June 27, 1999. The
increase can be attributed to interest earned on marketable securities and
increased cash balances from funds received for refinancing certain equipment
under the new capital lease obligation.
Interest expense decreased 13% for the six months ended June 25, 2000 as
compared to the six months ended June 27, 1999. The majority of the decrease can
be attributed to reduced deferred financing amortization costs associated with
the new capital lease obligation. The Company financed a new capital lease
obligation of $10.0 million on May 28, 1999. The current rate of interest is
9.3%.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW, WORKING CAPITAL AND CAPITAL EXPENDITURES
During the six month period ended June 25, 2000, the Company generated $5.1
million in cash flows from operating activities. These funds were used to
purchase marketable securities of $1.0 million, fund capital expenditures of
$3.9 million and make payments on the new capital lease obligation of $1.1
million. Of the funds used for capital expenditures, $2.6 million has been spent
on Phase II construction, described below, during fiscal year 2000. The Company
had unrestricted cash balances of $15.5 million as of June 25, 2000.
As of June 25, 2000, the Company had approximately $1.8 million reserved for
unsecured disputed claims related to the Restated Second Amended Plan. The $1.8
million estimated reserve for unsecured disputed claims is classified as other
accrued expenses on the accompanying June 25, 2000, Condensed Consolidated
Balance Sheet. Additional payments will be made from restricted cash and/or
investment balances.
The Company has begun construction of the unfinished 1,000 bay hotel tower and
other amenities including the new pool area and coffee shop (collectively "Phase
II"). Completion of Phase II may be critical for the Company to remain
competitive in the long-term. The Company estimates that the construction to
complete Phase II will take approximately fourteen months and cost approximately
$70.0 million. The Company is currently seeking funding for the completion of
Phase II and is considering various alternatives. There can be no assurance that
the Company will ultimately be able to obtain adequate funding for Phase II or,
if available, will be on favorable terms to the Company. The Company has begun
the construction process with funds available from cash flows from operating
activities and will obtain additional construction financing, at market rates,
from entities controlled by Mr. Icahn.
YEAR 2000
The Company has completed an extensive program to ensure its computer systems
are Year 2000 compliant and has experienced no significant problems to date
associated with the Year 2000 issue. Additionally, to the best of management's
knowledge, there are no claims pending or threatened against the Company arising
from the Year 2000 issue.
OTHER
On March 8, 2000, California residents voted to expand Native American gaming
operations within that state. The Native American gaming expansion could result
in 43,000 slot machines on 57 tribal reservations. The Company estimates that
approximately 35% of its hotel occupancy are from guests traveling from southern
California. Any proliferation of gaming in southern California could have a
material adverse effect on the Company's business. In addition, any imposed
limitations on college sports betting could adversely impact future revenues of
the Company.
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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).
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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 went 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. The matter has been briefed and argument was
heard in May 2000. A decision is pending.
The Company has filed a complaint for the avoidance of preferential transfers
made to Grand Casinos, Inc. ("Grand"). Included in the complaint are
approximately $5.9 million of payments made to Grand prior to the Company
beginning bankruptcy proceedings. The Company expects counsel to file a motion
for summary judgment in the third quarter 2000, at which time the Bankruptcy
Court Judge will set a hearing date.
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. After evidentiary hearing, 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 assume the Lease. The Bankruptcy Court's ruling was affirmed
by the Bankruptcy Appellate Panel for the United States District Court of
Appeals, Ninth Circuit on March 21, 2000. Further appeal to the Ninth Circuit
Court of Appeals was filed by the Company. The case will likely be briefed,
argued and submitted for decision before December 2000. 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 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. On February 1, 2000,
Strato-Retail filed an adversary complaint alleging prepetition damages in
excess of $1 million plus a claimed right to set off future damages against
future rent. The adversary complaint has been set for trial on January 28, 2001.
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 financial statements of the
Company taken as a whole.
ITEM 5. OTHER INFORMATION
On April 25, 2000, Carl C. Icahn, the owner and controlling person,
respectively, of Nybor and American Real Estate Holdings, L.P. (together, "Icahn
Entities"), which collectively own 89.6% of the Company's outstanding common
stock, submitted a written offer to the Company to have an entity formed by the
Icahn Entities merge into the Company, pursuant to which merger the stockholders
of the Company, other than the Icahn Entities, would receive cash for their
shares of approximately $44.35 per share, based upon the offer's stated
valuation of $90 million for the equity of the entire Company, and the Icahn
Entities would thereafter be the Company's sole stockholders and together own
100% of the Company's common stock.
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<PAGE> 16
Upon receipt of the offer, the Company transmitted it to the members of the
Board of Directors, including the independent director, to study the matter and
make a determination of what action the Company should take with respect to the
offer. In anticipation of the receipt of an offer from Mr. Icahn, Jerome Becker,
as the independent director on the Board of Directors and with the authority of
the Board of Directors, engaged independent counsel and engaged an investment
banking firm to advise with respect to the range of valuation for the Company
and its common stock.
On May 2, 2000, counsel to the special committee of the Board of Directors,
consisting of the independent director, wrote to Mr. Icahn and indicated that
Mr. Icahn's offer did not form a basis for a transaction in view of the
disparity between the valuation of the Company using the offer price and the
valuation range determined by the investment banker. However, counsel invited
further discussion of the matter. The Company understands that a meeting of the
special committee and its advisors together with representatives of Mr. Icahn
had been scheduled and that possible further discussions may occur from time to
time.
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<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K/A
<S> <C>
(a) Exhibits
27 Financial Data Schedule
99.1 Carl C. Icahn Written Offer
99.2 News Release Announcing Carl Icahn's Written Offer
(b) Reports on Form 8-K/A
The Company filed the following report on Form 8-K/A during the fiscal
quarter ended June 25, 2000.
Date Filed Items Listed
June 5, 2000 4
June 7, 2000 4
</TABLE>
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<PAGE> 18
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: August 8, 2000 By: /s/ William F. Bischoff
-------------------------------
Name: William F. Bischoff
-------------------------------
Title: Secretary/Treasurer/CFO
------------------------------
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EXHIBIT INDEX
STRATOSPHERE CORPORATION
<TABLE>
<CAPTION>
Exhibit
No.
<S> <C>
(a) Exhibits
27 Financial Data Schedule
99.1 Carl C. Icahn Written Offer
99.2 News Release Announcing Carl Icahn's Written Offer
(b) Reports on Form 8-K/A
The Company filed the following report on Form 8-K/A during the fiscal
quarter ended June 25, 2000.
Date Filed Items Listed
June 5, 2000 4
June 7, 2000 4
</TABLE>
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