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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 26, 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
------ ------
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>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AT MARCH 26, 2000 (UNAUDITED) AND DECEMBER 26, 1999 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 4
26, 2000 AND MARCH 28, 1999
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS 5
ENDED MARCH 26, 2000 AND MARCH 28, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 9-11
RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 12-13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14-19
</TABLE>
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
BALANCE SHEETS STRATOSPHERE CORPORATION AND SUBSIDIARIES
========================================================================================================================
MARCH 26, DECEMBER 26,
2000 1999
- ------------------------------------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 18,805 $ 16,422
Cash and cash equivalents-restricted 1,926 1,926
Marketable securities 3,459 3,459
Investments-restricted 2,278 2,278
Accounts receivable, net 2,407 1,414
Other current assets 5,288 5,284
- ------------------------------------------------------------------------------------------------------------------------
Total Current Assets 34,163 30,783
- ------------------------------------------------------------------------------------------------------------------------
Property and Equipment, Net 121,894 123,461
- ------------------------------------------------------------------------------------------------------------------------
Other Assets:
Deferred financing costs, net 215 244
Other receivable 3,000 3,000
- ------------------------------------------------------------------------------------------------------------------------
Total Other Assets 3,215 3,244
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 159,272 $ 157,488
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 1,669 $ 1,203
Current portion of long-term debt 51 87
Current portion of capital lease obligations 2,667 2,667
Accrued payroll and related expenses 6,351 5,212
Income taxes payable 846 400
Other accrued expenses 11,624 13,027
- ------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 23,208 22,596
- ------------------------------------------------------------------------------------------------------------------------
Capital lease obligation-less current portion 5,333 5,778
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 28,541 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 3,653 2,036
- ------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 130,731 129,114
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 159,272 $ 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 MARCH 26, 2000 AND MARCH 28, 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C>
REVENUES:
Casino $ 14,161 $ 13,693
Hotel 6,619 6,576
Food and beverage 9,097 9,160
Tower, retail and other income 7,056 6,999
- --------------------------------------------------------------------------------------------------------------------------------
Gross Revenues 36,933 36,428
Less promotional allowances 2,929 2,513
- --------------------------------------------------------------------------------------------------------------------------------
NET REVENUES 34,004 33,915
- --------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 7,750 7,034
Hotel 3,414 3,472
Food and beverage 6,774 6,581
Other operating expenses 3,178 2,754
Depreciation and amortization 2,090 2,225
Selling, general and administrative 8,340 8,434
- --------------------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 31,546 30,500
- --------------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 2,458 3,415
- --------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 226 141
Interest expense (206) (244)
Gain (loss) on sale of assets 9 (52)
- --------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense), net 29 (155)
- --------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,487 3,260
- --------------------------------------------------------------------------------------------------------------------------------
Provision for Income Taxes 870 1,141
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,617 $ 2,119
================================================================================================================================
BASIC INCOME PER COMMON SHARE $ 0.80 $ 1.04
================================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,030 2,030
================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED) STRATOSPHERE CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 26, 2000 AND MARCH 28, 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 1,617 $ 2,119
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,114 2,325
Provision for doubtful accounts 38 13
Loss (gain) on sale or disposal of assets (9) 52
Changes in operating assets and liabilities:
Accounts receivable (1,030) (514)
Other current assets (4) 116
Accounts payable - trade 466 351
Accrued expenses 181 895
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,373 5,357
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in cash and cash equivalents-restricted - 60
Change in investments-restricted - (26)
Payments for property and equipment (530) (365)
Cash proceeds from sale of property and equipment 16 125
- -------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (514) (206)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (32) (51)
Payments on capital lease obligations (444) (2,171)
- -------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (476) (2,222)
- -------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,383 2,929
Cash and cash equivalents - beginning of period 16,422 12,624
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 18,805 $ 15,553
=========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest-net of capitalized interest $ 122 $ 138
=========================================================================================================================
</TABLE>
See notes to condensed financial statements.
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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.
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 other Common Stock equivalents as of
March 26, 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 March 26, 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 March 26, 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 effectively controls 51% of the Company. 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.
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. and Fresca, LLC dba Arizona Charlie's East
(entities owned 100% by Mr. Icahn). The Company has recorded a $40,000
receivable that was reimbursed on April 20, 2000, from Arizona Charlie's, Inc.
and a $20,000 receivable that was reimbursed on April 26, 2000, from Arizona
Charlie's East for payroll and other expenses related to the services performed
from December 27, 1999 to March 26, 2000.
Pursuant to a wholesale tour and travel agreement with Lowestfare.com (a company
owned by Mr. Icahn), the Company received hotel revenues of $.2 million during
the first 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 a hearing is set
for May 2000.
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 May 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 is being considered. If appealed, the case probably would 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. It is anticipated that the adversary complaint will be set for
trial after September 1, 2000.
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.
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(5) SUBSEQUENT EVENT
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.
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
has been scheduled and that possible further discussions may occur from time to
time thereafter.
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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
26, 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
The following is a discussion of the comparison of operating results for the
first quarter of 2000 and 1999.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 26, 2000 AND
MARCH 28, 1999
REVENUES
Casino revenues of $14.2 million for first quarter, 2000 were $.5 million (3%)
greater than the same period in 1999. Revenues from table games decreased $.4
million (10%) in the first quarter, 2000 when compared with first quarter, 1999.
Management attributes this decline to a 1.6% decrease in the table games hold
percentage. Revenues from slots increased $.5 million (5%) in the first quarter,
2000 when compared with first quarter, 1999. Management attributes the increase
to decreased disruption caused by construction of the new Race and Sports Book
and escalator experienced during the first quarter of 1999. The Company's new
Race and Sports Book, opened August 1999, contributed $.5 million to revenues in
first quarter, 2000. Competition is expected to continue to increase during the
next twelve months with the opening of one additional mega resort. 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 38% of total gross revenues
for the first quarters of 2000 and 1999.
Hotel occupancy was 93% during the first quarter, 2000 as compared to 87% in
1999. The average daily rate ("ADR") was $54 during the first quarter, 2000 as
compared to $57 in 1999. This ADR decrease of 5% 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 18% of total gross
revenues during the first 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.
Tower visitations (including the Top of The World dining) totaled 536,759 during
the first quarter, 2000 as compared to 579,823 for the same period in 1999. The
decline in Tower visitation (7%) is attributed to the increase in new
attractions on the Las Vegas Strip. Tower, retail and other revenues represented
19% of total gross revenues for the first quarters of 2000 and 1999.
COSTS AND EXPENSES
Promotional allowances increased from $2.5 million during the three months ended
March 26, 1999, to $2.9 million for the same period in 2000. The 17% 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. Management anticipates that promotional allowances will increase in
future periods with an increase in direct marketing efforts and special events
offered to casino guests.
Casino operating costs increased 10% from $7.0 million for first quarter, 1999
to $7.8 million in the first quarter, 2000. Operating expenses of the new Race
and Sports Book contributed $.4 million to the increase and $.2 million is
attributed to an increase in complimentaries from additional promotional events
and
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direct mail programs.
Other operating expenses increased 15% from $2.8 million for the 1999 first
quarter to $3.2 million for first quarter, 2000. The majority of this increase
is due to increased entertainer fees, $.1 million, and complimentary costs, $.3
million, associated with additional direct marketing coupons aimed at increasing
showroom attendance.
Depreciation and amortization expenses have decreased from $2.2 million for
first quarter, 1999 to $2.1 million for first quarter, 2000. Depreciation
decreased $.2 million relating to the retirement in 1999 of certain computer and
gaming equipment. This decrease was offset by an increase of $.1 million
relating to the depreciation of building improvements and equipment related to
the new Race and Sports Book completed in August 1999.
OTHER FACTORS IMPACTING EARNINGS
Interest income was approximately $.2 million for the first quarter, 2000 as
compared to $.1 million for the first 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 16% in first quarter, 2000 as compared to first
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 8.5%.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW, WORKING CAPITAL AND CAPITAL EXPENDITURES
During the three month period ended March 26, 2000, the Company generated $3.4
million in cash flows from operating activities. These funds were used to fund
capital expenditures of $.5 million and payments on the new capital lease
obligation of $.4 million. The Company had unrestricted cash balances of $18.8
million as of March 26, 2000.
As of March 26, 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 liabilities on the accompanying March 26, 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
$65.0 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. However, in order to
begin the construction process, the Company may seek bridge financing from
entities controlled by Mr. Icahn at market rates. There is no assurance that
bridge financing, if obtained, will be able to be taken out by the Company and
no prediction can now be made of the effect of failure to take out any bridge
financing.
YEAR 2000
The Company has completed an extensive program to ensure its computer systems
are Year 2000 compliant and have 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.
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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.
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 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 a hearing is set
for May 2000.
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 May 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 is being considered. If appealed, the case probably would 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. It is anticipated that the adversary complaint will be set for
trial after September 1, 2000.
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.
12
<PAGE> 13
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
has been scheduled and that possible further discussions may occur from time to
time thereafter.
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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
The Company filed the following report on Form 8-K during the fiscal
quarter ended March 26, 2000.
Date Filed Items Listed
------------- ------------
March 1, 2000 4
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 10, 2000 By: /s/ William F. Bischoff
--------------------------------------
Name: William F. Bischoff
------------------------------------
Title: Secretary/Treasurer/CFO
-----------------------------------
15
<PAGE> 16
EXHIBIT INDEX
STRATOSPHERE CORPORATION
Exhibit
No.
(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
The Company filed the following report on Form 8-K during the fiscal
quarter ended March 26, 2000.
Date Filed Items Listed
------------- ------------
March 1, 2000 4
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-26-2000
<CASH> 18,805
<SECURITIES> 3,459
<RECEIVABLES> 2,661
<ALLOWANCES> (254)
<INVENTORY> 2,319
<CURRENT-ASSETS> 2,969
<PP&E> 134,201
<DEPRECIATION> (12,307)
<TOTAL-ASSETS> 159,272
<CURRENT-LIABILITIES> 23,208
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 130,711
<TOTAL-LIABILITY-AND-EQUITY> 159,272
<SALES> 34,004
<TOTAL-REVENUES> 36,933
<CGS> 3,975
<TOTAL-COSTS> 24,118
<OTHER-EXPENSES> 7,428
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 206
<INCOME-PRETAX> 2,487
<INCOME-TAX> 870
<INCOME-CONTINUING> 1,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,617
<EPS-BASIC> .80
<EPS-DILUTED> .80
</TABLE>
<PAGE> 1
STRATOSPHERE CORPORATION
EXHIBIT 99.1
CARL ICAHN WRITTEN OFFER
[Letterhead of Carl C. Icahn]
April 25, 2000
Board of Directors
Stratosphere Corporation
2000 Las Vegas Blvd. So.
Las Vegas, Nevada 89104
Gentlemen:
As you know, I am the owner of Nybor Limited Partnership, a limited
partnership formed under the law of the State of Delaware, and am the
controlling person of American Real Estate Holdings LP ("AREH"), a limited
partnership formed under the laws of the State of Delaware, which together own
approximately 89.5% of the issued and outstanding stock of Stratosphere
Corporation ("Stratosphere").
By this letter, I am proposing that Stratosphere agree with Nybor and
AREH to enter into a transaction pursuant to which a newly-formed Delaware
Corporation, whose outstanding stock would be owned by Nybor and by AREH, would
be merged with an into Stratosphere. As a result of the merger, AREH and Nybor
would be the only two stockholders of the surviving corporation, which would be
Stratosphere. The existing stockholders of Stratosphere would receive cash in
respect of the Stratosphere shares which they now own, on a basis that would
value 100% of Stratosphere at $90 million. I believe that you will find a $90
million valuation of Stratosphere would be fair and equitable for all
Stratosphere stockholders.
As I envision the transaction, there would be a vote of stockholders of
Stratosphere to approve the merger after the Board of Directors of Stratosphere
recommends it to the stockholders. I am advised that stockholders of
Stratosphere who wish to dissent from the transaction may do so under Section
262 of the General Corporation Law of the State of Delaware.
Should the foregoing be acceptable to you please so indicate in the
space provided below and return it to me. If the terms set forth in this letter
meet with your approval, we should then instruct our respective attorneys to
begin prepare the necessary documentation so that the transaction can move
forward. This letter, even if executed by you shall not constitute a binding
agreement between us, as it is intended merely as an expression of our
intentions. No agreement shall exist between us regarding the proposed
transaction prior to the execution of documents agreeable to each of us.
Very truly yours,
/s/ Carl C. Icahn
Carl C. Icahn
Agreed and Accepted By:
- ------------------------
<PAGE> 1
STRATOSPHERE CORPORATION
EXHIBIT 99.2
NEWS RELEASE ANNOUNCING CARL C. ICAHN WRITTEN OFFER
NEWS RELEASE
STRATOSPHERE CORPORATION
2000 LAS VEGAS BOULEVARD SOUTH
LAS VEGAS, NEVADA 89104
702-380-7777
702-383-4733 (fax)
[TOWER LOGO]
- --------------------------------------------------------------------------------
FOR FURTHER INFORMATION CONTACT:
William Bischoff - (702) 383-5207
- --------------------------------------------------------------------------------
FOR IMMEDIATE RELEASE:
THURSDAY, APRIL 27, 2000
ICAHN OFFERS TO BUY MINORITY INTEREST OF STRATOSPHERE
LAS VEGAS, NEV. - STRATOSPHERE CORPORATION announced that 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 proposal to the Company
to acquire the minority interest in the Company for cash. Under the proposal,
the stockholders of the Company, other than the Icahn Entities, would receive
approximately $44.35 per share.
The Company is currently reviewing the proposal.
Stratosphere Corporation is a casino/hotel/entertainment complex located at the
north end of the Las Vegas Strip. The complex is centered around the
Stratosphere Tower, the tallest freestanding observation tower in the United
States.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this press
release (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 plan for future expansion 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 the interest rates), domestic
or global economic conditions, activities of competitors and the presence of new
or additional competition, fluctuations and changes in customer preferences and
attitudes, changes in federal or state tax laws of the administration of such
laws and changes in gaming laws or regulations (including the legalization of
gaming in certain jurisdictions). For more information, review the Company's
filings with the Securities and Exchange Commission, including the Company's
annual report on Form 10-K and certain registration statements of the Company.
-30-
