<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 24, 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
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 24, 2000 (UNAUDITED)
AND DECEMBER 26, 1999 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE
MONTHS ENDED SEPTEMBER 24, 2000 AND SEPTEMBER 26, 1999 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE NINE
MONTHS ENDED SEPTEMBER 24, 2000 AND SEPTEMBER 26, 1999 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE
MONTHS ENDED SEPTEMBER 24, 2000 AND SEPTEMBER 26, 1999 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 10-15
RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND 8-K/A 18
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
BALANCE SHEETS STRATOSPHERE CORPORATION AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 24, DECEMBER 26,
2000 1999
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(In thousands, except per share data) (Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 21,284 $ 16,422
Cash and cash equivalents-restricted 1,926 1,926
Marketable securities 4,459 3,459
Investments-restricted 428 2,278
Accounts receivable, net 2,967 1,414
Other current assets 4,641 5,284
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Total Current Assets 35,705 30,783
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Property and Equipment, Net 129,682 123,461
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Other Assets:
Deferred financing costs, net 161 244
Other receivable 3,000 3,000
------------------------------------------------------------------------------------------------------------------------
Total Other Assets 3,161 3,244
------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 168,548 $ 157,488
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 1,082 $ 1,203
Current portion of long-term debt - 87
Current portion of capital lease obligations 2,667 2,667
Notes payable to related party 7,000 -
Accrued payroll and related expenses 6,249 5,212
Income taxes payable 1,039 400
Other accrued expenses 13,936 13,027
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Total Current Liabilities 31,973 22,596
------------------------------------------------------------------------------------------------------------------------
Capital lease obligation-less current portion 4,000 5,778
------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 35,973 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 5,497 2,036
------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 132,575 129,114
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 168,548 $ 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 SEPTEMBER 24, 2000 AND SEPTEMBER 26, 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C>
REVENUES:
Casino $ 12,846 $ 12,315
Hotel 5,977 5,756
Food and beverage 8,541 7,914
Tower, retail and other income 7,120 7,271
-------------------------------------------------------------------------------------------------------------------------------
Gross Revenues 34,484 33,256
Less promotional allowances 2,861 2,544
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NET REVENUES 31,623 30,712
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COSTS AND EXPENSES:
Casino 7,271 7,469
Hotel 3,425 3,453
Food and beverage 6,499 6,386
Other operating expenses 3,350 3,006
Depreciation and amortization 2,048 2,001
Selling, general and administrative 8,020 8,244
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Total Costs and Expenses 30,613 30,559
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INCOME FROM OPERATIONS 1,010 153
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OTHER INCOME (EXPENSE):
Interest income 246 222
Interest expense (213) (216)
Loss on sale of assets - (3)
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Total Other Income (Expense), net 33 3
-------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,043 156
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Provision for Income Taxes 365 55
-------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 678 $ 101
===============================================================================================================================
BASIC AND DILUTED INCOME PER COMMON SHARE $ 0.33 $ 0.05
===============================================================================================================================
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 OPERATIONS (UNAUDITED) STRATOSPHERE CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 24, 2000 AND SEPTEMBER 26, 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C>
REVENUES:
Casino $ 39,228 $ 37,280
Hotel 19,131 18,445
Food and beverage 26,641 25,301
Tower, retail and other income 21,003 20,783
--------------------------------------------------------------------------------------------------------------------------------
Gross Revenues 106,003 101,809
Less promotional allowances 8,288 7,411
--------------------------------------------------------------------------------------------------------------------------------
NET REVENUES 97,715 94,398
--------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 22,037 21,053
Hotel 10,481 10,499
Food and beverage 19,972 19,320
Other operating expenses 9,671 8,535
Depreciation and amortization 6,262 6,283
Selling, general and administrative 24,103 24,909
--------------------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 92,526 90,599
--------------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 5,189 3,799
--------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 733 531
Interest expense (594) (656)
Loss on sale of assets (3) (71)
--------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense), net 136 (196)
--------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 5,325 3,603
--------------------------------------------------------------------------------------------------------------------------------
Provision for Income Taxes 1,864 1,261
--------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,461 $ 2,342
================================================================================================================================
BASIC AND DILUTED INCOME PER COMMON SHARE $ 1.70 $ 1.15
================================================================================================================================
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
-------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 24, 2000 AND SEPTEMBER 26, 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,461 $ 2,342
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,335 6,482
Provision for (recovery of) doubtful accounts 13 (113)
Loss on sale or disposal of assets 3 71
Changes in operating assets and liabilities:
Accounts receivable (1,565) 383
Other current assets 644 153
Accounts payable - trade (121) 28
Accrued expenses and income taxes payable 2,584 2,603
-------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,354 11,949
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in cash and cash equivalents-restricted - 67
Decrease in investments-restricted 1,850 1,513
Purchase of marketable securities (1,000) (2,471)
Proceeds from the sale of marketable securities - 1,000
Payments for property and equipment (2,428) (4,955)
Payments for construction in process (10,183) (477)
Cash proceeds from sale of property and equipment 124 551
-------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (11,637) (4,772)
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (77) (124)
Proceeds from related party notes payable 9,000 -
Payments of related party notes payable (2,000) -
Payments on capital lease obligations - new (1,778) (666)
Final payments on capital lease obligations - original - (8,979)
Increase in deferred financing costs - (274)
Proceeds from capital lease obligations - 10,000
-------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,145 (43)
-------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 4,862 7,134
Cash and cash equivalents - beginning of period 16,422 12,624
-------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 21,284 $ 19,758
=========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest-net of capitalized interest $ 459 $ 443
Income taxes 800 300
=========================================================================================================================
</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
Leasing, LLC, 2000 Las Vegas Boulevard Retail Corporation and Stratosphere
Development, LLC an entity controlled by the Stratosphere 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
September 24, 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 September 24, 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
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Carl C. Icahn related entities own approximately 89.6% of the Company's Common
Stock as of September 24, 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 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 October 10, 2000, from Arizona Charlie's, Inc. and a $30,000
receivable that was reimbursed on October 24, 2000, from Fresca, LLC ("Arizona
Charlie's East") for payroll and other expenses related to the services
performed from June 26, 2000 to September 24, 2000.
In September, 2000, the Company created Stratosphere Leasing, LLC ("Leasing"), a
wholly-owned LLC, to lease and manage the retail shops located in the
Stratosphere Hotel and Casino. Leasing was formed as a Limited Liability Company
in the State of Delaware. See note (5) below.
In June 2000, the Company, Arizona Charlie's, Inc. and Arizona Charlie's East
created Stratosphere Development, LLC ("Development"), to provide development
and construction management services for construction related projects.
Development has recorded a receivable from Arizona Charlie's properties of $.1
million for construction related services that is classified in accounts
receivable on the accompanying September 24, 2000 Condensed Consolidated Balance
Sheet. Development was formed as a series LLC under Delaware law.
On July 21, 2000, AREH and NYBOR, provided $1,138,000 and $862,000,
respectively, to the Company to fund the construction of the unfinished 1,000
bay hotel tower and other amenities including the new pool area and coffee shop
(collectively "Phase II"). Each note payable was an unsecured, demand note
paying 9.5% interest. Both of the notes were paid off on September 12, 2000.
On September 1, 2000 and September 12, 2000, AREH provided funding of $2.0
million and $5.0 million, respectively, to the company to fund additional Phase
II construction and to payoff the $1,138,000 and $862,000 demand notes referred
to above. Each note payable is an unsecured, demand note paying 9.5% interest.
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 third quarter, 2000 and $.4 million for fiscal year, 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
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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 fourth 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, LLC. 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 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. 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. On October 4,
2000, the Company and Strato-Retail executed a Settlement Agreement, Purchase
and Sale Agreement and Mutual General Release, whereby the parties resolved all
pending disputes, among other things, and dismissed the above referenced appeal
and adversary complaint.
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 EVENTS
By agreement dated September 30, 2000, between the Company and Strato-Retail the
parties: (i) agreed to dismiss various litigation actions pending between them;
(ii) exchanged mutual releases; and (iii) agreed that Strato-Retail's rights, as
tenant, under the Lease would be assigned to a subsidiary of the Company
Stratosphere Leasing, LLC and the related construction agreement between the
Company and Strato-Retail would be terminated. In connection with the
transaction, the Company paid to Strato-Retail approximately $12.5 million after
taking into consideration applicable expenses.
On October 4, 2000 AREH provided funding of $12.5 million to Stratosphere
Leasing, LLC to fund the purchase of the Lease from Strato-Retail, LLC. This
note payable is an unsecured, demand note paying 9.5% interest.
On October 10, 2000 AREH provided funding of $4.75 million to the Company to
fund additional Phase II construction. The note payable is an unsecured, demand
note paying 9.5% interest. 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
September 24, 2000, the operations included 1,550 slot machines, 44 table games,
6 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 SEPTEMBER 24, 2000
AND SEPTEMBER 26, 1999
REVENUES
Casino revenues of $12.8 million for third quarter, 2000 were $.5 million (4%)
greater than the same period in 1999. Revenues from table games of $2.9 million
remained flat in the third quarter, 2000 when compared with third quarter, 1999.
Revenues from slots increased $.8 million (9%) to $9.9 million in the third
quarter, 2000 from $9.1 million in the third quarter, 1999. Management
attributes this increase to decreased disruption caused by construction of the
new Race and Sports Book and escalator experienced during the third quarter of
1999. The Company's new Race and Sports Book opened in late August 1999. Race
and Sports book revenues declined $.3 million from $.1 million in the third
quarter, 1999 to $(.2) million for the third quarter, 2000. Management
attributes this decrease to Sports book losses associated with the United States
Tennis Association's U.S. Open. 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 37% of total gross revenues for the third
quarters of 2000 and 1999.
Hotel revenues of $6.0 million for third quarter, 2000 were approximately $.2
million (3%) higher than the same period in 1999. Hotel occupancy was 96% during
the third quarter, 2000 as compared to 93% in 1999. The average daily rate
("ADR") was $47 during the third quarters of 2000 and 1999. Hotel revenues
averaged 17% of total gross revenues during the third quarters of 2000 and 1999.
With the addition of 2,500 newly constructed hotel rooms opened 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 $7.9 million for third quarter, 1999
to $8.5 million for third quarter, 2000. The 8% 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. Food and beverage revenues averaged 25% and 24% of
total gross revenues for the third quarter, 2000 and third quarter, 1999,
respectively.
Tower, retail and other revenues declined from $7.3 million in third quarter,
1999 to $7.1 million for the third quarter, 2000. This represents a 3% decrease.
Revenues from the Entertainment department have increased from $.9 million in
the third quarter, 1999 to $1.3 million for the third quarter, 2000. This $.4
million (44%) increase can be attributed to increased ticket prices and showroom
attendance. Tower visitations (including the Top of The World dining) totaled
548,875 during the third quarter, 2000 as compared to 585,420 for the same
period in 1999. Tower revenues decreased $.4 million from $4.3 million in the
third quarter, 1999 to $3.9 million for the third quarter, 2000. The 6% decline
in Tower
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visitations and 9% decline in revenues is attributed to the increase in new
attractions on the Las Vegas Strip and the Company's "High Roller" roller
coaster being closed for maintenance.
Retail and other revenues have decreased $.2 million (10%) from $2.1 million in
the third quarter, 1999 to $1.9 million for the third quarter, 2000. Management
attributes this decline to decreased foot traffic through the retail mall for
Tower visitations. Tower, retail and other revenues represented 21% and 22% of
total gross revenues for the third quarter, 2000 and third quarter, 1999,
respectively.
COSTS AND EXPENSES
Promotional allowances increased from $2.5 million during the three months ended
September 26, 1999, to $2.9 million for the same period in 2000. The 16%
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.
Other operating expenses increased 13% from $3.0 million for the third quarter,
1999 to $3.4 million for third quarter, 2000. This increase is due to higher
entertainer fees, $.1 million; complimentary costs associated with additional
direct marketing coupons aimed at increasing showroom attendance, $.3 million
and repairs and maintenance costs for the "High Roller" and "Big Shot" thrill
rides of $.1 million. These increases were offset by a $.1 million decrease in
payroll and retail cost of sales and other expenses.
OTHER FACTORS IMPACTING EARNINGS
Interest income was approximately $.25 million for the third quarter, 2000 as
compared to $.22 million for the third quarter, 1999. The 14% 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.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 24, 2000 AND
SEPTEMBER 26, 1999
REVENUES
Casino revenues of $39.3 million for the nine months ended September 24, 2000
were $1.9 million (5%) greater than the nine months ended September 26, 1999.
Revenues from slots increased $1.5 million (6%) for the nine months ended
September 24, 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 three quarters of 1999. Revenues from
table games decreased $.1 million (2%) for the nine months ended September 24,
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. Revenues from the Race and Sports
book increased from $.1 million for the nine months ended September 26, 1999 to
$.9 million for the nine months ended September 24, 2000. The Company's New Race
and Sports Book opened in late August, 1999. Keno revenues decreased $.2 million
(81%) for the nine months ended September 24, 2000 when compared with 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. 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 $19.1 million for the nine months ended September 24, 2000
were approximately $.7 million (4%) higher than the nine months ended September
26, 1999. Hotel occupancy was 95% during the nine months ended September 24,
2000 as compared to 90% in 1999. With the addition of 2,500
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newly constructed hotel rooms opened 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 $25.3 million for the nine months
ended September 26, 1999 to $26.6 million for the nine months ended September
24, 2000. The 5% increase in revenues can be attributed to the increased hotel
occupancy, 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, retail and other revenues increased $.2 million (1%) from $20.8 million
for the nine months ended September 29,1999 to $21.0 million for the nine months
ended September 24, 2000. Revenues from the Entertainment department have
increased from $2.4 million for the nine months ended September 26, 1999 to $3.6
million for the nine months ended September 24, 2000. This $1.2 million (50%)
increase can be attributed to increased ticket prices and showroom attendance.
Tower visitations (including the Top of The World dining) totaled 1,624,234
during the nine months ended September 24, 2000 as compared to 1,721,477 for the
nine months ended September 26, 1999. Tower revenues decreased $.6 million from
$12.0 million or the nine months ended September 26, 1999 to $11.4 million for
the nine months ended September 24, 2000. The 6% decline in Tower visitations
and 5% decline in Tower revenues is attributed to the increase in new
attractions on the Las Vegas Strip and the Company's "High Roller" roller
coaster being closed for maintenance in the third quarter, 2000. Retail and
other revenues have decreased $.4 million (6%) from $6.4 million for the nine
months ended September 26, 1999 to $6.0 million for the nine months ended
September 24, 2000. Management attributes this decline to decreased foot traffic
through the retail mall for Tower visitations.
COSTS AND EXPENSES
Promotional allowances increased $.9 million from $7.4 million during the nine
months ended September 26, 1999, to $8.3 million for the nine months ended
September 24, 2000. The 12% increase in promotional allowances was the result of
more direct mail promotions that included room, food and beverage being offered
to guests on a complimentary basis.
Casino operating costs increased $1.0 million (5%) from $21.0 million for the
nine months ended September 26, 1999 to $22.0 million for the nine months ended
September 24, 2000. Operating expenses of the new Race and Sports Book
contributed $.7 million to the increase, $.5 million is attributed to an
increase in the Company's slot lease expense and $.2 million is attributed to a
decrease in complimentaries.
Other operating expenses increased $1.1 million (13%) from $8.6 million for the
nine months ended September 26, 1999 to $9.7 million for the nine months ended
September 24, 2000. The majority of this increase is due to entertainer fees,
$.2 million, and complimentary costs associated with additional direct marketing
coupons aimed at increasing showroom attendance, $.9 million.
Selling, general and administrative expenses have decreased $.8 million (3%)
from $24.9 million for the nine months ended September 26, 1999 to $24.1 million
for the nine months ended September 24, 2000. Management attributes this change
to decreases in marketing operating expenses of $1.0 million, reduced operating
lease expense of $.6 million and reduced insurance expense of $.1 million. These
decreases were offset by increases in payroll of $.2 million and a gaming tax
adjustment of $.5 million. Also, in the third quarter, 1999, the Company
received $.2 million from the divestment of the pre-petition construction bank
account. 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 increased $.2 million (40%) from $.5 million for the nine months
ended September 26, 1999 to $.7 million for the nine months ended September 24,
2000. 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 $.1 million (14%) from $.7 million for the nine
months ended September 26, 1999 to $.6 million for the nine months ended
September 24, 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 9.1875%.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW, WORKING CAPITAL AND CAPITAL EXPENDITURES
During the nine month period ended September 24, 2000, the Company generated
$11.4 million in cash flows from operating activities. These funds were used to
purchase marketable securities of $1.0 million, fund non-construction in process
capital expenditures of $2.4 million, make payments on the new capital lease
obligation of $1.8 million, to increase the Company's cash balance and fund
Phase II construction expenditures. On September 8, 2000 the Nevada Gaming
Control Board issued to the Company a waiver of the reserve requirement pursuant
to Regulation 22.040. This enabled the Company to divest these restricted
certificates of deposit of $1.9 million. The Company had unrestricted cash
balances of $21.3 million as of September 24, 2000.
As of September 24, 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 September 24, 2000, Condensed
Consolidated Balance Sheet. Additional payments will be made from restricted
cash and/or investment balances.
On July 21, 2000, AREH and NYBOR, provided $1,138,000 and $862,000, respectively
to Stratosphere Development, LLC to fund Phase II construction. Each note was an
unsecured, demand note paying 9.5% interest. Both of these notes were paid off
on September 12, 2000.
On September 1, 2000 and September 12, 2000, AREH provided funding of $2.0
million and $5.0 million, respectively, to Development to fund additional Phase
II construction and to pay off the $1,138,000 and $862,000 demand notes referred
to above. Each note payable is an unsecured, demand note paying 9.5% interest.
These notes, in addition to funds available from operating activities, have
enabled the Company to fund capital expenditures of $10.2 million for
construction in process of Phase II.
In April 2000, the Company began construction to complete the unfinished 1,000
bay hotel tower and other amenities including the new pool area and coffee shop
(collectively "Phase II") and refurbish certain restaurants. 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 $73.0 million. The Company
has begun the construction process with funds available from cash flows from
operating activities and additional construction financing, at market rates,
from entities controlled by Mr. Icahn. AREH has agreed to advance to the Company
all funds necessary to complete Phase II construction.
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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 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 fourth 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, LLC. 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. 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. On October 4,
2000, the Company and Strato-Retail executed a Settlement Agreement, Purchase
and Sale Agreement and Mutual General Release, whereby the parties resolved all
pending disputes, among other things, and dismissed the above referenced appeal
and adversary complaint.
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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ITEM 5. OTHER INFORMATION
On April 25, 2000, Carl C. Icahn, owner and controlling person, respectively, of
NYBOR and American Real Estate Holdings, L.P. (together Icahn Entities),
submitted a written offer to the Company to purchase the remaining outstanding
shares not owned by Icahn Entities. Icahn Entities collectively own 89.6% of the
Company's outstanding common stock. The Company would then be merged into Icahn
Entities. Pursuant to the merger, shareholders of the Company, other than Icahn
Entities, would receive approximately $44.35 per share based upon the offer's
stated valuation of $90 million for the equity of the entire Company. Icahn
Entities would thereafter be the Company's sole shareholder 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 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.
On September 19, 2000 the Company announced a proposed going private
transaction. The Company would be merged with a newly-formed subsidiary of AREP.
The transaction has been approved by the independent director of the Company's
Board of Directors, who also serves as the Committee to consider the
transaction. Pursuant to the terms of the proposed merger, shareholders of the
Company that are not affiliated with Carl Icahn will receive $45.32 per share.
Mr. Icahn's companies, other than AREP, will receive $44.33 per share. It is
expected the transaction will close in early 2001.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8K AND 8-K/A
(a) Exhibits
27 Financial Data Schedule
99.3 News Release Announcing Approval of Company's Going Private
Transaction
(b) Reports on Form 8-K and 8-K/A
The Company filed the following report on Form 8-K/A during the fiscal
quarter ended September 24, 2000.
Date Filed Items Listed
---------- ------------
None None
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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: November 8, 2000 By: /s/ William F. Bischoff
--------------------------------
Name: William F. Bischoff
-------------------------------
Title: Secretary/Treasurer/CFO
-------------------------------
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EXHIBIT INDEX
STRATOSPHERE CORPORATION
Exhibit
No.
-------
(a) Exhibits
27 Financial Data Schedule
99.3 News Release Announcing Approval of Company's Going Private
Transaction
(b) Reports on Form 8-K and 8-K/A
The Company filed the following report on Form 8-K/A during the fiscal
quarter ended September 24, 2000.
Date Filed Items Listed
---------- ------------
None None
20
