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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: June 30, 2005
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-9481
ARCHON CORPORATION
(Exact name of registrant as specified in its charter)
Nevada | 88-0304348 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
3993 Howard Hughes Parkway, Suite 630, Las Vegas, Nevada 89109
(Address of principal executive office and zip code)
(702) 732-9120
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by a 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 by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
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 Section 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 ¨ NO ¨
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
6,235,931 as ofAugust 12, 2005
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ARCHON CORPORATION
Page | ||||
PART I | FINANCIAL INFORMATION | |||
Item 1 | Unaudited Condensed Consolidated Financial Statements: | |||
Condensed Consolidated Balance Sheets as of June 30, 2005 and September 30, 2004 | 1 | |||
3 | ||||
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended June 30, 2005 | 4 | |||
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2005 and 2004 | 5 | |||
Notes to Unaudited Condensed Consolidated Financial Statements | 6 | |||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 | ||
Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 22 | ||
Item 4 | Controls and Procedures | 22 | ||
PART II | OTHER INFORMATION | |||
Item 1 | Legal Proceedings | 24 | ||
Item 2 | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 24 | ||
Item 3 | Defaults Upon Senior Securities | 25 | ||
Item 4 | Submission of Matters to a Vote of Security Holders | 25 | ||
Item 5 | Other Information | 25 | ||
Item 6 | Exhibits | 25 |
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PART I – FINANCIAL INFORMATION
Item 1. | Unaudited Condensed Consolidated Financial Statements |
Archon Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2005 | September 30, 2004 (restated) | |||||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 2,374,785 | $ | 3,442,418 | ||
Investment in marketable securities | �� | 6,964,681 | 5,398,441 | |||
Accounts receivable, net | 167,734 | 3,286,668 | ||||
Inventories | 311,709 | 294,162 | ||||
Prepaid expenses and other | 923,119 | 805,578 | ||||
Total current assets | 10,742,028 | 13,227,267 | ||||
Land held for development | 21,504,400 | 21,504,400 | ||||
Property held for investment, net | 131,329,485 | 133,708,401 | ||||
Property and equipment, net | 29,306,199 | 31,162,313 | ||||
Other assets | 7,134,735 | 7,329,354 | ||||
Total assets | $ | 200,016,847 | $ | 206,931,735 | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Archon Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
June 30, 2005 | September 30, 2004 (restated) | |||||
LIABILITIES and STOCKHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable | $ | 1,961,256 | $ | 2,138,077 | ||
Interest payable | 267,793 | 1,939,750 | ||||
Accrued and other liabilities | 3,464,675 | 3,220,391 | ||||
Current portion of debt | 13,639,439 | 13,475,761 | ||||
Current portion of non-recourse debt | 1,848,627 | 30,057,775 | ||||
Total current liabilities | 21,181,790 | 50,831,754 | ||||
Debt – less current portion | 602,925 | 1,127,915 | ||||
Non-recourse debt – less current portion | 79,518,114 | 80,929,404 | ||||
Deferred income taxes | 27,707,769 | 29,748,077 | ||||
Other liabilities | 48,763,380 | 21,902,820 | ||||
Stockholders’ equity | 22,242,869 | 22,391,765 | ||||
Total liabilities and stockholders’ equity | $ | 200,016,847 | $ | 206,931,735 | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Archon Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2005 | 2004 (restated) | 2005 | 2004 (restated) | |||||||||||||
Revenues: | ||||||||||||||||
Casino | $ | 5,847,066 | $ | 6,291,626 | $ | 18,416,771 | $ | 21,790,344 | ||||||||
Hotel | 835,180 | 863,817 | 2,070,709 | 2,329,853 | ||||||||||||
Food and beverage | 1,773,059 | 2,069,398 | 5,312,827 | 6,621,185 | ||||||||||||
Investment properties | 3,100,562 | 3,100,562 | 9,301,685 | 9,301,685 | ||||||||||||
Other | 689,905 | 546,511 | 2,350,595 | 1,714,000 | ||||||||||||
Gross revenues | 12,245,772 | 12,871,914 | 37,452,587 | 41,757,067 | ||||||||||||
Less casino promotional allowances | (1,271,847 | ) | (1,793,528 | ) | (4,261,096 | ) | (6,135,396 | ) | ||||||||
Net operating revenues | 10,973,925 | 11,078,386 | 33,191,491 | 35,621,671 | ||||||||||||
Operating expenses: | ||||||||||||||||
Casino | 3,019,882 | 3,593,437 | 9,754,778 | 11,975,878 | ||||||||||||
Hotel | 302,876 | 203,024 | 767,799 | 489,037 | ||||||||||||
Food and beverage | 1,138,521 | 1,254,011 | 3,194,426 | 3,315,770 | ||||||||||||
Other | 332,554 | 280,168 | 837,662 | 872,105 | ||||||||||||
Stock-based compensation | 3,746,763 | — | 3,929,634 | — | ||||||||||||
Selling, general and administrative | 875,906 | 975,623 | 2,642,556 | 3,441,580 | ||||||||||||
Corporate | 888,374 | 911,686 | 2,907,841 | 2,519,399 | ||||||||||||
Utilities and property | 1,110,484 | 1,283,840 | 3,408,472 | 3,818,683 | ||||||||||||
Depreciation and amortization | 1,445,583 | 1,329,918 | 4,411,162 | 4,206,416 | ||||||||||||
Total operating expenses | 12,860,943 | 9,831,707 | 31,854,330 | 30,638,868 | ||||||||||||
Operating income (loss) | (1,887,018 | ) | 1,246,679 | 1,337,161 | 4,982,803 | |||||||||||
Interest expense | (3,094,507 | ) | (2,746,285 | ) | (8,836,837 | ) | (9,925,848 | ) | ||||||||
Loss on sale/disposal of assets | — | — | (244,648 | ) | — | |||||||||||
Interest income | 70,794 | 277,204 | 219,071 | 779,283 | ||||||||||||
Other income | 303,530 | — | 965,362 | — | ||||||||||||
Loss before income tax benefit | (4,607,201 | ) | (1,222,402 | ) | (6,559,891 | ) | (4,163,762 | ) | ||||||||
Federal income tax benefit | 1,612,520 | 415,617 | 2,295,962 | 1,415,679 | ||||||||||||
Net loss | (2,994,681 | ) | (806,785 | ) | (4,263,929 | ) | (2,748,083 | ) | ||||||||
Dividends accrued on preferred shares | (366,603 | ) | (381,251 | ) | (1,140,453 | ) | (1,169,538 | ) | ||||||||
Net loss applicable to common shares | $ | (3,361,284 | ) | $ | (1,188,036 | ) | $ | (5,404,382 | ) | $ | (3,917,621 | ) | ||||
Average common shares outstanding | 6,234,616 | 6,221,431 | 6,226,684 | 6,221,431 | ||||||||||||
Average common and common equivalent shares outstanding | 6,234,616 | 6,221,431 | 6,226,684 | 6,221,431 | ||||||||||||
Loss per common share: | ||||||||||||||||
Basic | $ | (0.54 | ) | $ | (0.19 | ) | $ | (0.87 | ) | $ | (0.63 | ) | ||||
Diluted | $ | (0.54 | ) | $ | (0.19 | ) | $ | (0.87 | ) | $ | (0.63 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Archon Corporation and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
For the Nine Months Ended June 30, 2005
Common Stock | Preferred Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Treasury Stock | Total | ||||||||||||||||||||
Balances, October 1, 2004 | $ | 62,214 | $ | 9,673,553 | $ | 54,582,364 | $ | (42,830,615 | ) | $ | 992,023 | $ | (87,774 | ) | $ | 22,391,765 | ||||||||||
Net loss | — | — | — | (4,263,929 | ) | — | — | (4,263,929 | ) | |||||||||||||||||
Common stock options exercised | 145 | — | 19,275 | — | — | — | 19,420 | |||||||||||||||||||
Stock-based compensation expense | — | — | 3,929,634 | — | — | — | 3,929,634 | |||||||||||||||||||
Preferred stock purchased and retired | — | (169,774 | ) | (139,034 | ) | — | — | — | (308,808 | ) | ||||||||||||||||
Unrealized gain on marketable securities | — | — | — | — | 474,787 | — | 474,787 | |||||||||||||||||||
Balances, June 30, 2005 | $ | 62,359 | $ | 9,503,779 | $ | 58,392,239 | $ | (47,094,544 | ) | $ | 1,466,810 | $ | (87,774 | ) | $ | 22,242,869 | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Archon Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
Nine Months Ended June 30, | ||||||||
2005 | 2004 | |||||||
Cash flows from operating activities: | ||||||||
Cash flows provided by operations before changes in operating assets and liabilities: | $ | 4,842,733 | $ | 2,050,590 | ||||
Changes in assets and liabilities: | ||||||||
Accounts receivable, net | 3,118,934 | 3,012,504 | ||||||
Inventories | (17,547 | ) | (57,768 | ) | ||||
Prepaid expenses and other | (117,540 | ) | (344,658 | ) | ||||
Deferred income taxes | (2,295,962 | ) | (1,227,690 | ) | ||||
Other assets | (326,599 | ) | (640,825 | ) | ||||
Accounts payable | (176,821 | ) | (58,384 | ) | ||||
Interest payable | (1,671,957 | ) | (1,972,065 | ) | ||||
Accrued and other liabilities | (39,158 | ) | (135,493 | ) | ||||
Other liabilities | 27,144,002 | 3,990,092 | ||||||
Net cash provided by operating activities | 30,460,085 | 4,616,303 | ||||||
Cash flows from investing activities: | ||||||||
Decrease in restricted cash | — | 13,898,971 | ||||||
Capital expenditures | (420,781 | ) | (791,807 | ) | ||||
Marketable securities purchased | (898,838 | ) | (225,328 | ) | ||||
Marketable securities sold | 63,039 | 2,871,330 | ||||||
Net cash provided by (used in) investing activities | (1,256,580 | ) | 15,753,166 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from debt | 1,164,187 | 18,565,751 | ||||||
Paid on debt and obligation under lease | (31,145,937 | ) | (44,987,109 | ) | ||||
Note receivable | — | 4,884,301 | ||||||
Stock options exercised | 19,420 | — | ||||||
Stock subscription paid | — | 73,743 | ||||||
Preferred stock acquired | (308,808 | ) | (175,056 | ) | ||||
Net cash used in financing activities | (30,271,138 | ) | (21,638,370 | ) | ||||
Decrease in cash and cash equivalents | (1,067,633 | ) | (1,268,901 | ) | ||||
Cash and cash equivalents, beginning of period | 3,442,418 | 5,852,354 | ||||||
Cash and cash equivalents, end of period | $ | 2,374,785 | $ | 4,583,453 | ||||
See the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
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ARCHON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Basis of Presentation and General Information |
Archon Corporation (the “Company” or “Archon”) is a Nevada corporation. The Company’s primary business operations are conducted through a wholly-owned subsidiary corporation, Pioneer Hotel Inc. (“PHI”), which operates the Pioneer Hotel & Gambling Hall (the “Pioneer”) in Laughlin, Nevada. In addition, the Company owns real estate on Las Vegas Boulevard South (the “Strip”) in Las Vegas, Nevada, and also owns investment properties in Dorchester, Massachusetts and Gaithersburg, Maryland.
The condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. The results for the three and nine-month periods are not necessarily indicative of results to be expected for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2004.
Summary of Significant Accounting Policies
Principles of Consolidation. The accompanying unaudited condensed consolidated financial statements include the accounts of Archon and its wholly-owned subsidiaries. Amounts representing the Company’s investment in less than majority-owned companies in which a significant equity ownership interest is held are accounted for on the equity method. All material intercompany accounts and transactions have been eliminated in consolidation.
Earnings Per Share. The Company presents its per share results in accordance with Statement of Accounting Standards (“SFAS”) No. 128, “ Earnings Per Share “ (“SFAS 128”). SFAS 128 requires the presentation of basic net loss per share and diluted net loss per share. Basic per share amounts are computed by dividing net loss by average shares outstanding during the period, while diluted per share amounts reflect the impact of additional dilution for all potentially dilutive securities, such as stock options. Dilutive stock options of approximately 800,000 were not included in diluted calculations during the nine months and quarter ended June 30, 2005 and dilutive stock options of approximately 500,000 were not included in diluted calculations during the similar periods in 2004 as the Company incurred a net loss during these periods and the effect would be antidilutive.
Accounting for Stock-Based Compensation. The Company had a Key Employee Stock Option Plan (the “Stock Option Plan”), which ceased granting options in 2003. In July 2005, shareholders approved the reinstatement and an amendment to the Stock Option Plan which will allow the plan to be reinstated until 2013. The Company accounts for the Stock Option Plan under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees and related Interpretations.
During the fiscal third quarter 2005, certain stock options were granted by the compensation committee of the Company’s board of directors to Christopher Lowden, David Lowden and Paul Lowden. Each individual received a grant of 150,000 stock options (Paul Lowden, however, notified the compensation committee in May
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2005 that he was forfeiting the award that was to be granted to him). The options were granted in April 2005 and included terms of immediate vesting and were intended to be issued with an exercise price of $1.00 per share. However, the Compensation Committee (as per the Form 8-K on this topic), decided in June 2005 that the option grants in April 2005 were to be granted with an exercise price equal to the closing market price of the Company’s common stock on the date of grant. The Company recognized stock-based compensation associated with the issuance of the stock options of approximately $2.4 million representing the difference in the Company’s common stock price between the date of grant and the measurement date of the options. Additionally, the compensation committee approved an extension of other previously issued stock options which otherwise would have expired. A charge of approximately $1.5 million related to this extension of stock options was recorded. The following table illustrates the effect on net loss and loss per share as if the Company had applied the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation, to stock-based employee compensation (in thousands except for per share amounts):
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net loss applicable to common shares | $ | (3,361 | ) | $ | (1,188 | ) | $ | (5,404 | ) | $ | (3,918 | ) | ||||
Add: Compensation cost recorded on the condensed consolidated statements of operations, net of related tax effects | 2,435 | — | 2,554 | — | ||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (3,928 | ) | — | (4,047 | ) | — | ||||||||||
Pro forma net loss applicable to common shares | $ | (4,854 | ) | $ | (1,188 | ) | $ | (6,897 | ) | $ | (3,918 | ) | ||||
Loss per share: | ||||||||||||||||
Basic and diluted - as reported | $ | (0.54 | ) | $ | (0.19 | ) | $ | (0.87 | ) | $ | (0.63 | ) | ||||
Basic and diluted - pro forma | $ | (0.78 | ) | $ | (0.19 | ) | $ | (1.11 | ) | $ | (0.63 | ) | ||||
Estimates and Assumptions. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates used by the Company include those related to customer incentives, bad debts, inventories, investments, estimated useful lives for depreciable and amortizable assets, valuation reserves and estimated cash flows in assessing the recoverability of long-lived assets, estimated liabilities for slot club bonus point programs, income taxes, contingencies and litigation. Actual results may differ from estimates.
Preferred Stock. The Company accounts for its purchases of its preferred stock as if the preferred stock has been retired. However, the Company has not formally retired the stock and it does not have current plans to resell the shares it has repurchased.
Recently Issued Accounting Standards:
Emerging Issues Task Force (“EITF”) 04-8. In December 2004, the Financial Accounting Standards Board (the “FASB”) issued EITF No. 04-8,The Effect of Contingently Convertible Debt on Diluted Earnings per Share, requiring the inclusion of convertible shares in diluted EPS regardless of whether the market
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price trigger has occurred for all periods presented. As the Company does not have contingently convertible debt, this requirement will not have an impact on the Company’s condensed consolidated financial statements.
SFAS 123(R). In December 2004, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised 2004),Share-Based Payment , replacing SFAS No. 123,Accounting for Stock-Based Compensation, and superseding APB No. 25,Accounting for Stock Issued to Employees. SFAS No. 123(R) requires recognition of share-based compensation in the financial statements. SFAS No. 123(R) is effective as of the first annual reporting period that begins after June 15, 2005 and will be adopted by the Company in the fourth quarter of fiscal 2006. The Company will continue to evaluate its compensation practices, as well as other available valuation models, for valuing stock options. The Company anticipates no material impact on its results of operations or financial position as a result of adopting this statement.
SFAS 151. In November 2004, the FASB issued SFAS No. 151,Inventory Costs, amending ARB 43 Chapter 4,Inventory Pricing. SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight and handling costs, and wasted material (spoilage). SFAS 151 introduces the concept of “normal capacity” requiring allocation of fixed production overheads to inventory based upon normal capacity of production facilities. Unallocated overhead costs must be expensed in the period in which they are incurred. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company anticipates no material impact on its results of operations or financial position as a result of adopting this statement.
SFAS 153. In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets, amending APB No. 29, which treated nonmonetary exchanges of similar productive assets as an exception from fair value measurement. SFAS No. 153 replaces this exception with a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. Nonmonetary exchanges have commercial substance if the future cash flows of an entity are expected to change significantly as a result of the exchange. This statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, and will be adopted by the Company in the fourth quarter of fiscal 2005. The Company anticipates no material impact on its results of operations or financial position as a result of adopting this statement.
Reclassifications. Certain reclassifications have been made in prior year’s condensed consolidated financial statements to conform to the presentations used in fiscal 2005.
2. | Comprehensive Loss |
Comprehensive loss is the total of net loss and all other non-stockholder changes in stockholders’ equity. Comprehensive loss for the three and nine months ended June 30, 2005 and 2004 is as follows (in thousands):
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net (loss) | $ | (2,995 | ) | $ | (807 | ) | $ | (4,264 | ) | $ | (2,748 | ) | ||||
Unrealized gain/(loss) on marketable securities | (193 | ) | (8 | ) | 475 | 595 | ||||||||||
Comprehensive loss | $ | (3,188 | ) | $ | (815 | ) | $ | (3,789 | ) | $ | (2,153 | ) | ||||
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3. | Other Assets |
Included in “Other Assets” at June 30, 2005 and September 30, 2004 are unamortized loan issue costs and deferred rents of approximately $4.8 million which were incurred when the Company acquired certain rental property and debt instruments. The unamortized loan issue costs are being amortized on a straight-line basis, which closely approximates the effective interest method, over the loan period, and the deferred rents are being amortized using the straight-line method over the remaining lease periods.
Also included in “Other Assets” at June 30, 2005 and September 30, 2004 are approximately $0.4 million of commercial and residential mortgage loans, representing loans originally funded by J & J Mortgage to unaffiliated third parties as well as loans made directly to J & J Mortgage under a master loan agreement. The loans purchased by the Company were purchased for the principal amount, plus accrued interest, if any. The advances to J & J Mortgage under the master loan arrangement bear interest at the prime rate plus 2%. J & J Mortgage is owned by LICO, which in turn is wholly-owned by Paul W. Lowden, the President, Chief Executive Officer and majority stockholder of the Company. John W. Delaney, a director of the Company, is the president of J & J Mortgage.
Miscellaneous investments in key man life insurance policies and unconsolidated entities are also included in Other Assets and total approximately $1.6 million and $1.5 million at June 30, 2005 and September 30, 2004, respectively.
4. | Related Parties |
The Company has entered into a Patent Rights and Royalty Agreement with David Lowden, brother of Paul W. Lowden, with respect to certain gaming technology for which David Lowden has been issued a patent. The Company has agreed to pay certain royalty payments with respect to the technology incorporated into gaming devices placed in operation, as well as costs related to maintain the patent. David Lowden has granted the Company an exclusive five-year license expiring in January 2007 in the United States with respect to the technology, which will be automatically renewed for additional two-year terms unless Archon terminates the agreement within thirty days prior to the renewal or the agreement is otherwise earlier terminated in accordance with its terms. The Company also has an understanding with David Lowden that it will pay for the costs of commercial development of the technology. Through June 30, 2005, the Company had expensed approximately $0.25 million for commercial development of the technology, although none had been expensed in the nine months ended June 30, 2005.
See Note 3 for information regarding transactions between the Company and J & J Mortgage.
5. | Debt |
The Company has a financial covenant related to its outstanding long-term debt with a certain lender. This covenant requires the Company to maintain a minimum ratio of earnings before interest, taxes, depreciation and amortization, net of investment properties, compared to current portions of long-term debt, excluding investment properties. At June 30, 2005, the Company was not in compliance with this covenant and, as such, was technically in default under the debt agreement. Management, based on conversations with bank personnel, believes it is not the intention of the lender to declare a default relative to this covenant. Because of the technical default, the Company has included all amounts owing under the debt agreement (approximately $12.2 million at June 30, 2005) in the current portion of long-term debt in the Company’s condensed consolidated financial statements. Management believes the Company has sufficient assets to meet any unforeseen demands on current operations or significant debt obligations.
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6. | Federal Income Tax |
The Company recorded a federal income tax benefit, based on statutory rates, of $1.6 million for the quarter ended June 30, 2005 and $0.4 million for the quarter ended June 30, 2004. For the nine months ended June 30, 2005, the Company recorded federal income tax benefits, based on statutory rates, of $2.3 million and $1.4 million for the nine months ended June 30, 2004. The Company has recorded deferred tax assets related to net operating assets, as the Company is able to offset its assets generated from operating losses with its deferred tax liabilities. Realization of the net deferred tax assets is dependent on the Company’s ability to generate profits from operations or from the sale of long-lived assets, which would reverse the temporary differences that established the deferred tax liabilities. There can be no assurance that the Company will generate profits from operations or sell those assets or will generate profits from sales if they were to occur in the future. In the event the Company does generate profits from sales of long-lived assets in the future, the valuation allowance would need to be recorded and would impact the Company’s future results of operations.
7. | Lease Retirement |
On December 29, 2003, the Company exercised an early purchase option to acquire leases related to PHI from a third party. The Company paid approximately $35.6 million in exercising its option to retire certain lease obligations of approximately $37.0 million. Proceeds from debt of approximately $18.0 million as well as a use of marketable securities, restricted cash and cash from collections on certain receivables financed this acquisition. Previous agreements, covenants and restrictions on the use of cash related to the lease agreements are no longer applicable. The $18.0 million debt instrument is secured by land held for development by the Company, as well as a personal guaranty from the Company’s Chief Executive Officer and Chairman of the Board and requires monthly principal and interest payments of approximately $0.12 million with a balloon payment of approximately $11.3 million in December 2006. The debt bears interest at a variable rate (approximately 7.0% at June 30, 2005).
8. | Supplemental Statement of Cash Flows Information |
Supplemental statement of cash flows information for the nine-month periods ended June 30, 2005 and 2004 is presented below:
2005 | 2004 | |||||
(amounts in thousands) | ||||||
Operating activities: | ||||||
Cash paid during the period for interest | $ | 9,988 | $ | 11,379 | ||
Cash paid during the period for income taxes | $ | — | $ | — | ||
Investing and financing activities: | ||||||
Long-term debt incurred in connection with the acquisition of machinery and equipment | $ | — | $ | 267 | ||
Negative amortization of obligation under lease | $ | — | $ | 345 | ||
Reduction of property and equipment from the acquisition of capital leases | $ | — | $ | 1,412 | ||
Unrealized gain on marketable securities | $ | 475 | $ | 595 | ||
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9. | Segment Information |
The Company’s operations are in the hotel/casino industry and investment properties. The Company’s hotel/casino operations are conducted at the Pioneer in Laughlin, Nevada. The Company owns investment properties in Dorchester, Massachusetts and Gaithersburg, Maryland. “Other and Eliminations” below includes financial information for the Company’s corporate operations and Archon Sparks Management Company, adjusted to reflect eliminations upon consolidation.
Set forth below is the financial information for the segments in which the Company operates for the three-month and nine-month periods ended June 30, 2005 and 2004:
Three Months Ended June 30, | ||||||||
2005 | 2004 (restated) | |||||||
(dollars in thousands) | ||||||||
Pioneer Hotel: | ||||||||
Net operating revenues | $ | 7,574 | $ | 7,855 | ||||
EBITDA: | ||||||||
Operating income / (loss) | $ | 170 | $ | (267 | ) | |||
Depreciation and amortization | 609 | 491 | ||||||
EBITDA(1) | $ | 779 | $ | 224 | ||||
Interest expense | $ | 333 | $ | 340 | ||||
Interest and other income | $ | 3 | $ | 2 | ||||
Capital expenditures / transfers | $ | 43 | $ | 105 | ||||
Investment Properties: | ||||||||
Net operating revenues | $ | 3,101 | $ | 3,101 | ||||
EBITDA: | ||||||||
Operating income | $ | 2,308 | $ | 2,308 | ||||
Depreciation and amortization | 793 | 793 | ||||||
EBITDA (1) | $ | 3,101 | $ | 3,101 | ||||
Interest expense | $ | 2,796 | $ | 2,443 | ||||
Interest and other income | $ | — | $ | — | ||||
Capital expenditures / transfers | $ | — | $ | — | ||||
Other and Eliminations: | ||||||||
Net operating revenues | $ | 299 | $ | 122 | ||||
EBITDA: | ||||||||
Operating loss | $ | (4,365 | ) | $ | (794 | ) | ||
Depreciation and amortization | 44 | 46 | ||||||
EBITDA (1) | $ | (4,321 | ) | $ | (748 | ) | ||
Interest expense | $ | (34 | ) | $ | (37 | ) | ||
Interest and other income | $ | 371 | $ | 275 | ||||
Capital expenditures / transfers | $ | 79 | $ | 17 | ||||
Total: | ||||||||
Net operating revenues | $ | 10,974 | $ | 11,078 | ||||
EBITDA: | ||||||||
Operating income (loss) | $ | (1,887 | ) | $ | 1,247 | |||
Depreciation and amortization | 1,446 | 1,330 | ||||||
EBITDA (1) | $ | (441 | ) | $ | 2,577 | |||
Interest expense | $ | 3,095 | $ | 2,746 | ||||
Interest and other income | $ | 374 | $ | 277 | ||||
Capital expenditures / transfers | $ | 122 | $ | 122 | ||||
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Nine Months Ended June 30, | ||||||||
2005 | 2004 (restated) | |||||||
(dollars in thousands) | ||||||||
Pioneer Hotel: | ||||||||
Net operating revenues | $ | 22,607 | $ | 25,302 | ||||
EBITDA: | ||||||||
Operating income | $ | 18 | $ | 665 | ||||
Depreciation and amortization | 1,886 | 1,571 | ||||||
EBITDA(1) | $ | 1,904 | $ | 2,236 | ||||
Interest expense | $ | 950 | $ | 1,960 | ||||
Interest and other income | $ | 8 | $ | 15 | ||||
Capital expenditures / transfers | $ | 141 | $ | 2,473 | ||||
Identifiable assets(2) | $ | 32,705 | $ | 36,224 | ||||
Investment Properties: | ||||||||
Net operating revenues | $ | 9,302 | $ | 9,302 | ||||
EBITDA: | ||||||||
Operating income | $ | 6,923 | $ | 6,923 | ||||
Depreciation and amortization | 2,379 | 2,379 | ||||||
EBITDA(1) | $ | 9,302 | $ | 9,302 | ||||
Interest expense | $ | 7,995 | $ | 8,004 | ||||
Interest and other income | $ | 1 | $ | — | ||||
Capital expenditures / transfers | $ | — | $ | — | ||||
Identifiable assets(2) | $ | 135,890 | $ | 139,123 | ||||
Other and Eliminations: | ||||||||
Net operating revenues | $ | 1,282 | $ | 1,018 | ||||
EBITDA: | ||||||||
Operating loss | $ | (5,604 | ) | $ | (2,605 | ) | ||
Depreciation and amortization | 146 | 256 | ||||||
EBITDA(1) | $ | (5,458 | ) | $ | (2,349 | ) | ||
Interest expense | $ | (108 | ) | $ | (38 | ) | ||
Interest and other income | $ | 1,175 | $ | 764 | ||||
Capital expenditures / transfers | $ | 280 | $ | (1,704 | ) | |||
Identifiable assets (2) | $ | 31,422 | $ | 32,816 | ||||
Total: | ||||||||
Net operating revenues | $ | 33,191 | $ | 35,622 | ||||
EBITDA: | ||||||||
Operating income | $ | 1,337 | $ | 4,983 | ||||
Depreciation and amortization | 4,411 | 4,206 | ||||||
EBITDA (1) | $ | 5,748 | $ | 9,189 | ||||
Interest expense | $ | 8,837 | $ | 9,926 | ||||
Interest and other income | $ | 1,184 | $ | 779 | ||||
Capital expenditures / transfers | $ | 421 | $ | 769 | ||||
Identifiable assets(2) | $ | 200,017 | $ | 208,163 | ||||
(1) | EBITDA represents earnings before interest, taxes, depreciation and amortization. The Company’s definition of EBITDA may not be the same as that of similarly captioned measures used by other companies. EBITDA is presented solely as a supplemental disclosure because management believes that it is (i) a widely used measure of operating performance in the gaming industry and (ii) a principal basis of valuation of gaming companies by certain analysts and investors. Management uses segment-level EBITDA as the primary measure of the Company’s business segments’ performance. EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating, investing and financing activities, which are determined in accordance with generally accepted accounting principles. |
(2) | Identifiable assets represent total assets less elimination for intercompany items. |
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ARCHON CORPORATION
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This discussion is intended to further the reader’s understanding of the consolidated financial condition and results of operations of Archon Corporation (the “Company” or “Archon”). It should be read in conjunction with the financial statements included in this quarterly report on Form 10-Q and the Company’s annual report on Form 10-K for the year ended September 30, 2004. These historical financial statements may not be indicative of the Company’s future performance.
General
Overview of Business Operations and Trends
The Company historically has owned, managed and operated hotel/casino properties through a number of acquisitions or developments, and it has subsequently divested certain of these properties. Presently, the Company operates a hotel/casino in Laughlin, Nevada, known as the Pioneer Hotel & Gambling Hall (the “Pioneer”). It also owns land in Las Vegas, Nevada on the Las Vegas Strip that it may sell or develop in the future (the “Strip Property”).
The Company’s property in Laughlin, Nevada has experienced a decrease of its revenues over the last few years after experiencing strong revenue and profit growth in the early 1990’s. Management believes the growth and expansion of casino properties on Native American lands in such locations as California and Arizona within the last several years caused revenue declines and caused the Company to focus on market definition and development in Laughlin to maintain or achieve profitability. Management believes Laughlin has now become a mature market with marginal, if any, growth forecasted for the next few years based on its current plans. Management also believes it will be necessary to make certain capital improvements to maintain its existing customer base and remain competitive in its market as evidenced by an approximate $1.0 million refurbishment to its primary restaurant facilities in late 2003.
The Company also owns two investment properties. These investment properties do not contribute significant profitability or net cash flow to the Company.
Management believes the recent revenue and expense trends in its Laughlin hotel/casino property may not change significantly over the next few years, but believes the opportunity to sell or develop its Las Vegas strip property could greatly enhance the Company’s ability to generate future profitability.
During the nine months ended June 30, 2005 and 2004, the Company incurred a net loss applicable to common shareholders of approximately $5.4 million and $3.9 million, respectively. This occurred as a result of decreased revenues and the incurrence of $3.9 million of stock-based compensation cost associated with issuance of stock options and extension of previously granted options. Management believes the decrease in revenue occurred due to competitive marketing strategies used by competitors to attract some of the Company’s local market share. The decrease in revenue was partially offset by decreased costs and expenses. Management believes marketing strategies used in the second half of calendar 2004 were unsuccessful and may have contributed to the decline in overall revenues. Management believes recent management and marketing changes may recapture some or all of the revenue decrease experienced in the nine-month period ended June 30, 2005. Management is aggressively pursuing additional strategies to regain market share but can give no assurance that this will occur. The 2005 period also includes a significant reduction in interest expense compared to the 2004 period as certain lease obligations were retired in late December 2003 and were replaced with less debt at a significantly lower cost.
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Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses Archon’s unaudited, condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to customer incentives, bad debts, inventories, investments, estimated useful lives for depreciable and amortizable assets, valuation reserves and estimated cash flows in assessing the recoverability of long-lived assets, estimated liabilities for slot club bonus point programs, income taxes, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:
Allowance for Doubtful Accounts. The Company allows for an estimated amount of receivables that may not be collected. The Company estimates our allowance for doubtful accounts using a specific formula applied to aged receivables as well as a specific review of large balances. Historical experience is considered, as are customer relationships, in determining specific reserves.
Long-Lived Assets. The Company has a significant investment in long-lived property and equipment. The Company estimates that the undiscounted future cash flows expected to result from the use of these assets exceeds the current carrying value of these assets. Any adverse change in the estimate of these undiscounted future cash flows could necessitate an impairment charge that would adversely affect operating results. The Company estimates useful lives for its assets based on historical experience, estimates of assets’ commercial lives, and the likelihood of technological obsolescence. Should the actual useful life of a class of assets differ from the estimated useful life, the Company would record an impairment charge. The Company reviews useful lives and obsolescence and assesses commercial viability of these assets periodically.
Income Taxes. The Company has recorded deferred tax assets related to net operating assets as the Company is able to offset its assets generated from operating losses with its deferred tax liabilities. Realization of the net deferred tax assets is dependent on the Company’s ability to generate profits from operations or from the sale of long-lived assets that would reverse the temporary differences that established the deferred tax liabilities. There can be no assurance that the Company will generate profits from operations or sell those assets or will generate profits from sales if they were to occur in the future. In the event the Company does generate profits from sales of long-lived assets in the future, a valuation allowance would need to be recorded and would impact the Company’s future results of operations.
Results of Operations – Nine Months Ended June 30, 2005 and 2004
Consolidated
Net Operating Revenues. Consolidated net operating revenues for the nine months ended June 30, 2005 were $33.2 million, a $2.4 million, or 6.8%, decrease from $35.6 million for the nine months ended June 30, 2004. Income from the investment properties was $9.3 million in each of the nine months ended June 30, 2005 and 2004. Net revenues decreased $2.7 million to $22.6 million at the Pioneer Hotel and Gambling Hall (the “Pioneer”) for the nine months ended June 30, 2005 compared to the nine months ended June 30, 2004. Archon Sparks Management Company (“ASMC”), which began operating Duke’s Casino in February 2003 and closed on December 31, 2003, had net revenues of approximately $0 and $0.4 million during the nine months ended June 30, 2005 and 2004,
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respectively. Sahara Las Vegas Corp (“SLVC”) had net revenues of approximately $1.1 million and $0.4 million during the nine months ended June 30, 2005 and 2004, respectively.
Operating Expenses. Total operating expenses increased approximately $1.2 million, or 4.0%, to $31.9 million for the nine months ended June 30, 2005 from $30.6 million for the nine months ended June 30, 2004. Total operating expenses as a percentage of revenue increased to 96.0% in the current year period from 86.0% in the prior year period. Operating expenses decreased by $2.0 million, or 8.3%, at the Pioneer, due primarily to employee headcount reductions throughout 2004, and increased by $4.1 million in general corporate and other expenses. The increase in corporate expenses was primarily due to increased compensation expense from stock option transactions. ASMC had operating expenses of $0 and $0.8 million for the nine months ended June 30, 2005 and 2004, respectively.
Operating Income (Loss). Consolidated operating income was $1.3 million and $5.0 million for the nine months ended June 30, 2005 and June 30, 2004, respectively. Operating income of $6.9 million for each of the nine-month periods ended June 30, 2005 and 2004 is attributable to the investment properties. Operating income decreased by $0.6 million at the Pioneer to an operating income of less than $0.1 million. The operating losses at corporate and SLVC totaled approximately $5.6 million for the nine months ended June 30, 2005, an increased loss of approximately $3.4 million from the prior year period. ASMC also had an operating loss of $0 and $0.4 million during the nine months ended June 30, 2005 and 2004, respectively.
Interest Expense. Consolidated interest expense for the nine months ended June 30, 2005 was $8.8 million, a $1.1 million decrease compared to $9.9 million for the nine months ended June 30, 2004. The decrease was primarily due (i) to the retirement of certain lease obligations at the Pioneer and the replacement thereof with lower cost debt during the nine months ended June 30, 2004, and (ii) to reduced amounts of non-recourse debt in the 2005 period.
Interest and Other Income. Consolidated interest and other income for the nine months ended June 30, 2005, was $1.2 million, a $0.4 million increase compared to $0.8 million for the nine months ended June 30, 2004, due principally to a sale of certain utility rights for approximately $0.3 million in the 2005 period.
Loss on Sale/Disposal of Assets.During the nine months ended June 30, 2005, the Company disposed of certain older slot machines no longer deemed useful and incurred a loss with the disposal of approximately $0.2 million. No such charges were incurred in the 2004 period.
Loss Before Income Tax. Consolidated loss before income tax for the nine months ended June 30, 2005 was $6.6 million, a $2.4 million increase compared to $4.2 million for the nine months ended June 30, 2004.
Federal Income Tax. The Company recorded a federal income tax benefit of $2.3 million for the nine months ended June 30, 2005 and $1.4 million for the nine months ended June 30, 2004, based on statutory income tax rates.
Preferred Share Dividends. Undeclared preferred share dividends are not recorded in the stockholders’ equity section of the balance sheet as the Company may elect at its sole discretion to redeem its preferred stock. However, dividends of approximately $1.1 million for the nine-month period ended June 30, 2005 and $1.2 million for the nine-month period ended June 30, 2004 were accrued on the preferred stock for purposes of calculating net loss applicable to common shares.
Net Loss. Consolidated net loss attributable to common shares was $5.4 million, or $0.87 per common share, for the nine months ended June 30, 2005 compared to net loss attributable to common shares of $3.9 million, or $0.63 per common share, for the nine months ended June 30, 2004.
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Pioneer
Net Operating Revenues. Net operating revenues at the Pioneer decreased $2.7 million, or 10.7%, to $22.6 million in the nine months ended June 30, 2005 from $25.3 million in the nine months ended June 30, 2004.
Casino revenues decreased $3.0 million, or 14.1%, to $18.4 million in the nine months ended June 30, 2005 from $21.4 million in the nine months ended June 30, 2004. Slot and video poker revenues decreased $2.2 million, or 11.5%, to $16.6 million in the nine months ended June 30, 2005 from $18.8 million in the nine months ended June 30, 2004. Management believes this decrease was a result of the loss of market share to other casino properties in the 2005 period. Other gaming revenues, including table games, decreased $0.8 million, or 32.1%, to $1.8 million in the nine months ended June 30, 2005 from $2.6 million in the nine months ended June 30, 2004. Casino promotional allowances decreased $1.8 million, or 30.1%, to $4.3 million in the nine months ended June 30, 2005 from $6.1 million in the nine months ended June 30, 2004 primarily due to the aforementioned decline in slot, video poker and other gaming revenues.
Hotel revenues decreased approximately $0.3 million, or 11.1%, to approximately $2.1 million for the nine months ended June 30, 2005 from approximately $2.3 million for the nine months ended June 30, 2004, caused by a decrease in occupancy rate to 57.3% from 70.3%, which was due to the decrease in casino promotional allowances. Food and beverage revenues decreased $1.2 million, or 18.9%, to $5.3 million for the nine months ended June 30, 2005 compared to $6.5 million in the nine months ended June 30, 2004, primarily due to the decrease in casino promotional allowances. Other revenues were unchanged at $1.1 million for the nine months ended June 30, 2005 and 2004.
Operating Expenses. Operating expenses decreased $2.0 million, or 8.3%, to $22.6 million in the nine months ended June 30, 2005 from $24.6 million in the nine months ended June 30, 2004. Operating expenses as a percentage of revenue increased to 99.9% in the current year period from 97.4% in the prior year period.
Casino expenses decreased $1.9 million, or 16.4%, to $9.8 million in the nine months ended June 30, 2005 from $11.7 million in the nine months ended June 30, 2004, primarily due to the decrease in casino promotional allowances. Casino expenses as a percentage of casino revenues decreased to 53.0% in the current year period from 54.4% in the prior year period.
Hotel expenses increased $0.3 million, or 57.0%, to $0.8 million in the nine months ended June 30, 2005 from $0.5 million in the nine months ended June 30, 2004. Due to the decrease in casino promotional allowances, the hotel department received a $0.4 million decreased expense transfer to the casino department. Food and beverage expenses were $3.2 million in the nine months ended June 30, 2005 compared to $3.3 million in the nine months ended June 30, 2004. Due to the decrease in casino promotional allowances, the food and beverage department received a $1.1 million decreased expense transfer to the casino department. Food and beverage expenses as a percentage of food and beverage revenues increased to 60.1% in the current year period from 49.4% in the prior year period. Other expenses were $0.8 million for the nine months ended June 30, 2005 and June 30, 2004.
Selling, general and administrative expenses decreased approximately $0.3 million, or 7.5%, to $3.4 million for the nine months ended June 30, 2005 from $3.6 million for the nine months ended June 30, 2004. Selling, general and administrative expenses as a percentage of revenues increased to 14.9% in the current year period from 14.4% in the prior year period. Utilities and property expenses decreased $0.4 million, or 11.9%, to $2.8 million in the nine months ended June 30, 2005 from $3.2 million in the nine months ended June 30, 2004, due to a decrease in rent expense. Utilities and property expenses as a percentage of revenues decreased to 12.5% in the current year period from 12.6% in the prior year period. Depreciation and amortization expenses increased $0.3 million, or 20.0%, to $1.9 million in the nine months ended June 30, 2005 from $1.6 million in the nine months ended June 30, 2004.
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Results of Operations – Three Months Ended June 30, 2005 and 2004
Consolidated
Net Operating Revenues. Consolidated net operating revenues for the quarter ended June 30, 2005 were $11.0 million, a $0.1 million, or 0.9%, decrease from $11.1 million for the quarter ended June 30, 2004. Income from the investment properties was $3.1 million in each of the quarters ended June 30, 2005 and 2004. Revenues decreased $0.3 million, or 3.6%, at the Pioneer. SLVC had net revenues of approximately $0.3 million and $0.1 million during the three months ended June 30, 2005 and 2004, respectively.
Operating Expenses. Total operating expenses increased approximately $3.0 million, or 30.8%, to $12.9 million for the quarter ended June 30, 2005 from $9.8 million for the quarter ended June 30, 2004. Total operating expenses as a percentage of revenue increased to 117.2% for the current year quarter from 88.7% for the prior year quarter. Operating expenses decreased by $0.7 million, or 8.8%, at the Pioneer due primarily to employee headcount reductions throughout the 2004 and 2005 periods. and increased by $3.7 million at corporate and SLVC due primarily to increased compensation expense from stock option transactions.
Operating Income (Loss). Condensed consolidated operating loss for the quarter ended June 30, 2005 was $1.9 million, a change of $3.1 million from condensed consolidated operating income of $1.2 million for the quarter ended June 30, 2004. Operating income of $2.3 million for each of the three-month periods ended June 30, 2005 and 2004 is attributable to the investment properties. Operating income increased by $0.4 million at the Pioneer to $0.2 million and decreased by $3.6 million at corporate and SLVC.
Interest Expense. Consolidated interest expense for the three months ended June 30, 2005 was $3.1 million, an approximately $0.3 million increase compared to $2.7 million for the three months ended June 30, 2004.
Interest and Other Income. Consolidated interest and other income for the three months ended June 30, 2005, was $0.4 million, a $0.1 million increase compared to $0.3 million for the three months ended June 30, 2004, due principally to a gain on sales of certain securities of approximately $0.1 million in the 2005 period.
Loss Before Income Tax. Consolidated loss before income tax for the quarter ended June 30, 2005 was $4.6 million, approximately a $3.4 million increased loss compared to $1.2 million for the quarter ended June 30, 2004.
Federal Income Tax. The Company recorded a federal income tax benefit of $1.6 million for the quarter ended June 30, 2005 compared to $0.4 million benefit for the quarter ended June 30, 2004 based on statutory income tax rates.
Preferred Share Dividends. Undeclared preferred share dividends are not recorded in the stockholders’ equity section of the balance sheet as the Company may elect at its sole discretion to redeem its preferred stock. However, dividends of approximately $0.4 million for each of the three-month periods ended June 30, 2005 and 2004 were accrued on the preferred stock for purposes of calculating net loss applicable to common shares.
Net Loss. Consolidated net loss attributable to common shares was $3.4 million, or $0.54 per common share, for the quarter ended June 30, 2005 compared to net loss attributable to common shares of $1.2 million, or $0.19 per common share, for the quarter ended June 30, 2004.
Pioneer
Net Operating Revenues. Net operating revenues at the Pioneer decreased $0.3 million, or 3.6%, to $7.6 million in the three months ended June 30, 2005 from $7.9 million in the three months ended June 30, 2004.
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Casino revenues decreased approximately $0.4 million, or 7.1%, to $5.8 million in the three months ended June 30, 2005 from $6.3 million in the three months ended June 30, 2004. Slot and video poker revenues decreased approximately $ 0.2 million, or 4.1%, to $5.2 million in the three months ended June 30, 2005 from $5.5 million in the three months ended June 30, 2004. Management believes this decrease was a result of the loss of market share to other casino properties in the 2005 period. Other gaming revenues, including table games, decreased $0.2 million, or 26.3%, to $0.6 million in the three months ended June 30, 2005 from $0.8 million in the three months ended June 30, 2004. Casino promotional allowances decreased $0.5 million, or 29.1%, to $1.3 million in the three months ended June 30, 2005 from $1.8 million in the three months ended June 30, 2004 primarily due to the aforementioned decline in slot and video poker revenues.
Hotel revenues were relatively unchanged at $0.8 million for the three months ended June 30, 2005. A decrease in occupancy rate to 57.7% from 71.1%, which was due to the decrease in casino promotional allowances, was offset by an increase in cash revenues and an increase in the average room rate. Food and beverage revenues decreased $0.3 million, or 14.3%, to $1.8 million for the three months ended June 30, 2005 compared to $2.1 million in the three months ended June 30, 2004, primarily due to the decrease in casino promotional allowances. Other revenues were unchanged at $0.4 million for the three months ended June 30, 2005 and 2004.
Operating Expenses. Operating expenses decreased $0.7 million, or 8.8%, to $7.4 million in the three months ended June 30, 2005 from $8.1 million in the three months ended June 30, 2004. Operating expenses as a percentage of revenue decreased to 97.8% in the current year period from 103.4% in the prior year period.
Casino expenses decreased $0.6 million, or 16.0%, to $3.0 million in the three months ended June 30, 2005 from $3.6 million in the three months ended June 30, 2004, primarily due to the decrease in casino promotional allowances. Casino expenses as a percentage of casino revenues decreased to 51.6% in the current year period from 57.1% in the prior year period.
Hotel expenses increased $0.1 million, or 49.2%, to $0.3 million in the three months ended June 30, 2005 from $0.2 million in the three months ended June 30, 2004. Due to the decrease in casino promotional allowances, the hotel department received a $0.1 million smaller expense transfer to the casino department. Food and beverage expenses decreased approximately $0.1 million, or 9.2%, to $1.1 million in the three months ended June 30, 2005 from $1.3 million in the three months ended June 30, 2004. Due to the decrease in casino promotional allowances, the food and beverage department received a $0.3 million smaller expense transfer to the casino department. Food and beverage expenses as a percentage of food and beverage revenues increased to 64.2% in the current year period from 60.6% in the prior year period. Other expenses were $0.3 million for the three months ended June 30, 2005 and June 30, 2004. Other expenses as a percentage of other revenues increased to 83.3% in the current year period from 63.6% in the prior year period.
Selling, general and administrative expenses decreased $0.1 million, or 9.9%, to $1.1 million for the three months ended June 30, 2005 from $1.2 million for the three months ended June 30, 2004. Selling, general and administrative expenses as a percentage of revenues decreased to 14.5% in the current year period compared to 15.6% in the prior year period. Utilities and property expenses decreased $0.2 million, or 16.7%, to $0.9 million in the three months ended June 30, 2005 from $1.1 million in the three months ended June 30, 2004, mainly due to a decrease in rent expense. Utilities and property expenses as a percentage of revenues decreased to 12.0% in the current year period from 13.9% in the prior year period. Depreciation and amortization expenses increased $0.1 million, or 24.2%, to $0.6 million in the three months ended June 30, 2005 from $0.5 million in the three months ended June 30, 2004.
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Liquidity and Capital Resources; Trends and Factors Relevant to Future Operations
Contractual Obligations and Commitments: The following table summarizes the Company’s fiscal year contractual obligations and commitments as of June 30, 2005 (for the three-month period ending September 30, 2005 and for the fiscal years ending September 30, 2006, 2007, 2008, 2009, 2010, and 2011 and thereafter.)
Payments Due By Periods(1) | 2011 and Thereafter | Total | ||||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Non-recourse debt: | ||||||||||||||||||||||||
Gaithersburg | $ | 437 | $ | 1,915 | $ | 2,195 | $ | 2,490 | $ | 2,828 | $ | 3,186 | $ | 37,116 | $ | 50,167 | ||||||||
Sovereign | 0 | 0 | 0 | 0 | 0 | 0 | 31,199 | 31,199 | ||||||||||||||||
Debt: | ||||||||||||||||||||||||
Building | 18 | 80 | 14 | 0 | 0 | 0 | 0 | 112 | ||||||||||||||||
Equipment | 187 | 603 | 415 | 53 | 0 | 0 | 0 | 1,258 | ||||||||||||||||
Mortgage obligation | 12,198 | 0 | 0 | 0 | 0 | 0 | 0 | 12,198 | ||||||||||||||||
Other | 674 | 0 | 0 | 0 | 0 | 0 | 0 | 674 | ||||||||||||||||
Operating leases: | ||||||||||||||||||||||||
Ground lease | 76 | 302 | 302 | 302 | 302 | 302 | 20,648 | 22,234 | ||||||||||||||||
Corp. offices | 39 | 100 | 22 | 0 | 0 | 0 | 0 | 161 | ||||||||||||||||
Total | $ | 13,629 | $ | 3,000 | $ | 2,948 | $ | 2,845 | $ | 3,130 | $ | 3,488 | $ | 88,963 | $ | 118,003 | ||||||||
(1) | Expected cash interest payments are $1.1 million, $8.2 million, $7.4 million, $7.0 million, $6.8 million, $6.6 million and $46.3 million for the three months ending September 30, 2005, the fiscal years ending September 30, 2006, 2007, 2008, 2009, 2010, and 2011 and thereafter, respectively. |
The Company has no significant purchase commitments or obligations other than those included in the above schedule.
The Company has a financial covenant related to its outstanding long-term debt with a certain lender. This covenant requires the Company to maintain a minimum ratio of earnings before interest, taxes, depreciation and amortization, net of investment properties, compared to current portions of long-term debt, excluding investment properties, as defined. At June 30, 2005, the Company was not in compliance with this covenant and, as such, was technically in default under the debt agreement. Management believes it is not the intention of the lender to declare a default relative to this covenant. Because of the technical default, the Company has included all amounts owing under the debt agreement (approximately $12.2 million at June 30, 2005), in the current portion of long-term debt in the Company’s condensed consolidated financial statements. Management believes the Company has sufficient assets to meet any unforeseen demands on current operations or significant debt obligations.
The Company’s ability to service its contractual obligations and commitments, other than the non-recourse debt, will be dependent on the future performance of the Pioneer, which will be affected by, among other things, prevailing economic conditions and financial, business and other factors, including competitive pressure from the expansion of Native American gaming facilities in the southwest United States, certain of which are beyond the Company’s control. The Company may also be required to liquidate certain of its marketable securities or long-term assets to service contractual obligations, commitments and operating costs. In addition, the Company will be dependent on the continued ability of the tenants in the investment properties in Gaithersburg, Maryland and Dorchester, Massachusetts to make payments pursuant to the leases with the Company. The payments under the
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leases are contractually committed to be used to make payments on the Company’s non-recourse debt obligations related to the properties.
Liquidity. As of June 30, 2005 and September 30, 2004, the Company held cash and cash equivalents of $2.4 million and $3.4 million, respectively. The Company had $7.0 million in investments in marketable securities at June 30, 2005 compared to $5.4 million at September 30, 2004. Certain amounts of debt were reduced during the nine months ended June 30, 2004 by utilizing certain marketable securities and approximately $0.9 million of additional marketable securities were acquired during the nine months ended June 30, 2005 by incurring new debt of approximately $0.9 million. The investment properties are structured such that future tenants’ payments cover future required mortgage payments including balloon payments. Management believes that the Company will have sufficient available cash and cash resources to meet its cash requirements for a reasonable period of time.
Cash Flows from Operating Activities. The Company’s cash provided by operating activities was $30.5 million for the nine months ended June 30, 2005 as compared to $4.6 million for the nine months ended June 30, 2004. This increase of approximately $26 million was primarily due to cash received from a significant rent receivable as required under the debt agreement of approximately $25.7 million on non-recourse debt obligations within the period.
Cash Flows from Investing Activities. Cash used in investing activities was $1.3 million for the nine months ended June 30, 2005, as compared to cash provided by investing activities of $15.8 million for the nine months ended June 30, 2004. The decrease was caused principally by the usage of restricted cash and marketable securities of approximately $16.5 million in the prior year period to acquire certain assets of the Pioneer. The restricted cash and marketable securities were used to fund, in part, the purchase of property subject to certain lease obligations as described below. During the nine months ended June 30, 2005, the Company used cash for capital expenditures and the acquisition of certain marketable securities.
Cash Used in Financing Activities. Cash used in financing activities was $30.3 million for the nine months ended June 30, 2005 as compared to $21.6 million for the nine months ended June 30, 2004. For the nine months ended June 30, 2005 and 2004, the Company repaid $31.1 million and $45.0 million, respectively, of debt and obligations under lease, including a significant principal payment of approximately $25.7 million in June 2005. For the nine months ended June 30, 2004, the Company received $4.9 million from a note receivable and $18.0 million of proceeds from a loan in order to acquire certain assets and retire lease obligations at the Pioneer.
The Company’s primary source of operating cash is from operations of the Pioneer and from interest income on available cash and cash equivalents and investments in marketable securities. Rental income from the Company’s two investment properties is contractually committed to reducing the non-recourse indebtedness issued or assumed in connection with the acquisition of the investment properties. Under the two leases, the tenants are responsible for substantially all obligations related to the property. Sahara Las Vegas Corp. (“SLVC”), an indirect wholly-owned subsidiary of the Company, owns an approximately 27-acre parcel of real property on Las Vegas Boulevard South which is subject to a lease with a condominium developer. SLVC generates minimal cash from the lease agreement after payment of property taxes.
Throughout the latter half of calendar 2004, the Company financed certain legal costs associated with certain arbitration between Duke’s LLC and a general contractor. Christopher Lowden, son of Paul W. Lowden, is a limited partner in Duke’s LLC which was the managing member of Duke’s Casino, a casino managed and operated by a subsidiary of the Company. The Company had previously written-off its investment in and receivables from Duke’s LLC, related to the operation of Duke’s Casino, of approximately $1.4 million in the fiscal year ended September 30, 2003. In January 2005, the American Arbitration Association awarded Duke’s LLC approximately $4.9 million against the general contractor of a casino renovation at Duke’s Casino. The Company has an agreement with Duke’s LLC whereby the Company is to be reimbursed for legal and other costs related to the arbitration as well as recovery of amounts previously written-off, which in total may exceed $2 million. However, due to various contingencies surrounding the enforcement, collection or settlements with Duke’s LLC and the general contractor, management can give no assurance of the timing or the amount it will ultimately receive.
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Pioneer
Pioneer’s principal uses of cash are for payments of slot machine debt obligations, ground lease rent and capital expenditures to maintain the facility. The Company has implemented changes in personnel and promotional programs and installed new slot equipment to address the decreases in revenues and operating income. One of management’s main focuses is to recapture market share in the Laughlin market. Management, however, can give no assurance that market share will be recaptured in its Laughlin market as its competition in the market typically has greater capital resources than does the Pioneer.
Payments of obligations under lease were $0 and $0.9 million for the nine months ended June 30, 2005 and 2004, respectively, and rent expense was approximately $0.2 million and $0.6 million for the nine months ended June 30, 2005 and 2004, respectively. Capital expenditures to maintain the facility in fiscal 2005 are expected to be less than $1.0 million.
Preferred Stock
The Company’s preferred stock provides that dividends accrue on a semi-annual basis, to the extent not declared. Prior to fiscal 1997, the Company satisfied the semiannual dividend payments on its preferred stock through the issuance of paid-in-kind dividends. The Company has not declared the semiannual preferred stock dividends since October 1, 1996. The dividend rate per annum was equal to 8% of $2.14 for each share of preferred stock until September 30, 1998, at which date the dividend rate increased to 11%; the dividend rate continued to increase by an additional 50 basis points on each succeeding semiannual dividend payment date up to a maximum of 16.0% per annum. In October 2003, the dividend rate increased to 16.0%. As of June 30, 2005, the aggregate liquidation preference of the preferred stock was approximately $19.6 million, or $4.41 per share.
Pursuant to the Certificate of Designation of Preferred Stock, dividends are payable only when, as and if declared by the Board of Directors and the liquidation preference is payable only upon a liquidation, dissolution or winding up of the Company. Because dividends in an amount equal to dividend payments for one dividend period have accrued and remain unpaid for at least two years, the preferred stockholders, voting as a separate class, are entitled to elect two directors. As such, two of the Company’s six directors have been elected by the preferred shareholders.
The Board of Directors of the Company authorized an increase in the amount of cash that may be used to purchase preferred stock to $2.5 million. As of August 12, 2005, the Company had purchased 966,800 shares of preferred stock for approximately $1.7 million under this program. During the nine months ended June 30, 2005, the Company purchased approximately 79,000 shares for approximately $0.3 million.
Recently Issued Accounting Standards
The Company keeps abreast of new generally accepted accounting principles and disclosure reporting requirements issued by the SEC and other standard setting agencies. Recently issued accounting standards are noted in Note 1 of our Unaudited Condensed Consolidated Financial Statements.
Effects of Inflation
The Company has been generally successful in recovering costs associated with inflation through price adjustments in its hotel. Any such future increases in costs associated with casino operations and maintenance of properties may not be completely recovered by the Company.
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Private Securities Litigation Reform Act
Certain statements in this Quarterly Report on Form 10-Q which are not historical facts are forward-looking statements, such as statements relating to future operating results, existing and expected competition, financing and refinancing sources and availability and plans for future development or expansion activities, capital expenditures and expansion of business operations into new areas. Such forward-looking statements involve a number of risks and uncertainties that may significantly affect the Company’s liquidity and results in the future and, accordingly, actual results may differ materially from those expressed in any forward looking statements. Such risks and uncertainties include, but are not limited to, those related to effects of competition, leverage and debt service, general economic conditions, changes in gaming laws or regulations (including the legalization of gaming in various jurisdictions) and risks related to development activities and the startup of non-gaming operations.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk is the risk of loss arising from changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity process. Excluding its non-recourse debt, the Company has total interest-bearing debt at June 30, 2005 of approximately $14.2 million, of which approximately $12.9 million bears interest at a variable rate (approximately 7.0% at June 30, 2005). Therefore, the Company maintains certain market rate risk related to this debt. A change in the interest rates of 1% would cause an approximate $129,000 change in the amount of interest the Company would incur based on the amount of variable-interest rate debt outstanding for any current or future year in which this debt is outstanding. Future borrowings related to this debt will be exposed to this same market rate risk.
The Company holds investments in various available-for-sale securities; however, management believes that exposure to price risk arising from the ownership of these investments is not material to the Company’s consolidated financial position, results of operations or cash flow as historically price fluctuations of these securities have not been material.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that Archon’s disclosure controls and procedures are effective. However, it has been concluded that the Company’s failure to determine that it was in technical default of a loan agreement during the period covered by this report (as described in Note 5 to the Financial Statements in Item 1 of Part 1 and Management’s Discussion and Analysis in Item 2 of Part 1 above) constitutes a material weakness in
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our internal control over financial reporting. A material weakness, as defined by the Public Company Accounting Oversight Board, is a reportable condition in which the design or operation of one or more elements of the internal control structure does not sufficiently reduce the risk of material errors and irregularities occurring and not being timely detected.
As part of our normal operations, we update our internal controls as necessary to accommodate any modifications to our business processes or accounting procedures. There have not been any other changes in our internal controls or in other factors that materially affected, or are reasonably likely to materially affect these controls as of the end of the period covered by this report, except as noted below.
Our previous independent accountants noted a significant deficiency in the design or operation of the Company’s internal control that could adversely affect the Company’s ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. Specifically, it was noted the Company did not have a documented process in place for its financial closing and reporting process and for research and conclusions on unusual transactions. It also appeared to our previous independent accountants that detailed reviews of significant balance sheet accounts by individuals independent of the preparer and supporting analyses were not performed.
Management of the Company has reviewed these items noted by our previous independent accountants with the Audit Committee of the Board and has implemented procedures and plans to document its financial closing and reporting processes and the research and conclusions on unusual transactions. Additionally, the Company is ensuring that detailed reviews of significant balance sheet accounts and supporting analyses are performed by individuals independent of the preparer.
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ARCHON CORPORATION
PART II – OTHER INFORMATION
Item 1. | Legal Proceedings |
None
Item 2. | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
The table below sets forth information regarding repurchases of Archon preferred stock during the three months ended June 30, 2005.
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||
April 2005: | ||||||||||
April 1, 2005 through April 30, 2005 | 0 | $ | 0.00 | 879,559 | $ | 1,093,601 | ||||
May 2005: | ||||||||||
May 1, 2005 through May 31, 2005 | 0 | $ | 0.00 | 879,559 | $ | 1,093,601 | ||||
June 2005: | ||||||||||
June 1, 2005 through June 30, 2005 | 79,132 | $ | 3.90 | 958,691 | $ | 785,328 | ||||
All shares of preferred stock were purchased pursuant to a $2,500,000 stock repurchase program which was previously approved by our Board of Directors. Funds are available until expended or until the program is suspended by the Chief Executive Officer or by the Board of Directors.
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Item 3. | Defaults Upon Senior Securities |
The Company has outstanding redeemable exchangeable cumulative preferred stock (“Preferred Stock”). Prior to fiscal 1997, the Company satisfied the semi-annual dividend payments on its Preferred Stock through the issuance of paid in kind dividends. Commencing in fiscal 1997, dividends paid on the Preferred Stock, to the extent declared, must be paid in cash. No dividends have been declared on the Preferred Stock since October 1, 1996. Pursuant to the terms of the Certificate of Designation with respect to the Preferred Stock, dividends that are not declared are cumulative and accrue. The dividend rate per annum was equal to 8% of $2.14 for each share of preferred stock until September 30, 1998, at which date the dividend rate increased to 11% and the dividend continued to increase by an additional 50 basis points on each succeeding semi-annual dividend payment date up to a maximum of 16% per annum. The dividend rate is 16% effective October 1, 2003. The accrued stock dividends have not been recorded as an increase to the Preferred Stock account. As of June 30, 2005, the aggregate liquidation preference of the Preferred Stock was approximately $19.6 million, or $4.41 per share.
Item 4. | Submission of Matters to a Vote of Security Holders |
None
Item 5. | Other Information |
On June 22, 2005, the compensation committee of the Board of Directors of Archon Corporation met and determined that the stock option award granted to Christopher Lowden and David Lowden should be priced based on the closing market price of the Company’s common stock on April 18, 2005, the first business date following the grant of the stock option award.
Item 6. | Exhibits |
a. | Exhibits. |
Exhibit Number | Description of Exhibit | |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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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 thereunto duly authorized.
ARCHON CORPORATION, | ||
Registrant | ||
By: | /s/ Paul W. Lowden | |
Paul W. Lowden | ||
Chairman of the Board and | ||
Chief Executive Officer | ||
By: | /s/ John M. Garner | |
John M. Garner, | ||
Chief Financial Officer |
Date: August 15, 2005
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