SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 2001
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[_] 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
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ARCHON CORPORATION
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(Exact name of registrant as specified in its charter)
Nevada 88-0304348
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
3993 Howard Hughes Parkway, Suite 630, Las Vegas, Nevada 89109
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(Address of principal executive office and zip code)
(702) 732-9120
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(Registrant's telephone number, including area code)
Santa Fe Gaming Corporation, 4336 Losee Rd, Unit 9, North Las Vegas,
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Nevada 89030
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(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
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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.
6,206,856 as of May 14, 2001
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ARCHON CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1 Consolidated Condensed Financial Statements
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 2001 (UNAUDITED) and
September 30, 2000..................................................... 2
CONSOLIDATED CONDENSED STATEMENTS OF
OPERATIONS (UNAUDITED) for the three and six
months ended March 31, 2001 and 2000.................................. 3
CONSOLIDATED CONDENSED STATEMENT OF
STOCKHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED) for the six months ended
March 31, 2001......................................................... 4
CONSOLIDATED CONDENSED STATEMENTS OF CASH
FLOWS (UNAUDITED) for the six months ended
March 31, 2001 and 2000................................................ 5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (UNAUDITED)................................................. 6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 16
ITEM 3 Market Risk Disclosure ................................................................. 26
PART II. OTHER INFORMATION................................................................. 27
1
Archon Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
March 31, September 30,
ASSETS 2001 2000
- ------------------------------------------------- -------------------- -------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 26,663,108 $ 6,986,984
Investment in marketable securities 3,385,836 549,446
Restricted cash 15,000,000 0
Accounts receivable, net 7,354,433 1,070,242
Inventories 553,028 769,218
Prepaid expenses and other 2,335,385 3,000,170
Assets held for sale 0 63,497,055
-------------------- -------------------
Total current assets 55,291,790 75,873,115
Land held for development 23,109,400 23,109,400
Property and equipment, net 32,786,088 34,629,736
Rental property held for investment, net 144,795,678 0
Deferred income taxes 0 10,982,007
Other assets 3,996,780 1,001,612
-------------------- -------------------
Total assets $ 259,979,736 $ 145,595,870
==================== ===================
LIABILITIES and STOCKHOLDERS' EQUITY (DEFICIENCY)
- -------------------------------------------------
Current liabilities:
Accounts payable $ 1,362,956 $ 2,441,253
Interest payable 2,337,628 4,178,684
Accrued and other liabilities 3,669,475 6,287,287
Note payable - officer 0 1,500,000
Debt to be paid upon sale of assets 0 174,894,440
Current portion of long-term debt 65,979 72,685
Current portion of non-recourse debt 4,811,866 0
-------------------- -------------------
Total current liabilities 12,247,904 189,374,349
Long-term debt - less current portion 317,464 349,801
Non-recourse debt - less current portion 127,877,509 0
Obligation under lease 33,741,259 0
Deferred income taxes 36,809,051 0
Other liabilities 474,353 0
Minority interest 100,000 0
Stockholders' equity (deficiency) 48,412,196 (44,128,280)
-------------------- -------------------
Total liabilities and stockholders' equity (deficiency) $ 259,979,736 $ 145,595,870
==================== ===================
See the accompanying Notes to Unaudited Consolidated Condensed Financial
Statements.
2
Archon Corporation and Subsidiaries
Consolidated Condensed Statements of Operations
(Unaudited)
Three Months Six Months
Ended March 31, Ended March 31,
2001 2000 2001 2000
------------- -------------- -------------- --------------
Revenues:
Casino $ 9,629,403 $ 27,520,148 $ 17,815,228 $ 53,117,671
Hotel 678,061 1,449,393 1,202,423 2,829,309
Food and beverage 2,270,113 5,900,837 4,344,339 11,442,079
Other 2,510,806 3,791,408 4,161,291 7,545,136
----------- ------------ ------------ ------------
Gross revenues 15,088,383 38,661,786 27,523,281 74,934,195
Less casino promotional allowances (2,128,915) (4,037,930) (4,083,907) (7,934,899)
----------- ------------ ------------ ------------
Net operating revenues 12,959,468 34,623,856 23,439,374 66,999,296
----------- ------------ ------------ ------------
Operating expenses:
Casino 4,580,802 11,351,639 8,912,054 22,899,643
Hotel 180,496 479,323 353,618 945,903
Food and beverage 1,085,952 3,810,771 2,114,323 7,545,561
Other 890,970 2,756,634 1,919,346 5,725,511
Selling, general and administrative 1,382,487 3,284,590 3,117,524 6,993,897
Corporate expenses 692,758 718,028 1,384,281 1,449,129
Utilities and property expenses 1,368,364 2,584,698 2,499,641 6,246,128
Depreciation and amortization 770,641 2,635,673 1,602,144 5,902,373
Reorganization expenses 0 528,343 0 1,405,109
----------- ------------ ------------ ------------
Total operating expenses 10,952,470 28,149,699 21,902,931 59,113,254
----------- ------------ ------------ ------------
Operating income 2,006,998 6,474,157 1,536,443 7,886,042
Interest expense (1,422,925) (5,044,808) (1,906,291) (11,459,151)
Gain on sale of assets 0 0 137,238,005 12,098,609
Litigation settlement, net 3,693,778 0 3,693,778 0
----------- ------------ ------------ ------------
Income before income tax expense
and extraordinary item 4,277,851 1,429,349 140,561,935 8,525,500
Federal income tax expense 1,454,469 0 47,791,058 0
----------- ------------ ------------ ------------
Income before extraordinary item 2,823,382 1,429,349 92,770,877 8,525,500
Extraordinary item-gain
on early extinguishment of debt,
net of tax provision of $0 0 703,713 0 2,774,280
----------- ------------ ------------ ------------
Net income 2,823,382 2,133,062 92,770,877 11,299,780
Dividends accrued on preferred shares, net (597,932) (568,597) (1,210,372) (1,137,194)
----------- ------------ ------------ ------------
Net income applicable to common shares $ 2,225,450 $ 1,564,465 $ 91,560,505 $ 10,162,586
=========== ============ ============ ============
Average common shares outstanding 6,205,545 6,195,356 6,204,633 6,195,356
=========== ============ ============ ============
Extraordinary item, net of tax
provision per common share
Basic $ 0.00 $ 0.11 $ 0.00 $ 0.45
=========== ============ ============ ============
Diluted $ 0.00 $ 0.10 $ 0.00 $ 0.41
=========== ============ ============ ============
Income per common share
Basic $ 0.36 $ 0.25 $ 14.76 $ 1.64
=========== ============ ============ ============
Diluted $ 0.33 $ 0.23 $ 13.42 $ 1.49
=========== ============ ============ ============
See the accompanying Notes to Unaudited Consolidated Condensed Financial
Statements.
3
Archon Corporation and Subsidiaries
Consolidated Condensed Statements of Stockholders' Equity (Deficiency)
(Unaudited)
Common Preferred Additional Accumulated Treasury
Stock Stock Paid-in Capital Deficit Stock Total
---------- -------------- ----------------- ---------------- ----------- ---------------
Balances, October 1, 2000 $ 62,004 $ 26,439,760 $ 51,520,954 $ (122,063,224) $ (87,774) $ (44,128,280)
Net income 92,770,877 92,770,877
Preferred stock 0
dividends accrued, net 1,210,372 (1,210,372) 0
Preferred stock retired (463,318) 224,917 (238,401)
Stock options exercised 65 7,935 8,000
-------- ------------ ------------ -------------- --------- -------------
Balances, March 31, 2001 $ 62,069 $ 27,186,814 $ 51,753,806 $ (30,502,719) $ (87,774) $ 48,412,196
======== ============ ============ ============== ========= =============
See the accompanying Notes to Unaudited Consolidated Condensed Financial
Statements.
4
Archon Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended March 31,
2001 2000
- ---------------------------------------------------------------- --------------- -------------
Cash flows from operating activities:
Cash and cash equivalents provided by (used in) operations $ (42,623,725) $ 5,214,125
Changes in assets and liabilities:
Accounts receivable, net (6,284,191) (363,641)
Inventories 216,190 (190,648)
Prepaid expenses and other 1,664,786 (295,113)
Deferred income taxes 47,791,058 0
Other assets (363,338) 878,456
Accounts payable (1,078,297) (903,513)
Interest payable (1,784,560) (3,885,132)
Accrued and other liabilities (3,391,567) (2,189,960)
------------- ------------
Net cash used in operating activities
before reorganization items (5,853,644) (1,735,426)
Reorganization expenses incurred in connection with
Chapter 11 and related legal proceedings 0 (1,405,109)
------------- ------------
Net cash used in operating activities (5,853,644) (3,140,535)
------------- ------------
Cash flows from investing activities:
Proceeds of sale of assets 207,500,000 37,126,512
Increase in restricted cash (15,000,000) 0
Cost and expenses related to sale of assets (3,691,166) 0
Capital expenditures (68,295,670) (1,056,609)
Increase in marketable securities (2,836,390) 0
Development costs 0 (25,388)
------------- ------------
Net cash provided by investing activities 117,676,774 36,044,515
------------- ------------
Cash flows from financing activities:
Non-recourse debt 55,434,006 0
Obligation under lease 32,500,000 1,000,000
Paid on long-term debt (175,256,262) (31,112,003)
Paid on note payable - officer (1,500,000) 0
Minority capital contribution 100,000 0
Preferred stock acquired (238,401) 0
Stock options exercised 8,000 0
Debt issue costs (3,194,349) (19,058)
------------- ------------
Net cash used in financing activities (92,147,006) (30,131,061)
------------- ------------
Increase in cash and cash equivalents 19,676,124 2,772,919
Cash and cash equivalents, beginning of period 6,986,984 13,710,226
------------- ------------
Cash and cash equivalents, end of period $ 26,663,108 $ 16,483,145
============= ============
See the accompanying Notes to Unaudited Consolidated Condensed Financial
Statements.
5
ARCHON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and General Information
Archon Corporation, formerly known as Santa Fe Gaming Corporation (the "Company"
or "Archon"), is a publicly traded Nevada corporation. The Company changed its
name to Archon Corporation on May 11, 2001. 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 under long-term lease and license arrangements.
In addition the Company owns real estate on Las Vegas Boulevard South (the
"Strip") and at the corner of Rainbow and Lone Mountain Road, both in Las Vegas,
Nevada, and owns investment properties in Dorchester, Massachusetts and
Gaithersburg, Maryland.
Until October 2, 2000, the Company, through its wholly-owned subsidiary Santa Fe
Hotel Inc. ("SFHI"), owned and operated the Santa Fe Hotel and Casino (the
"Santa Fe"), located in Las Vegas, Nevada. On October 2, 2000, SFHI sold
substantially all of its assets including the name "Santa Fe Hotel and Casino"
and any derivative names and marks for $205 million (the "SFHI Asset Sale"). See
Notes 5, 8 and 13
On December 29, 2000, the Company entered into a series of agreements to
exchange, pursuant to Sections 721 and 351 of the Internal Revenue Code (the
"Code"), the real and personal property, excluding gaming equipment, and
intangible assets used in the operation of the Pioneer to a third party (the
"Purchaser") and agreed to lease and license the assets for up to 20 years,
during which period the Company will operate the Pioneer (collectively, the
"Pioneer Transactions"). See Notes 4, 6, 9 and 11
In March 2001, SFHI completed the acquisition of investment properties in
Dorchester, Massachusetts and Gaithersburg, Maryland for an aggregate purchase
price of $145.0 million plus expenses of $3.2 million, consisting of $15.5
million in cash and $132.7 million of non-recourse indebtedness. The
acquisitions are intended to qualify as like-kind exchanges of real property
under Section 1031 of the Internal Revenue Code and defer a portion of the
federal corporate income tax resulting from the SFHI Asset Sale. See Notes 5, 7
and 10
2. Summary of Significant Accounting Policies
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
6
estimates used by the Company include estimated useful lives for depreciable and
amortizable assets, certain other estimated liabilities and valuation reserves
and estimated cash flows in assessing the recoverability of long-lived assets.
Actual results may differ from estimates.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Costs
of maintenance and repairs of property and equipment are expensed as incurred.
Costs of major improvements are capitalized and depreciated over the estimated
useful lives of the assets or the remaining term of the leases. Gains or losses
on the disposal of property and equipment are recognized in the year of sale. In
sale/leaseback transactions of equipment, gains are deferred and recognized over
the lease term and losses are recognized in the year of sale. In sale/leaseback
transactions of real property, where the Company retains an option to purchase
the assets under lease, the Company accounts for the transaction as a financing
pursuant to Statement of Financial Accounting Standards No. 98, Accounting for
Leases ("SFAS 98").
Treasury Stock
Treasury stock is the Company's common stock that has been issued and
subsequently reacquired. The acquisition of common stock is accounted for under
the cost method, and presented as a reduction of stockholders' equity.
Earnings Per Share
The dilutive effect of the assumed exercise of stock options increased the
weighted average number of shares of common stock by 624,346 and 619,214 shares
for the three and six months ended March 31, 2001, respectively, and 609,535
shares for the three and six months ended March 31, 2000.
In December 2000, the Company announced that the Board of Directors had
authorized the use of up to $500,000 to purchase preferred stock. Additionally,
as discussed in Note 18, subsequent to March 31, 2001, in connection with the
settlement of litigation initiated by the Company against David H. Lesser and
Hudson Bay Partners, L.P. ("HBP"), and an application by Mr. Lesser for
reimbursement of approximately $1.1 million of attorneys' fees in the PHI and
Pioneer Finance Corp. bankruptcy proceedings, the Company acquired 3,456,942
shares of preferred stock held by Mr. Lesser, HBP and their affiliates. Pursuant
to the certificate of designation of the preferred stock, shares of preferred
stock acquired by the Company are retired. In future periods, the accrual for
preferred stock dividends will be less due to the retirement of the preferred
stock. See Note 18
Investment in Marketable Securities
Debt securities available-for-sale are stated at market value with unrealized
gains or losses, when material, reported as a component of accumulated other
comprehensive income (loss). Gains or losses on disposition are based on the net
proceeds and the adjusted carrying amount of the securities. Debt Securities
Available-for-sale at March 31, 2001 include investments in government
obligations and corporate securities.
Equity securities available-for-sale are reported at fair value with unrealized
gains or losses, when material, reported as a component of accumulated other
comprehensive income (loss). Realized gains and losses are determined on a
specific identification method. At March 31, 2001, equity securities
available-for-sale included investments in common and preferred stocks.
As market value approximates cost for the above securities, the Company did not
record any other comprehensive income associated with unrealized gains or
losses on these securities during the quarters ended March 31, 2001 and 2000.
7
Recently Issued Accounting Standards
In January 2001, the Emerging Issues Task Force determined in Issue No. 00-22,
Accounting for "Points and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to be Delivered in
the Future," that cash rebates arising from loyalty programs should be
recognized as a reduction of revenues.
Accordingly, beginning with the quarter ending March 31, 2001, the Company has
recorded the expense of cash paid for slot play based points earned as a
reduction of revenue. Prior periods presented in the Statements of Operations
have been reclassified. These amounts are included in casino promotional
allowances.
Certain reclassifications have been made in the prior year's consolidated
financial statements to conform to the presentation used in 2001.
3. Cash and Cash Equivalents
At March 31, 2001, the Company held cash and cash equivalents of $26.7 million
compared to $7.0 million at September 30, 2000. Approximately $3.6 million was
held by PHI and was subject to certain restrictions and limitations on its use,
including restrictions on its availability for distribution to the Company, by
the terms of the agreements entered into in the Pioneer Transactions. See Note 9
At March 31, 2001, approximately $1.5 million is held in escrow until October
2001 pursuant to the agreements related to the SFHI Asset Sale. See Note 8
4. Restricted Cash
Approximately $15.0 million held by SFHI has been pledged to secure SFHI's
guaranty of PHI's lease and license obligations. The permitted investments for
the restricted cash are investment grade commercial paper, money market
accounts, government backed securities and preferred stock of the Purchaser.
Additionally, $5.0 million of the $15.0 million may be used for capital
expenditures at the Pioneer and acquisition of real property and equipment under
lease at the Pioneer. Disbursements from the $5.0 million for other purposes and
of the remaining $10.0 million may be made only with the approval of the
Purchaser. See Note 9
5. Assets Held For Sale
On October 2, 2000, the Company and the Company's subsidiary, SFHI, consummated
the SFHI Asset Sale. The carrying value of the assets sold is approximately
$63.5 million and is included in Assets held for sale in the accompanying
Consolidated Condensed Balance Sheet at September 30, 2000. The Company received
cash
8
consideration of $205.0 million and used approximately $182.2 million of the net
proceeds to satisfy substantially all of its indebtedness plus accrued interest
thereon, and to pay costs of the transactions. The remaining proceeds were added
to working capital. See Notes 3, 8 and 13
6. Property and Equipment, net
In December 2000, PHI sold all of its gaming equipment for cash consideration of
$2.5 million. Simultaneously, PHI entered into an agreement to lease back the
equipment for a period of four years at $59,000 per month. The lease has been
accounted for as an operating lease in the accompanying Consolidated Condensed
Balance Sheet, and accordingly, the gain on sale of approximately $800,000 has
been deferred and is being amortized over the term of the lease.
Included in Property and equipment, net in the accompanying Consolidated
Condensed Balance Sheet at March 31, 2001 are certain assets held under lease at
the Pioneer with a net carrying value of approximately $32.0 million. See Note 9
7. Property Held for Investment
The property in Dorchester, Massachusetts is located on 12 acres and includes
several buildings with approximately 425,000 square feet of commercial office
space. The property was acquired for approximately $82.4 million plus $500,000
in expenses. The Company paid $5.6 million in cash and issued $77.3 million in
non-recourse debt associated with the property. The property is under a net
lease through 2019 with a single tenant with an investment grade credit rating.
Under the lease, the tenant is responsible for substantially all obligations
related to the property. The Company allocated approximately $15.0 million of
the purchase price to land and the balance to building and improvements. The
expense incurred to acquire the property is recorded in Other assets in the
accompanying Consolidated Condensed Balance Sheet and will be amortized over the
remaining term of the lease. See Note 10
The property in Gaithersburg, Maryland is located on 55 acres and includes one
building with approximately 342,000 square feet of commercial office space. The
property was acquired for $62.6 million, plus expenses of $2.7 million. The
Company paid $9.9 million in cash and issued $55.4 million in non-recource first
mortgage indebtedness. The building is located on approximately 20 acres of the
property and is under lease to a single tenant with an investment grade credit
rating. Under the lease, the tenant is responsible for substantially all
obligations related to the property. The Company allocated approximately $23.0
million of the purchase price to land and the balance to building, improvements
and equipment. The expense incurred to acquire the property is recorded in Other
assets in the accompanying Consolidated Condensed Balance Sheet and will be
amortized over the remaining term of the lease. See Note 10
8. Debt To Be Paid Upon Sale of Assets
Debt to be paid upon sale of assets in the accompanying Consolidated Condensed
Balance Sheet as of September 30, 2000 consists of debt net of unamortized debt
9
discounts and debt obligations owned, but not retired by the Company, which was
repaid in full with proceeds of the SFHI Asset Sale. In addition, the Company
repaid the Note payable-officer reported in the September 30, 2000 Consolidated
Condensed Balance Sheet contained herein with proceeds from the SFHI Asset Sale.
See Note 5
9. Obligations Under Lease
On December 29, 2000, the Company entered into the Pioneer Transactions and
agreed to lease and license the real and personal property, (excluding gaming
equipment) and intangible assets used by the Pioneer for up to 20 years, during
which period the Company will operate the Pioneer. The consideration for the
Pioneer Transactions consisted of the assumption and immediate repayment by the
Purchaser of $32.5 million of debt owed by PHI to SFHI and preferred stock of
the Purchaser having a $1.0 million liquidation preference. The preferred stock
is classified in Prepaid and other in the accompanying Consolidated Condensed
Balance Sheet. See Notes 4 and 6
In accordance with SFAS 98, the Pioneer Transactions are accounted for as a
financing transaction. As of March 31, 2001 the Company has recorded $33.7
million as an Obligation under lease in the accompanying Consolidated Condensed
Balance Sheet. Future minimum lease payments including interest thereon under
the lease are as follows by fiscal year: 2001 - $1.7 million; 2002 - $3.4
million; 2003 - $3.4 million; 2004 - $3.9 million; 2005 - $4.2 million and
thereafter - $101.1 million.
Archon and SFHI guaranteed the payments under the lease and license agreements
and agreed to certain covenants, including restrictions on the payment of
management fees, restriction on competing in the Laughlin, Nevada area,
limitations on the incurrence of recourse debt obligations by Archon and
restrictions on dividend payments on the Archon preferred stock. In addition,
Archon agreed to maintain minimum consolidated liquidity amounts and agreed to
contribute capital to PHI and in certain events to the restricted cash account
in the event the ratio of fixed charges to operating cash flow at the Pioneer
falls below 1.00 to 1 during any twelve month period, determined on a quarterly
basis beginning March 31, 2001. The Company has an option to purchase the assets
under the lease and license agreements between the end of the third and seventh
years of the lease and license arrangements , at purchase price amounts which
approximate estimated fair market value at the relevant dates, and at the end of
the lease term for fair market value. See Notes 4, 6 and 11
10. Non-recourse Debt Obligations
The Company assumed $77.3 million of indebtedness, consisting of approximately
$75.1 million of first mortgage indebtedness and $2.1 million of indebtedness
under Section 467 of the Code, in connection with its acquisition on March 2,
2001 of the commercial office building located in Dorchester, Massachusetts. The
building is under a net lease through June 2019, which requires the tenant to
make higher semi-annual lease payments through June 2005 and lower semi-annual
lease payments thereafter.
10
The lease payments are applied to the outstanding indebtedness and are intended
to reduce the first mortgage note balance to $31.2 million by June 2005. The
portion of higher lease payments attributable to future periods is considered an
advance of rent under section 467 of the Code. The first mortgage indebtedness
is non-recourse and matures in June 2019 to coincide with the end of the lease
term. See Note 7
The Company issued approximately $55.4 million of first mortgage debt with a
7.01% interest rate per annum in connection with its acquisition of a commercial
office building located in Gaithersburg, Maryland. The building is under lease
through April 2014. The monthly lease payments are applied against the
outstanding indebtedness and will amortize the debt to approximately $22.3
million by the end of the lease in April 2014. See Note 7
11. Minority Interest
In connection with the Pioneer Transactions, PHI formed Pioneer LLC, a limited
liability company ("PLLC"), to which PHI transferred 100% of its real and
personal property (excluding gaming equipment) and intangible assets, valued at
approximately $1.0 million, net of $32.5 million of debt secured by the assets
of Pioneer for a 100% interest in PLLC. Subsequently, PLLC admitted LICO, a
Nevada corporation, wholly owned by Mr. Paul W. Lowden, as a 10% minority
interest member, in exchange for a capital contribution of $100,000 (the
"Minority Member"). PLLC subsequently transferred the assets contributed by PHI
to the Purchaser in exchange for preferred stock of the Purchaser with a
liquidation preference of $1.0 million and the assumption and immediate
repayment by the Purchaser of $32.5 million of indebtedness owed to SFHI. The
investment by the Minority Member is reflected as Minority interest in the
Consolidated Condensed Balance Sheet contained herein.
12. Contingency
The Company is the defendant in a pending action titled Local Joint Executive
Board et al. v. Santa Fe Gaming Corporation et al., No. CV-S-01-0233-RLH. The
plaintiffs instituted the action on or about February 28, 2001 in the United
States District Court for the District of Nevada, alleging that the Company
violated the Worker Adjustment Retraining and Notification Act by improperly
providing notification of the closing of the Santa Fe Hotel and Casino. The
plaintiffs seek damages in the amount provided for by the statute. The
plaintiffs have filed a motion for class certification, which remains pending.
11
13. Gain on Sale of Assets
The Company recorded a pre-tax gain on the SFHI Asset Sale of approximately
$137.2 million in the quarter ended December 31, 2000. In connection with the
sale, the Company, Paul W. Lowden, majority stockholder of the Company, and
members of the family of Paul W. Lowden entered into a three year non-compete
agreement, in which they agreed not to compete through October 2, 2003 within a
three mile radius of the Santa Fe. The Company and SFHI granted to the buyer a
three-year option to purchase for $5.0 million the approximately 20-acre parcel
of undeveloped real property located at the corner of Rainbow and Lone Mountain
Road adjacent to the Santa Fe. See Notes 5 and 8
In November 1999, Sahara Las Vegas Corp., an indirect wholly-owned subsidiary of
the Company ("SLVC"), sold real property located in Henderson, Nevada it had
acquired in March 1999 for $37.2 million. The Company recorded a pre-tax gain on
the sale of approximately $12.1 million in the quarter ended December 31, 1999.
In connection with the sale, the Company, SLVC, SFHI, Paul W. Lowden and members
of the family of Paul W. Lowden entered into non-compete agreements, in which
they agreed not to compete through November 15, 2014 within a five-mile radius
of two of the buyer's casinos located in the Henderson, Nevada area.
14. Litigation Settlement, net
On March 20, 2001 the Company agreed to settle the lawsuit titled Sahara Gaming
Corporation, et al. v. Francis L. Miller, et al., CV-S-94-01109-LRL, filed by
the Company alleging, among other things, violations of the Securities Exchange
Act of 1934. The terms of the settlement required that (i) the defendants'
insurers pay the Company approximately $4.9 million and the Company dismiss with
prejudice all its claims against all defendants, (ii) the Company pay Francis
Miller approximately $900,000 and Francis Miller dismiss with prejudice all his
counterclaims and third-party claims against the Company, and (iii) plaintiffs
and defendants cause the lawsuit and counterclaims to be dismissed with
prejudice.
The Company has reflected the net proceeds received in the settlement, net of
legal expenses incurred, as gain from litigation settlement in the accompanying
Consolidated Condensed Statement of Operations and in Accounts receivable, net
in the accompanying Consolidated Condensed Balance Sheet. All payments were made
and the legal proceedings dismissed in April 2001.
12
15. Supplemental Statement of Cash Flows Information
Supplemental statement of cash flows information for the six month periods ended
March 31, 2001 and 2000 is presented below:
2001 2000
--------- --------
(Amounts in Thousands)
Operating activities:
Cash paid during the period for interest $ 5,613 $ 11,462
========= =========
Cash paid during the period for income taxes: $ 120 $ 0
========= =========
Investing and financing activities:
Non-recourse debt assumed with the
acquisition of investment properties $ 77,300 $ 0
========= =========
Long-term debt incurred in connection with
the acquisition of machinery and equipment $ 0 $ 391
========= =========
Increase in obligations under lease due to
negative amortization $ 241 $ 0
========= =========
16. Segment Information
The Company's primary operations are in the hotel/casino industry and subsequent
to October 2, 2000, are conducted at the Pioneer in Laughlin, Nevada. During
fiscal year 2000, the Company also conducted operations at the Santa Fe in Las
Vegas, Nevada.
Three Months Ended Six Months Ended
--------------------- ---------------------
March 31, March 31,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Dollars in thousands) (Dollars in thousands)
Pioneer Hotel
- -----------------------------
Operating revenues $ 11,422 $ 12,236 $ 21,321 $ 23,190
======== ======== ======== ========
Operating income $ 1,521 $ 1,721 $ 2,001 $ 1,925
======== ======== ======== ========
Interest expense $ 1,145 $ 1,325 $ 2,048 $ 3,325
======== ======== ======== ========
Depreciation and amortization $ 472 $ 636 $ 1,113 $ 1,283
======== ======== ======== ========
Rents $ 384 $ 186 $ 570 $ 368
======== ======== ======== ========
EBITDA (1) $ 2,627 $ 3,322 $ 4,125 $ 5,481
======== ======== ======== ========
Capital expenditures $ 179 $ 379 $ 330 $ 826
======== ======== ======== ========
Identifiable assets (2) $ 38,100 $ 42,253
======== ========
13
During fiscal 2001, the Company acquired investment pro perties in Dorchester,
Massachusetts and Gaithersburg, Maryland. The lease payments received under
lease agreements with respect to both properties are applied to debt service
payments on non-recourse indebtedness secured by the respective properties.
Three Months Ended Six Months Ended
--------------------- ----------------------
March 31, March 31,
---------- -------- ----------- --------
2001 2000 2001 2000
---------- -------- ----------- --------
(Dollars in thousands) (Dollars in thousands)
Investment Properties
- -----------------------------
Revenues $ 369 $ 0 $ 369 $ 0
========== ======= =========== =======
Operating income $ 92 $ 0 $ 92 $ 0
========== ======= =========== =======
Interest expense $ 313 $ 0 $ 313 $ 0
========== ======= =========== =======
Depreciation and amortization $ 276 $ 0 $ 276 $ 0
========== ======= =========== =======
Rents $ 0 $ 0 $ 0 $ 0
========== ======= =========== =======
EBITDA (1) $ 368 $ 0 $ 368 $ 0
========== ======= =========== =======
Capital expenditures $ 145,019 $ 0 $ 145,019 $ 0
========== ======= =========== =======
Identifiable assets (2) $ 150,044 $ 0
=========== =======
(1) EBITDA represents earnings before interest, taxes, depreciation and
amortiation, rents, obligations due under lease, corporate expenses,
reorganization expenses and other nonrecurring charges. The Company's definition
of EBITDA may not be the same as that of similarly captioned measures used by
other companies.
(2) Identifiable assets represents total assets less elimination for
intercompany items.
18. Subsequent Event - Litigation Settlement
On April 20, 2001, the Company entered into a settlement agreement with David H.
Lesser, Hudson Bay Partners, L.P. and certain of their affiliates. In accordance
with the settlement agreement, among other things, (i) the Company and its
subsidiaries agreed to dismiss with prejudice pending litigation by the Company
against HBP and Mr. Lesser styled Santa Fe Gaming Corp. v. Hudson Bay Partners,
L. P., et al., CV-5-99-00298-KJD (LRL) and Santa Fe Gaming Corporation v. Hudson
Bay Partners L.P. and David H. Lesser., CV-5-99-00416 LDG (LRL), and Mr. Lesser
agreed to dismiss with prejudice his application for reimbursement of
approximately $1.1 million in attorneys' fees in connection with the PHI and PFC
bankruptcies, pursuant to legal proceedings styled In re Pioneer Finance Corp.,
Case No. BK-S-99-11404-LBR and In re Pioneer Hotel Inc., Case No. BK-S-99-12854-
LBR; (ii) the Company purchased the 3,456,942 shares of the Company's preferred
stock and acquired for no additional consideration 53,600 shares of common
stock held by the Hudson Bay affiliates; (iii) Mr. Lesser agreed to forfeit
14
options to acquire 12,500 shares of the Company's common stock, (iv) Mr. Lesser
forfeited his claim to director fees; (v) Mr. Lesser resigned from the Company's
Board of Directors and withdrew his name as the nominee for election by
preferred stockholders as a special director at the Company's annual meeting
held on May 11, 2001 and (vi) the Company paid Mr. Lesser $5.75 million.
15
ARCHON CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
General
- -------
Results of Operations - Six Months Ended March 31, 2001 and 2000
- ----------------------------------------------------------------
Consolidated
Net Operating Revenues. Consolidated net operating revenues for the six months
ended March 31, 2001 were $23.4 million, a $43.6 million, or 65.0%, decrease
from $67.0 million for the same period in fiscal 2000. The six months ending
March 31, 2000 included net revenues of approximately $43.2 million at the Santa
Fe Hotel and Casino (the "Santa Fe") which was sold on October 2, 2000. Revenues
decreased by $1.9 million at the Pioneer Hotel and Gambling Hall (the
"Pioneer").
Operating Expenses. Total operating expenses decreased $37.2 million, or 62.9%,
to $21.9 million for the six months ended March 31, 2001 from $59.1 million in
the six months ended March 31, 2000. Total operating expenses as a percentage of
revenue increased to 93.4% in the six months ended March 31, 2001 from 88.2% in
the six months ended March 31, 2000. The six months ended March 31, 2000
included operating expenses of approximately $36.1 million at the Santa Fe.
Operating expenses decreased by $2.0 million, or 9.1%, at the Pioneer. Operating
expenses of Sahara Las Vegas Corp. ("SLVC") decreased by $700,000, attributable
to loan issue costs being fully amortized by December 1999.
Operating Income. Consolidated operating income for the six months ended March
31, 2001 was $1.5 million, a $6.4 million, or 80.5%, decrease from operating
income of $7.9 million for the same period in fiscal 2000. The six months ended
March 31, 2000 included operating income of approximately $7.1 million at the
Santa Fe. Operating income increased by $100,000 at the Pioneer and $500,000 at
SLVC.
Interest Expense. Consolidated interest expense for the six months ended March
31, 2001 was $1.9 million, a $9.6 million decrease compared to $11.5 million in
the six months ended March 31, 2000, due to the repayment of the PFC 13 1/2%
First Mortgage Notes (the "13 1/2% Notes") in August 2000 and the repayment of
substantially all of the Company's remaining debt in October 2000.
Gain on Sale of Assets. The Company recorded a $137.2 million gain on the sale
of substantially all of the assets of the Santa Fe in the quarter ended December
31, 2000. The Company recorded a $12.1 million gain on the sale of real property
in Henderson, Nevada and related agreements in the quarter ended December 31,
1999.
16
Litigation Settlement, net. The Company recorded an approximate $3.7 million net
gain from a litigation settlement in the quarter ending March 31, 2001.
Income Before Income Tax and Extraordinary Item. Consolidated income before
income tax and extraordinary item for the six months ended March 31, 2001 was
$140.6 million, a $132.1 million increase compared to $8.5 million in the six
months ended March 31, 2000, principally due to the gain on sale of the Santa Fe
assets.
Federal Income Tax. The Company recorded a federal income tax provision of $47.8
million in the current six month period. The Company did not record an income
tax provision in the prior year six month period. In the six month period ended
March 31, 2000, the Company's annualized effective rate was 0%.
Extraordinary Item. During the six months ended March 31, 2000, SLVC purchased
$16.7 million principal amount of PFC's 13 1/2% Notes, plus accrued and unpaid
interest, for approximately $17.1 million, resulting in a $2.8 million gain on
the extinguishment of debt.
Preferred Share Dividends. Dividends of approximately $1.2 million and $1.1
million for the six months ended March 31, 2001 and 2000, respectively, accrued
on the preferred stock. The accrued dividend rate increased to 13% in the
current period compared to 12% in the prior year. Dividends for the six months
ended March 31, 2001 are reported net of the 155,200 shares of preferred stock
acquired by the Company and retired at March 31, 2001.
Net Income. Consolidated net income per common shares was $91.6 million, or
$14.76 per common share, in the 2001 period compared to $10.2 million, or $1.64
per common share, in the prior year period.
Pioneer
Net Operating Revenues. Revenues at the Pioneer decreased $1.9 million, or 8.1%,
to $21.3 million in the six months ended March 31, 2001 from $23.2 million in
the six months ended March 31, 2000. The decline in revenues at the Pioneer is
consistent with a general decline in the Laughlin market, which management
believes is due to expansion of Native American gaming facilities in Southern
California.
Casino revenues decreased $1.3 million, or 6.5%, to $17.8 million in the six
months ended March 31, 2001 from $19.1 million in the six months ended March 31,
2000.Slot and video poker revenues decreased $1.1 million, or 6.8%, to $15.6
million in the six months ended March 31, 2001 from $16.7 million in the six
months ended March 31, 2000. Other gaming revenues, including table games,
decreased $100,000. Casino promotional allowances increased $100,000, or 1.5%,
to $4.1 million in the six months ended March 31, 2001 from $4.0 million in the
six months ended March 31, 2000, due to increased promotions.
17
Hotel revenues remained at $1.2 million for the six months ended March 31, 2001
and 2000, as a slight decrease in occupancy rate was offset by an increase in
average daily room rate. Food and beverage revenues were substantially unchanged
at $4.3 million in the six months ended March 31, 2001 and March 31, 2000. Other
revenues decreased $600,000, or 21.5%, to $2.0 million in the six months ended
March 31, 2001 from $2.6 million in the six months ended March 31, 2000 due to
decreased sales in retail outlets caused by increased competition from other
retail outlets.
Operating Expenses. Operating expenses decreased $2.0 million, or 9.1%, to $19.3
million in the six months ended March 31, 2001 from $21.3 million in the six
months ended March 31, 2000. Operating expenses as a percentage of revenue
decreased to 90.6% in the six months ended March 31, 2001 from 91.7% in the six
months ended March 31, 2000 primarily as a result of the fact that no
reorganization expenses were incurred in the 2001 period. The March 2000 period
included reorganization expenses of $1.4 million.
Casino expenses increased $200,000, or 2.0%, to $8.9 million in the six months
ended March 31, 2001 from $8.7 million in the six months ended March 31, 2000,
largely due to an increase in labor costs as well as in casino promotions.
Casino expenses as a percentage of casino revenues increased to 50.0% in the six
months ended March 31, 2001 from 45.9% in the six months ended March 31, 2000.
Hotel expenses were unchanged at $400,000 in the six months ended March 31, 2001
and 2000. Food and beverage expenses decreased $100,000, or 5.7%, to $2.1
million in the six months ended March 31, 2001 compared to $2.2 million in the
six months ended March 31, 2000, primarily due to a decrease in beverage cost of
sales. Food and beverage expenses as a percentage of food and beverage revenues
decreased to 48.7% in the six months ended March 31, 2001 from 51.5% in the six
months ended March 31, 2000. Other expenses decreased $500,000, or 21.9%, to
$1.9 million for the six months ended March 31, 2001 compared to $2.4 million
for the six months ended March 31, 2000 related to the decrease in retail sales.
Other expenses as a percentage of other revenues decreased to 93.3% in the six
months ended March 31, 2001 from 93.7% in the six months ended March 31, 2000.
Selling, general and administrative expenses decreased $100,000, or 4.8%, to
$2.7 million in the six months ended March 31, 2001 from $2.8 million in the six
months ended March 31, 2000. Selling, general and administrative expenses as a
percentage of revenues increased to 12.5% in the six months ended March 31, 2001
from 12.1% in the six months ended March 31, 2000. Utilities and property
expenses increased $300,000, or 14.0% to $2.3 million in the six months ended
March 31, 2001 from $2.0 million in the six months ended March 31, 2000,
primarily due to increased rent expense associated with the lease of gaming
equipment. Utilities and property expenses as a percentage of revenues increased
to 10.6% in the six months ended March 31, 2001 from 8.5% in the six months
ended March 31, 2000. Depreciation and amortization expenses decreased $200,000,
or 13.3%, to $1.1 million in the six months ended March 31, 2001 from $1.3
million in the six months ended March 31, 2000, due to the sale of gaming
equipment. No reorganization expenses were incurred in the 2001 period.
18
During the six months ended March 31, 2000, PHI incurred approximately $1.4
million in reorganization expenses related to the restructuring of the PFC's
13 1/2% Notes.
Results of Operations - Three Months Ended March 31, 2001 and 2000
- ------------------------------------------------------------------
Consolidated
Net Operating Revenues. Consolidated net operating revenues for the three months
ended March 31, 2001 were $13.0 million, a $21.6 million, or 62.6%, decrease
from $34.6 million for the same period in fiscal 2000. The three months ended
March 31, 2000 included net revenues of approximately $22.0 million at the Santa
Fe. Revenues decreased by $800,000 at the Pioneer Hotel and Gambling Hall (the
"Pioneer").
Operating Expenses. Total operating expenses decreased $17.1 million, or 61.1%,
to $11.0 million for the quarter ended March 31, 2001 from $28.1 million in the
quarter ended March 31, 2000. The three months ended March 31, 2000 included
operating expenses of approximately $17.6 million at the Santa Fe. Total
operating expenses as a percentage of revenue increased to 84.5% in the quarter
ended March 31, 2001 from 81.3% in the quarter ended March 31, 2000. Operating
expenses decreased by $600,000, or 5.8%, at the Pioneer.
Operating Income. Consolidated operating income for the quarter ended March 31,
2001 was $2.0 million, a $4.5 million, or 69.0%, decrease from operating income
of $6.5 million for the same period in fiscal 2000. The three months ended March
31, 2000 included operating income of approximately $4.4 million at the Santa
Fe. Operating income decreased by $200,000 at the Pioneer in the 2001 quarter.
Interest Expense. Consolidated interest expense for the quarter ended March 31,
2001 was $1.4 million, a $3.6 million decrease compared to $5.0 million in the
quarter ended March 31, 2000, due to the repayment of the PFC 13 1/2% Notes in
August 2000 and the repayment of substantially all of the Company's remaining
debt in October 2000.
Litigation Settlement, net. The Company recorded an approximate $3.7 million net
gain from a litigation settlement in the quarter ended March 31, 2001.
Income Before Income Tax and Extraordinary Item. Consolidated income before
income tax and extraordinary item for the quarter ended March 31, 2001 was $4.3
million, a $2.9 million increase compared to $1.4 million in the fiscal 2000
quarter, principally due to the litigation settlement.
Federal Income Tax. The Company recorded a federal income tax provision of $1.5
million in the current quarter. The Company did not record an income tax
provision in the prior year quarter. In the quarter ended March 31, 2000, the
Company's annualized effective rate was 0%.
19
Extraordinary Item. During the quarter ended March 31, 2000, SLVC purchased $7.2
million principal amount of PFC's 13 1/2% Notes, plus accrued and unpaid
interest, resulting in a $700,000 gain on the extinguishment of debt.
Preferred Share Dividends. Dividends of approximately $600,000 for each of the
quarters ended March 31, 2001 and 2000 accrued on the preferred stock. The
accrued dividend rate increased to 13% in the current period compared to 12% in
the prior year. Dividends for the current quarter are reported net of the
155,200 shares of preferred stock acquired by the Company and retired at March
31, 2001.
Net Income. Consolidated net income per common shares was $2.2 million, or $.36
per common share, in the 2001 period compared to $1.6 million, or $0.25 per
common share, in the prior year period.
Pioneer
Net Operating Revenues. Revenues at the Pioneer decreased $800,000, or 6.7%, to
$11.4 million in the quarter ended March 31, 2001 from $12.2 million in the
quarter ended March 31, 2000. The decline in revenues at the Pioneer is
consistent with a general decline in the Laughlin market, which management
believes is due to expansion of Native American gaming facilities in Southern
California.
Casino revenues decreased $500,000, or 4.7%, to $9.6 million in the quarter
ended March 31, 2001 from $10.1 million in the quarter ended March 31, 2000.
Slot and video poker revenues decreased $400,000, or 4.1%, to $8.4 million in
the quarter ended March 31, 2001 from $8.8 million in the quarter ended March
31, 2000. Other gaming revenues, including table games, decreased $100,000.
Casino promotional allowances were unchanged at $2.1 million.
Hotel revenues remained at $700,000 for the quarters ended March 31, 2001 and
2000. Food and beverage revenues were substantially unchanged at $2.3 million in
the quarters ended March 31, 2001 and March 31, 2000. Other revenues decreased
$300,000, or 24.2%, to $1.0 million in the quarter ended March 31, 2001 from
$1.3 million in the quarter ended March 31, 2000 due to decreased sales in
retail outlets caused by increased competition from other retail outlets.
Operating Expenses. Operating expenses decreased $600,000, or 5.8%, to $9.9
million in the quarter ended March 31, 2001 from $10.5 million in the quarter
ended March 31, 2000. Operating expenses as a percentage of revenue increased to
86.7% in the quarter ended March 31, 2001 from 85.9% in the quarter ended March
31, 2000, primarily as a result of the decrease in operating revenues, partially
offset by the fact that no reorganization expenses were incurred in the 2001
quarter. The March 2000 quarter included reorganization expenses of $500,000.
20
Casino expenses increased $200,000, or 4.6%, to $4.6 million in the three months
ended March 31, 2001 from $4.4 million in the three months ended March 31, 2000,
largely due to increased promotional expenses. Casino expenses as a percentage
of casino revenues increased to 47.6% in the quarter ended March 31, 2001 from
43.4% in the quarter ending March 31, 2000. Hotel expenses were unchanged at
$200,000 in the quarter ended March 31, 2001, compared to the quarter ended
March 31, 2000. Food and beverage expenses decreased $100,000, or 6.0%, to $1.1
million in the quarter ended March 31, 2001 compared to $1.2 million in the
quarter ended March 31, 2000 primarily due to a decrease in beverage cost of
sales. Food and beverage expenses as a percentage of food and beverage revenues
decreased to 47.8% in the quarter ended March 31, 2001 from 50.0% in the quarter
ended March 31, 2000. Other expenses decreased $300,000, or 28.4%, to $900,000
for the quarter March 31, 2001 compared to $1.2 million for the quarter ended
March 31, 2000 related to the decrease in retail sales. Other expenses as a
percentage of other revenues decreased to 91.1% in the quarter ended March 31,
2001 from 96.5% in the quarter ended March 31, 2000.
Selling, general and administrative expenses were substantially unchanged at
$1.5 million in the quarter ended March 31, 2001 compared to $1.4 million in the
quarter ended March 31, 2000. Selling, general and administrative expenses as a
percentage of revenues increased to 12.9% in the quarter ended March 31, 2001
from 11.6% in the quarter ended March 31, 2000. Utilities and property expenses
increased $200,000, or 27.9%, to $1.2 million in the quarter ended March 31,
2001 from $1.0 million in the quarter ended March 31, 2000, primarily due to
increased rent expense associated with the lease of gaming equipment. Utilities
and property expenses as a percentage of revenues increased to 10.7% in the
quarter ended March 31, 2001 from 7.8% in the quarter ended March 31, 2000.
Depreciation and amortization expenses decreased $100,000, or 25.9%, to $500,000
in the quarter ended March 31, 2001 from $600,000 in the quarter ended March 31,
2000, due to the sale of gaming equipment. No reorganization expenses were
incurred in the 2001 quarter. During the quarter ended March 31, 2000, PHI
incurred approximately $500,000 in reorganization expenses related to the
restructuring of the PFC's 13 1/2% Notes.
Liquidity and Capital Resources; Trends and Factors Relevant to Future
Operations
Liquidity. As of March 31, 2001, the Company held cash and cash equivalents of
$26.7 million compared to $7.0 million at September 30, 2000. In April 2001, the
Company received net proceeds of approximately $3.7 million from the settlement
of the Treasure Bay litigation and expended approximately $5.75 million in
connection with the settlement of legal proceedings by the Company against David
H. Lesser and Hudson
21
Bay Partners, L.P. ("HBP") and an application by Mr. Lesser for reimbursement of
approximately $1.1 million of attorneys' fees related to the PHI and PFC
bankruptcy proceedings, pursuant to which, among other things, the Company
acquired approximately 3.5 million shares of preferred stock held by Mr. Lesser,
HBP and their affiliates.
Management believes that the Company will have sufficient available cash and
cash resources to meet its cash requirements through the twelve month period
ending March 31, 2002.
Cash Flow from Operating Activities. The Company's cash used in operations was
$5.9 million for the six months ended March 31, 2001 as compared to $3.1 million
for the same period in the prior year. The increase in cash used in operations
was primarily due to the reduction of accounts payable and other liabilities in
conjunction with the SFHI Asset Sale.
Cash Flow from Investing Activities. Cash provided by investing activities was
$117.7 million during the six months ended March 31, 2001, compared to $36.0
million during the six months ended March 31, 2000. In November 1999, the
Company sold real property in Henderson, Nevada and entered into related
agreements for total consideration of $37.2 million. In October 2000, the
Company completed the SFHI Asset Sale for total consideration of $205.0 million
which was offset in part by $67.7 million used in the acquisition of investment
properties in March 2001. Additionally, in December 2000, in connection with the
Pioneer Transactions, $15.0 million of cash was placed in restricted use
accounts. In the first six months of fiscal 2001, the Company incurred $600,000
of capital expenditures, excluding the purchase of investment properties,
comprised of improvements at the Pioneer and the build-out of a new corporate
office, compared to $1.1 million in fiscal 2000.
Cash Used in Financing Activities. Cash used in financing activities was $92.1
million in the six months ended March 31, 2001 compared to $30.1 million during
the same period in 2000. In October 2000, the Company used proceeds from the
SFHI Asset Sale to retire substantially all outstanding debt. The Pioneer
Transactions resulted in net cash of $32.5 million. In March 2001, the Company
issued $55.4 million of non-recourse first mortgage indebtedness in connection
with the acquisition of an investment property. The Company incurred an
aggregate $3.2 million of costs in conjunction with issuing the $55.4 million of
non-recourse debt and assuming $77.3 million non-recourse debt in connection
with the acquisition of another investment property. In fiscal 2000, the Company
used proceeds from the sale of the Henderson, Nevada property and related
agreements to reduce the outstanding principal amount of indebtedness.
The Company's primary source of cash is from Pioneer operations and from
interest income on available cash and cash equivalents and investments in
marketable securities. The agreements relating to the Pioneer Transactions
restrict the ability of PHI to make distribution to the Company, and, under
certain circumstances, to pay management fees to the Company. Cash from PHI is
not currently, and is not expected in the foreseeable future to be, available
for distribution to the Company.
22
Earnings before interest, taxes, depreciation and amortization, rents,
obligations due under lease, corporate expenses, reorganization expenses and
other non-recurring charges ("EBITDA") decreased $13.5 million, or 72.6%, to
$5.1 million in the six months ended March 31, 2001 from $18.6 million in the
six months ended March 31, 2000. The Company's earnings for the six months ended
March 31, 2001 were from the Pioneer operations while in fiscal 2000 earnings
were from the Santa Fe and the Pioneer operations. Excluding operations at the
Pioneer, the Company's primary use of cash is for selling, general and
administrative expenses of the Company and its subsidiaries including lease
costs relating to new corporate offices. Additionally, the Company will be
required to make capital contributions to PHI or cash payments to the restricted
cash accounts and to forgo all or a portion of its management fee from PHI if
the ratio of fixed charges to operating cash flow at the Pioneer is not
maintained at specified levels. See "Pioneer Transactions." 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
water theme park operator. SLVC generates minimal cash from the lease agreement
after payment of property costs. SLVC's principal use of cash is to pay real
property taxes. Additionally, in connection with the acquisition of the
property, SLVC assumed an operating lease under which the water theme park
operates. The lease may be terminated at any time by SLVC; however, if it is
terminated prior to 2004, SLVC has agreed to pay a loan owed by the tenant to
the prior owner which amortizes over the remaining life of the lease. The loan
owed by the tenant had an outstanding balance of $3.2 million as of March 31,
2001.
Results of operations at the Pioneer for the three and six months ended March
31, 2001 generated EBITDA, as defined, of $2.6 million and $4.1 million,
compared to $3.3 million and $5.5 million, respectively, of EBITDA in the same
period in 2000, respectively. The EBITDA margin decreased to 19.3% in fiscal
2001 from 23.6% in fiscal 2000 in the six month periods, and to 23.0% in fiscal
2001 from 27.2% in fiscal 2000 in the three month periods. PHI's principal uses
of cash are for lease payments, the management fee payable to the Company and
capital expenditures to maintain the facility. As a result of the completion of
the Pioneer Transactions on December 30, 2000, PHI's lease payments have
increased. In addition to the existing ground lease, monthly lease payments for
gaming equipment are $59,000 per month and monthly lease and license payments
related to the real and intangible assets are $285,000 for the first three years
and increase thereafter. Capital expenditures to maintain the facility in fiscal
2001 are expected to be approximately $1.0 million.
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 ("GAAP"), and it is included herein to provide additional
information with respect to the ability of the Company to meet its future debt
service, capital expenditures and working capital requirements. Although EBITDA
is not necessarily a measure of the Company's ability to fund its cash needs,
management believes that EBITDA is a useful tool for measuring the ability of
the Company to service its debt. The Company's definition of EBITDA may not be
the same as that of similarly captioned measures used by other companies.
As a result of the SFHI Asset Sale, the Company incurred an estimated $165.0
million tax gain for federal income tax purposes for fiscal 2001. As of
September 30, 2000, the Company had an estimated net operating loss carry
forward for regular tax purpose of
23
approximately $67.8 million, all of which can be utilized in fiscal 2001. In
March, 2001, SFHI acquired investment properties in Dorchester, Massachusetts
and Gaithersburg, Maryland. The acquisitions are intended to qualify as like-
kind exchanges of real property under Section 1031 of the Internal Revenue Code
and to defer approximately $90.0 million of the gain for federal corporate
income tax purposes resulting from the SFHI Asset Sale. The Company expects to
make an alternative minimum tax payment in fiscal 2001 from available cash
resources.
Pioneer Transactions
- --------------------
On December 29, 2000, the Company entered into a series of agreements to
transfer, pursuant to Sections 721 and 351 of the Code, the real and personal
property, excluding gaming equipment, and intangible assets used in the
operation of the Pioneer to a third party (the "Purchaser") and agreed to lease
and license the assets for up to 20 years, during which period the Company will
operate the Pioneer (collectively, the "Pioneer Transactions"). The
consideration for the Pioneer Transactions consisted of the assumption and
immediate repayment by the Purchaser of $32.5 million of debt owed by PHI to
SFHI and preferred stock of the Purchaser having a $1.0 million liquidation
preference.
Archon and SFHI guaranteed the payments under the lease and license agreements
and agreed to certain covenants, including restrictions on the payment of
management fees, restriction on competing in the Laughlin, Nevada area, and
restrictions on dividend payments on Archon preferred stock. In addition, Archon
agreed to maintain minimum consolidated liquidity amounts. Furthermore, Archon
has agreed to contribute capital to PHI and in certain events to deposit cash to
the restricted cash accounts in the event the ratio of fixed charges to
operating cash flow at the Pioneer falls below 1.00 to 1 during any rolling four
quarter period, calculated on a quarterly basis beginning March 31, 2001, and to
forgo all or a portion of the management fees payable by PHI if the ratio of
operating cash flow to fixed charges falls below 1.20 to 1. The ratio of
operating cash flow to fixed charges at March 31, 2001 was slightly less than
1.20 to 1. The agreements related to the Pioneer Transactions provide an option
for the Company to purchase the assets under the lease and license agreements to
PHI between the end of the third and seventh years at purchase price amounts
which approximate estimated fair market value at the relevant dates, and at the
end of the lease term for fair market value.
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 semi-annual dividend payments on its preferred stock through the issuance of
paid in kind dividends. The Company has accrued the semi-annual 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% of $2.14 for each share of preferred stock
and the dividend continues to increase by an additional 50 basis points on each
succeeding semi-annual dividend payment date up to a maximum of 16% per annum.
In April 2001, the dividend rate increased to 13.5%. The accrued stock dividends
have been recorded as an increase to the preferred stock
24
account. As of March 31, 2001, the aggregate liquidation preference of the
preferred stock was $27.2 million, or $3.12 per share, net of 155,200 shares
acquired by the Company and retired.
In December 2000, the Board of Directors of the Company authorized the purchase
from time to time by the Company of preferred stock, for total consideration of
up to $500,000. As of March 31, 2001, the Company has purchased 155,200 shares
of preferred stock for $238,401. Subsequent to March 31, 2001, the Company
acquired approximately 3.5 million shares of preferred stock pursuant to the
settlement agreement with David H. Lesser, HBP and certain of their affiliates.
See Part II, Item I, "Legal Proceedings."
Pursuant to the Certificate of Designations 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. The agreements relating to the Pioneer Transactions contain
provisions restricting the payment of dividends on the Archon preferred stock.
Recently Issued Accounting Standards
- ------------------------------------
In January 2001, the Emerging Issues Task Force determined in Issue No. 00-22,
Accounting for "Points and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to be Delivered in
the Future," that cash rebates arising from loyalty programs should be
recognized as a reduction of revenues.
Accordingly, beginning with the quarter ending March 31, 2001, the Company has
recorded the expense of cash paid for slot play based points earned as a
reduction of revenue. Prior periods presented in the Statements of Operations
have been reclassified. These amounts are included in casino promotional
allowances.
Effects of Inflation
- --------------------
The Company has been generally successful in recovering costs associated with
inflation through price adjustments in its hotels. Any such future increases in
costs associated with casino operations and maintenance of properties may not be
completely recovered by the Company.
25
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. Market Risk Disclosure
----------------------
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.
The Company has no debt instruments subject to market risks.
The Company holds investments in various available-for-sale securities, however,
exposure to price risk arising from the ownership of these investments is not
material to our consolidated financial position, results of operations or cash
flows.
26
ARCHON CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
- --------------------------
On March 20, 2001 the Company agreed to settle the lawsuit Sahara
Gaming Corporation, et al. v. Francis L. Miller, et al.,
CV-S-94-01109-LRL, filed by the Company alleging, among other things,
violations of the Securities Exchange Act of 1934. The terms of the
settlement required that (i) the defendants' insurers pay the Company
approximately $4.9 million and the Company dismiss with prejudice all
its claims against all defendants, (ii) the Company pay Francis Miller
approximately $900,000 and Francis Miller dismiss with prejudice all
his counterclaims and third-party claims against the Company, and (iii)
plaintiffs and defendants cause the lawsuit and counterclaims to be
dismissed with prejudice.
On April 20, 2001, the Company entered into a settlement agreement with
David H. Lesser, Hudson Bay Partners, L.P. and certain of their
affiliates. In accordance with the settlement agreement, among other
things, (i) the Company and its subsidiaries agreed to dismiss with
prejudice pending litigation by the Company against HBP and Mr. Lesser
styled Santa Fe Gaming Corp. v. Hudson Bay Partners, L. P., et al., CV-
5-99-00298-KJD (LRL) and Santa Fe Gaming Corporation v. Hudson Bay
Partners L.P. and David H. Lesser., CV-5-99-00416 LDG (LRL), and Mr.
Lesser agreed to dismiss with prejudice his application for
reimbursement of approximately $1.1 million in attorneys' fees in
connection with the PHI and PFC bankruptcies, pursuant to legal
proceedings styled In re Pioneer Finance Corp., Case No. BK-S-99-11404-
LBR and In re Pioneer Hotel Inc., Case No. BK-S-99-12854-LBR; (ii) the
Company acquired the 3,456,942 shares of the Company's preferred stock
and received for no additional consideration 53,600 shares of common
stock held by the Hudson Bay affiliates; (iii) Mr. Lesser agreed to
forfeit options to acquire 12,500 shares of the Company's common stock,
(iv) Mr. Lesser forfeited his claim to director fees; (v) Mr. Lesser
resigned from the Company's Board of Directors and withdrew his name as
the nominee for election by preferred stockholders as a special
director at the Company's annual meeting held on May 11, 2001 and (vi)
the Company paid Mr. Lesser $5.75 million.
The Company is the defendant in a pending action titled Local Joint
Executive Board et al. v. Santa Fe Gaming Corporation et al., No. CV-S-
01-0233-RLH. The plaintiffs instituted the action on or about February
28, 2001 in the United States District Court for the District of
Nevada, alleging that the Company violated the Worker Adjustment
Retraining and Notification Act by improperly providing notification of
the closing of the Santa Fe Hotel and Casino. The plaintiffs seek
damages in the amount provided for by the statute. The plaintiffs have
filed a motion for class certification, which remains pending.
27
Item 2 - Changes in Securities
None
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 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
continues 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 13.5% effective April 1, 2001. The accrued
stock dividends have been recorded as an increase to the Preferred
Stock account. As of March 31, 2001, the aggregate liquidation
preference of the Preferred Stock was $27.2 million, or $3.12 per
shares, net of 155,200 shares acquired by the Company and retired.
Item 4 - Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on May 11, 2001, Common
Stockholders elected one director, voted on a proposal to amend the
Articles of Incorporation to change the Company name to Archon
Corporation and voted on a proposal to ratify the selection of Deloitte
& Touche LLP as the Company's public accountants.
The Common Stockholders Directors whose terms in office continued after
the meeting are as follows:
Paul W. Lowden through 2002
William J. Raggio through 2002
John W. Delaney through 2003
Suzanne Lowden through 2003
The result of the vote taken on the election of Common Stockholders
Director to hold office until the 2004 Annual Meeting of Stockholders
and until his successor is elected and have qualified was as follows:
28
For Withheld from Voting
-------- --------------------
Thomas K. Land (Class II: until 6,040,023 24,329
the 2004 Annual Meeting of
Stockholders and until his
successor is elected and has
qualified)
The result of the vote taken for a proposal to amend the Articles of
Incorporation to change the name of the company to Archon Corporation
was as follows:
For: 6,044,583 Against: 12,403 Votes abstaining: 7,366
The result of the vote taken for ratification of selection of Deloitte
& Touche LLP as the Company's independent public accountants are as
follows:
For: 6,056,650 Against: 3,118 Votes abstaining: 4,558
The Preferred Stockholders Director whose terms in office continued
after the meeting is as follows:
Howard E. Foster through 2003
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
29
Exhibits
10.72 Purchase Contract by and between David Bralove, as trustee of the
Gaithersburg Realty Trust and Santa Fe Hotel, Inc. dated February
28, 2001.
10.73 Promissory Note dated February 28, 2001 by and between SFHI, LLC
and Lehman Brothers Holdings Inc., d/b/a Lehman Capital, a
division of Lehman Brothers Holdings Inc.
10.74 Deed of Trust and Security Agreement dated February 28, 2001 by
and between SFHI, LLC and Lehman Brothers Holdings Inc., d/b/a
Lehman Capital, a division of Lehman Brothers Holdings Inc.
10.75 Lease Agreement by and between REII-Gaithersburg, Maryland,
L.L.C. and GE Information Services, Inc. dated January 29, 1999.
10.76 Assignment of Lease and Rents dated February 28, 2001 by and
between Gaithersburg Realty Trust and SFHI, LLC.
10.77 Contract dated December 8, 2000 by and between S-BNK#2 Investors,
L.P. and Santa Fe Hotel Inc.
10.78 First Amendment dated December 26, 2000 to Contract dated
December 8, 2000 by and between S-BNK#2 Investors, L.P. and Santa
Fe Hotel Inc.
10.79 Non-Recourse Note S-BNK Dorchester Operations, LLC 10.20% A-1
Note due June 30, 2005
10.80 Non-Recourse Note S-BNK Dorchester Operations, LLC 12.18% A-2
Note due June 30, 2020
10.81 Mortgage, Open-End Mortgage, Assignment of Leases and Rents,
Security Agreement and Fixture Filing financing Statement dated
as of June 30, 2000 between S-BNK Dorchester Operations, LLC. And
First Security Bank, National Association as Indenture Trustee
10.82 Lease Agreement dated June 30, 2000 by and between S-BNK
Dorchester Operations, LLC and Sovereign Bank.
10.83 Indenture dated as of June 30, 2000 between S-BNK Dorchester
Operations, LLC. And First Security Bank, National Association as
Indenture Trustee
30
Reports
The Registrant filed a Current Report on Form 8-K dated January 5, 2001
under Item 5. Other Events reporting certain information relating to the
sale and lease/license-back of the real, personal and intangible property
used in the operation of the Pioneer Hotel and Gambling Hall, in Laughlin,
Nevada.
The Registrant filed a Current Report on Form 8-K dated March 2, 2001 under
Item 5. Other Events reporting the acquisition by SFHI of investment
properties in Dorchester, Massachusetts and Gaithersburg, Maryland.
31
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 authorized.
ARCHON CORPORATION, Registrant
By: /s/ Thomas K. Land
------------------------------------
Thomas K. Land, Chief Financial Officer
Dated: May 15, 2001
32